The decision of the Upper Tribunal (Lands Chamber) in Caribax Limited (and others) v Hinde House Management Company Limited [2015] UKUT 0234 (LC) turned on the interpretation of those parts of the lease concerning the use of a reserve fund.
Under the lease the landlord was permitted to build up a reserve towards certain specified items of expenditure and that the reserves should be transferred to a “specially designated trust fund” complying with s42 (5) of the Landlord and Tenant Act 1987. The lease further provided that the cost of those specified items should be met first from the reserve/trust fund. In this case, whilst the landlord had built up reserves it had never established a “specially designated trust fund”.
The First-tier Tribunal (Property Chamber) (“the Tribunal”) decided that where spending came within any of the relevant categories the landlord could not be required to first of all use the reserve fund.
The Upper Tribunal reversed this decision on the basis that the Tribunal had basically permitted the landlord to take advantage of its own breach of covenant by not setting up the designated fund in the first place.
Whilst there was no specific trust fund established, a reserve fund was apparent in the landlord’s accounts and therefore it was required to use that for repairs and maintenance before requesting further sums from tenants.
Landlords should make sure that reserve funds are properly set up, in compliance with the lease, and held on trust as required by Section 42 of the 1987 Act.
If there is a reserve fund revealed to be in existence- irrespective of whether it is held in a designated trust fund – landlords should think about meeting repair and maintenance expenditure from this fund before sending out demands for further contributions through the service charge.
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