You may have seen a line in your development’s annual budget for contributions to the reserve fund - sometimes also referred to as the sinking fund - but what is this and why does it matter?
A reserve fund is money earmarked for large-scale or substantial building projects that are carried out to keep your development looking good and working correctly. We refer to these projects as ‘major works’ and these can include things like redecorating the outside of your building, repairing the roof or replacing communal windows.
What’s the benefit of a reserve fund for your development?
A reserve fund gives you peace of mind that if a big job needs doing, you’re not going to suddenly get landed with a big bill, and you can get back to enjoying a home you can be proud of.
One of our London-based customers comments: “I have lived in central London apartment blocks since 1980. In my experience, all apartment blocks will sooner or later incur significant charges for items such as lift replacements, major renovations etc. These costs cannot be met from the normal annual budgeted service charge and in my view it is better to pay a few hundred pounds each year to build up Reserves to meet these expenditures, rather than have to pay a surcharge or a levy amounting to several thousand pounds when they occur, which they will.”
In 2019, we delivered 625 major works projects at developments we manage, funded by their reserve funds. Of these, 58% of these were redecoration projects (internal and/or external) and 21% were carpet replacement works. Both these types of projects are cyclical, meaning that they need to be scheduled over certain intervals to allow for wear and tear over time.
Another of our London-based customers said: “Having a Reserve Fund has worked well in our block where many leaseholders live overseas. It is much more difficult and time-consuming to raise a one-off levy when lessees have to be contacted all over the world. It has also made it much quicker to get on with necessary major works.
How do we manage the reserve fund?
The reserve fund goes into your dedicated development bank account. Like a club or a school, your building has its own bank account, which we set up and manage for you. You and your neighbours pay into this bank account to make sure there’s enough money to pay for the work your building needs. Any interest your money makes while it’s in the account belongs to your building.
How is the reserve fund different from the service charge?
For every service charge you pay, a portion of the money goes towards the reserve fund, but the two amounts account for very different things.
The service charge you pay goes towards the day-to-day running costs of your development and is used to cover items such as buildings insurance, maintenance, repairs, gardening and communal facilities, as well as for any staff that might work at your development.
Do you need to pay into a reserve fund if you’re planning to sell your property?
Having a healthy reserve fund in place should also make your property more attractive to a potential buyer and support the value of your home.
The reserve fund pays for works on the whole building and its grounds on behalf of all the residents. You and your neighbours all have a responsibility to pay into the reserve fund for the period you own your home, whether you plan to sell it or not. This will be written into the development’s lease.
Richard Thwaites, Director - Property Services, FirstPort Limited
