What are reserves

Reserves—also known as reserve funds, reserve accounts, or sinking funds—are designated savings set aside by property managers or leaseholders to cover future capital expenditures. These are typically non-recurring costs such as:

• Major refurbishments (e.g. external redecoration, roof repairs)
• Infrastructure upgrades (e.g. lift replacements, gate motors, lighting systems)
• Legal or compliance updates (e.g. the Fire Safety Act 2022)
• Emergency repairs not covered by insurance

They are not meant for routine maintenance or day-to-day operational expenses

Why is reserve planning so important?

All properties will require non-cyclical works from time to time, the most common example of this is re-decoration. Typically, leases require this to be done every 5-7 years and it is usually a high cost item. If all leaseholders are asked to fund these works as and when they arise (over and above the service charge), it can cause hardship and distress.

The creation of a reserve fund is just part of the equation. I have seen many developments create a reserve fund simply by applying a percentage of the service charge as a reserve contribution e.g. 10%. Whilst any funds towards a rainy day are welcome, this approach is flawed for a number of reasons

1. It’s lazy and points to a lack of thought and planning
2. Leaseholders may perceive this as money going into a “black hole”
3. It can cause mistrust with some leaseholders when they are asked for money but effectively not told why
4. As the contribution is not defined, they are often used to cover overspends rather than typical reserve items

The Common Ground Approach – Define what, when and how much?

The first thing to look at is the risk profile of the site. What are the big ticket items that could go wrong or fail. The roof is often the starting point and this can be assessed by a competent and trustworthy roofer or a chartered surveyor. Sadly, we see a lot of poorly constructed roofs and this usually presents quite early on in the building lifecycle. If you do find your self in this position, then you need to plan accordingly.

Anything with moving parts will need maintaining and upgrading from time to time. Examples of this include lifts (typically 25-year life span), electric gates, water pumps, sewage pumps, air conditioning, boilers and heating systems.

One approach to this is to appoint a chartered surveyor to complete a condition report and dilapidation survey, however, much of the information required can be gained at no cost from competent maintenance contractors and/or manufacturers.

Using this approach, Common Ground creates reserve plans as part of our standard budgeting process. We will first define the items we believe will require a contribution. We will then predict when we think each item will need to be addressed and will predict what we think it will cost at the time the work needs to be completed; There is no point using a quotation received in 2025 for works required in 2030. You’ll need to take into account inflation.

Communicate the plan

So having defined what, when and how much, it’s crucial to report this clearly to leaseholders. The approach of having a separate sheet on our budgets communicating the what, when and how much causes a lot less resistance and re-assures leaseholders that the building is being managed competently.
If you want some horror stories of developments with massive service charges due to a lack of planning, look no further than the BBC website.