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Am I entitled to a refund of my contributions to the service charge reserve fund?

Reader’s E-mail:

The building I am living in has a substantial reserved fund. And this year, there was an excess income on the account which was automatically contributed to the Reserve Fund. Yet our reserved fund contribution has remained unchanged (£770 per half year) since I’ve lived here (3 years). Is there any entitlement to a refund on Reserve Fund contributions? Particularly in the case of a) the reserve fund not being used and constantly growing and b) if we move out, can we get our money back?

Reply from Service Charge Dispute Guide

1. There are two separate issues involved in the situation you describe in your enquiry:

i. The treatment of credit on your service charge account

ii. Whether you are entitled to a refund of any monies you have previously paid into the reserve fund.

2. Typically modern leases require service charge payment to be made in advance yearly or half yearly ‘on account’ against an estimate of the costs which a Landlord predicts they will incur in fulfilling their obligations under the terms of a lease.

3. At the end of the service charge accounting period, normally 12 months, a Landlord is usually required to produce a statement of actual expenditure.

4. Unless the Landlord is able to predict precisely what costs they will incur, there will normally be a excess sum to be credited or a deficit to be paid by the Leaseholders.

5. Under Section 19 (2) of the Landlord and Tenant act 1985 there is a general obligation for Landlords to do ‘something’ with a credit on a service charge account:

Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise

6. The precise manner in which a Landlord is required to fulfil that obligation is dependent on the wording of the relevant lease.

7. There is no one standard lease type and Leaseholders must therefore carefully read their own lease to determine precisely what contractual obligations apply.

8. The vast majority of modern leases state either that a Landlord must apply the credit to the following year, or refund the surplus amount directly to leaseholders.

9. It would be unusual (but not impossible) for a lease to state that a credit should be automatically transferred to a reserve fund and this point needs to be carefully checked. Typically, a Landlord would be required to make a further demand to a Leaseholder for a reserve fund contribution to be made before payment of any further monies to reserve fund became due.

10. Depending on what your lease says, you may have a valid legal claim (based the contractual terms of your lease) for the credit on the account to either be refunded to you directly, or alternatively credited against the service charge account for the following period.

11. In respect of the second of the two issues identified above (regarding a refund of contributions previously made to a reserve fund), it is important to note that Leaseholders have no general legal right to a refund, except in those instances where a Landlord is not entitled under the terms of a Lease to demand such contributions.

12. The sale of a lease is very unlikely to provide valid legal grounds for a leaseholder to request a refund of the contributions they made whilst they were a tenant.

13. In order for a Leaseholder to have valid grounds too request a refund from a reserve fund they would need to demonstrate that the contributions were not being demanding in accordance with the contractual arrangements stated in their lease.

14. For example, many leases state the purpose for which monies in the reserve fun might be used. Typically modern leases specify that the purpose of a reserve fund would be to fund infrequent large items of expenditure. In this instance, a leaseholder may have grounds for complaint if the amount collected was clearly in excess of the amount which would be required in order to carry such large items of work, or if the lease did not require that the Landlord undertake such works.

15. Best practice is for a Landlord to calculate the amount which a Leaseholder is required to contribute to a reserve fund with a reference to a survey and a costed schedule of future works. For example, if a survey indicates that the roof needs replacing in 20 years time, a Landlord should be estimating the cost of that replacement work and calculating how much each Leaseholder needs to pay each year over the next 20 years to ensure that there are sufficient funds in the reserve fund to cover the cost of the work.

16. It is not an absolute legal requirement that Landlords calculate the required level of contributions in this way. However, you should note that in the Royal Institute of Chartered Surveyors (RICS): Residential Service Charge Management Code (2nd Edition) at point 9.2 this is recommended best practice. Moreover, Section 87 of the Leasehold Reform, Housing and Urban Development Act 1993 states that such a Code of Management Practice is admissible as evidence in a Court or Tribunal and that (when relevant) the Code of Management Practice should be taken into account in relation to determining a dispute.

17. As a starting point in resolving concerns about the level of contributions to a reserve fund a Leaseholder should therefore carefully check the wording of their lease, and request that their landlord provide any costed schedule of works, and information from any surveys they have carried out, which they are using as a basis for calculating the level of individual contributions to a reserve fund.

Click on the link to read more Reader’s Questions and Answers on Trust and Reserve Funds