Section 42 (Service Charge Contributions to be Held in Trust)

Section 42 of the Landlord and Tenant Act 1987

1. This section requires that Service Charge contributions must be held in one or more trust funds.

2. The monies held must be used only for those matters for which the Service Charge contributions are given by the contributing Leaseholders.

What does ‘trust fund’ mean under Section 42?

1. It means three things:

i. The contributing Leaseholders are taken to have a share of any monies held proportionate to the amount they contribute.

ii. Any interest or other gain which accrues on the monies held must be added to the amounts held in the fund.

iii. There are specific rules on how the monies must be kept until spent on matters relevant to the Service Charge contribution.

How must trust monies be held?

1. There are specific rules on where trust fund monies can be deposited or invested. These are given in The Service Charge Contributions (Authorised Investments) Order 1988 and later amended by Section 391 of the The Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001.

2. In essence there are three options given:

i. The money must be deposited with a banking institution based in the UK authorised to take deposits under Part 4 of the Financial Services and Markets Act 2000.

ii. The money must be deposited with a banking institution based in a European Union country authorised to take deposits under Schedule 3 of the Financial Services and Markets Act 2000.

iii. It may either be deposited with, or shares purchased in, a building society as defined by the Building Societies Act 1986.

Why is This Important to Leaseholders?

1. Leaseholders normally have pay to monies on account to cover future expenditure, whether that be over the forthcoming year or further in advance to cover large items of future expenditure.

2. The idea behind Section 42 is address two specific types of risk which might result in the monies not being available to spend on the purpose intended:

i. That the Landlord, or Agent acting for the Landlord, might simply treat Leaseholders’ Service Charge contributions as though the money was there was own and there would no clear record of where the money went or that any interest was credited to Service Charge fund.

ii. That the money might invested in something risky where there is a danger that the contributions might be lost.

Can Leaseholders get money back from the trust fund?

1. What Section 42 says is that if the trust fund is terminated for whatever reason all the remaining money goes to the Landlord for whatever they wish to spend it on. Please note, that this only relates to the termination of a trust fund in the event that Service Charge stop being collected for any reason.

2. A Leaseholder may only reclaim monies from the trust fund if the Landlord was not entitled to collect it in the first place, perhaps because the lease does not entitled the Landlord to collect contributions at all or perhaps because the contributions were collected for a purpose which was not permitted by the law or the terms of a lease.

3. This does not mean that a Leaseholder’s rights under their Leases in respect to surpluses at the end of a Service Charge year are affected in any way.

4. Nor does it mean that a Leaseholder can’t claim a refund of their Service Charge payments in the event that the contributions they have made were not properly payable under the terms of their Lease or the law.

Relevant Case Law

See the section of our case law library on Reserve Funds

Click on the link to read more about The Landlord and Tenant Act 1987