Who actually owns the money in our block's reserve fund - the leaseholders, the freeholder or the managing agent? And can a leaseholder get their share back when they sell?
Reserve fund contributions are not owned outright by any one party in the way people often assume. Qualifying service charge contributions, including reserve fund contributions, are generally held on statutory trust under section 42 of the Landlord and Tenant Act 1987 for the contributing leaseholders, and must be applied in accordance with the leases and the trust. That means the fund is not the managing agent's business money, not the freeholder's unrestricted money, and not a personal deposit an individual leaseholder can withdraw on sale. The lease governs whether reserves may be collected and how they may be spent.
The tidy answer people want is that leaseholders "own" the reserve fund in divisible shares. That is not quite right, and the difference matters.
Qualifying service charge contributions, including reserve or sinking fund contributions, are generally held on trust under section 42 of the Landlord and Tenant Act 1987 for the persons who are the contributing tenants for the time being. The fund is a pooled trust fund attached to the building and its service charge arrangements, to be applied in accordance with the leases and the trust. It is not a savings account with a named balance for each flat.
Three propositions follow, and they are the ones that resolve most arguments:
The trust says whose money it is. The lease says whether reserve contributions may be collected at all, what they may be spent on, and how they must be demanded and accounted for. Some leases have detailed reserve fund provisions; some allow only for anticipated expenditure in the coming year; a few are silent, in which case collecting a reserve may be difficult to justify. Before building or drawing down a fund, read the clause.
Whatever the tenure structure, the records should make the position unambiguous:
Where an estate has several blocks contributing on different schedules, mixing reserves between them is a common and expensive error to unwind. Our guidance on service charge bank accounts covers how funds should be held.
Transferring the fund to a new agent or to an RTM company does not change its character. It remains trust money, and the receiving party takes it subject to the same obligations. That is why a proper reconciliation on handover matters so much: the money and the record of what it represents need to travel together.
Whoever holds the fund, someone has to account for it properly each year. That reporting is part of our RTM company management service.
Treat the reserve fund as a pooled trust fund attached to the building, evidenced by clear accounting records, rather than as anybody's balance sheet asset.
Describing the reserve as each leaseholder''s savings
It creates an expectation of refunds on sale that the trust and the lease do not support, and leads to avoidable disputes.
Pooling reserves across separate blocks or schedules
Contributors to one schedule end up funding another, which is difficult to justify and expensive to correct.
Spending reserves on items the lease does not cover
Expenditure outside the permitted purposes can be challenged and may not be recoverable.
Handing over a balance with no history
Without the reconciliation, the receiving manager cannot show what the fund represents or defend it if challenged.
Most questions on this topic are management questions rather than legal ones, and the two are worth separating. A managing agent can tell you how something works day to day and what it will cost. A solicitor tells you what your rights are and how a Tribunal is likely to view them.
East Valley Properties provides management expertise, not legal advice. Where a matter turns on the wording of your lease or on formal proceedings, we will say so and work alongside your solicitor.
The official material behind this guide. We summarise it in plain English rather than reproducing it.
The statutory trust over service charge contributions.
Expected standards for holding and accounting for client money.
Clear budgets, service charge accounts in the client company's name where possible and year-end accounts leaseholders can actually follow. We can review your current arrangement at no cost.
Answered by Romain Maillard - Director, East Valley Properties
Romain manages residential blocks and estates for RTM companies, residents' management companies, share of freehold developments and freeholders across East London and Essex.
Published · Updated
Based on the legislation and official guidance cited on this page.
General property management information, not legal or professional advice. Where a decision depends on an individual lease, building, dispute or technical assessment, obtain specialist advice. See our editorial standards.
This answer has been anonymised. Personal details, addresses and company names have been removed. Guidance is general and does not replace advice from a solicitor or surveyor on your specific block. East Valley Properties is a managing agent, not a firm of solicitors or legal advisers.
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