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Reserve funds

Redendale Limited v Modi
[2010] UKUT 346 (LC)

Summary

The Upper Tribunal gives guidance on the operation of a reserve fund.

Facts

The appellant operates a reserve fund under which, in each financial year, any surplus of service charge receipts over actual expenditure is transferred to the fund and any deficit is met by transfers from the fund. The provisions of the lease were similar to those considered by the Court of Appeal in St Mary's Mansions Ltd v Limegate Investment Co Ltd [2003] 1 EGLR 41.

Held

The Upper Tribunal held that while the lease permitted this arrangement neither the certified service expenditure statements nor the demands for payments on account contained any detail about anticipated expenditure of a periodically recurring nature for which a reserve fund might be appropriate. The certified statements referred exclusively to expenditure that had been incurred. The lease also required any shortfall in service charges to be paid for by the lessee with unexpected balances being “carried forward as a credit to the next period”.

For those reasons and the reasons in the St Mary’s Mansions case the Upper Tribunal held that any surplus/deficit in the service charges compared with actual expenditure could not be properly transferred to/from a reserve fund in the years in question.

Comment

Where a lease makes provision for a reserve fund, transfers to/from the reserve fund will not allowed unless specific provision is made in the certified expenditure statements and/or the demands for payment on account.


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