Reserve or sinking funds

A reserve fund, also called a sinking fund, is money set aside to cover the cost of expensive work to buildings containing leasehold properties that is only done every few years, such as painting the outside of the building or replacing the roof or a lift.

The money is built up from regular payments by leaseholders through their service charges.

The purpose of the fund is:

• to make sure all leaseholders contribute to the cost of major work, not just those who own the properties at the time the work is done
• to spread the cost more evenly over time – this can help leaseholders budget and reduce the need for large one-off bills

Not all buildings have a reserve fund. Your lease should tell you whether you need to pay into one and how it will be used. Your landlord can only collect payments into a reserve fund if your lease specifically allows it.

Even if there is a reserve fund, it will not always be enough to cover the full cost of major work. You might need to make up the difference through your service charge.

Your lease might say how much you need to contribute to the fund each year. If your lease does not tell you the amount, then it’s up to the landlord to decide on how much to charge.

The contributions you’re asked for must be reasonable. For example, your landlord should take account of:

• the expected cost of the work, and how often it needs to be done – you could ask to see a long-term maintenance plan or survey to help you understand whether the charges are reasonable
• how much is already in the reserve fund – a demand for extra contributions might not be reasonable if there is already enough to pay for planned work

If the cost of work is not yet known, you're only legally required to pay a reasonable contribution in advance. You might need to pay a higher or lower amount later once the actual costs are known.

The lease will usually say what happens if there is a surplus. It might be paid back to you, or kept to be used in future.

Contributions to a reserve fund are part of your service charge. You have the right to challenge them at a tribunal if you think they’re not reasonable, in the same way as other costs that you pay through your service charge.

Find out how to challenge a service charge

By law, private sector landlords must hold the money in trust for the benefit of the leaseholders. It must be kept in an account that is separate from the landlord’s own money. It will usually be held in an account that earns interest, with the interest added to the fund.

If you sell your flat, you will not usually be able to get back any money you have paid into the fund, unless your lease specifically allows you to. However, the money will benefit your buyer in future, and so the reserve fund may add to the value of your property.

A reserve fund must only be used for the purposes for which it has been set up, in line with what your lease says.

Your landlord must consult you if they are planning major works that will cost any leaseholder more than £250, even if the money to cover the work is already in the reserve fund.

They must follow the Section 20 consultation process to give you a say on the work and the costs.

Find out more about:

• responding to a Section 20 consultation
• what happens if your landlord does not consult