Reserve funds (also called sinking funds) smooth the impact of periodic major works. They are only lawful if authorised by the lease, and are subject to the same reasonableness controls as any other service charge.
The statutory basis
- s.42 LTA 1987: sums held on account are held on trust for the contributing leaseholders. Landlords cannot treat them as their own money.
- s.19 LTA 1985: reasonableness applies to the amount of the contribution demanded.
- s.27A LTA 1985: the tribunal has jurisdiction to determine whether reserve fund contributions are payable.
Grounds of challenge
- No power in the lease. If the lease is silent on reserves, the landlord cannot invent one.
- Over-collection. Landlord collecting substantially more than any credible major works plan justifies.
- Under-transparency. No forecast, no schedule, no accounting.
- Misuse. Reserves spent on non-reserve items without leaseholder agreement.
What the tribunal expects
- A reserve fund forecast based on a stock condition survey.
- Clear ring-fencing in trust accounts under s.42.
- Annual statements showing balances and movements.
- Reasonable size in relation to identified future works.
Related
- [Reasonableness test for service charges](/guides/reasonableness-test-for-service-charges-key-caselaw-explained)
- [Section 20 consultation for major works](/guides/section-20-consultation-explained-for-leaseholders-major-works)
Frequently asked questions
Can we recover the reserve fund on selling?＋
Only if the lease says so — most leases treat reserve contributions as forfeit on assignment. Modern leases sometimes allow apportionment on completion.
Is a reserve fund mandatory?＋
No — most leases permit but do not require one. Its absence is not unlawful but can cause cliff-edge major works bills.
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