Reserve Fund & Sinking Fund Guide for Blocks of Flats
A comprehensive guide to understanding reserve funds and sinking funds for blocks of flats. Learn how much to save, your legal obligations under the Landlord and Tenant Act 1987, RICS best practice guidance, and how to manage fund investments responsibly.
Call 0161 371 7190What Is a Reserve Fund?
Definition of a Reserve Fund
A reserve fund is a dedicated savings pot maintained by the freeholder or managing agent of a block of flats. It is funded through regular contributions from leaseholders, collected as part of the annual service charge. The fund exists to cover the cost of future major works, cyclical maintenance, and significant repairs that are anticipated but not yet due.
Without a properly maintained reserve fund, leaseholders can be faced with sudden, large financial demands when expensive works become necessary, which can cause hardship and lead to disputes.
Difference Between a Reserve Fund and a Sinking Fund
The terms reserve fund and sinking fund are often used interchangeably, but there can be a subtle distinction. A sinking fund is typically earmarked for a specific future expense, such as a roof replacement or lift refurbishment. A reserve fund, by contrast, is a more general pot of money set aside to cover a range of future expenditures.
In practice, most blocks of flats operate a single combined fund that serves both purposes, and the terms are treated as synonymous by most property managers and leaseholders alike.
Why Blocks of Flats Need a Reserve Fund
- Spreads the cost of major works over many years rather than creating one-off demands
- Ensures funds are available when urgent or planned repairs are needed
- Reduces disputes between leaseholders and the freeholder about payment timing
- Helps maintain the condition and value of the building over the long term
- Demonstrates responsible financial management by the managing agent
- Meets RICS best practice recommendations for residential block management
For a broader understanding of how reserve fund contributions fit within the overall charges for your building, read our service charge guide.
How Much Should a Reserve Fund Be?
RICS Recommendations
The Royal Institution of Chartered Surveyors (RICS) provides clear guidance on reserve fund levels. The RICS Service Charge Residential Management Code recommends that managing agents should prepare a planned preventative maintenance (PPM) schedule covering at least 10 years, ideally 20 to 30 years, and use this to calculate the appropriate level of reserve fund contributions.
RICS considers it best practice for a reserve fund to hold between 25% and 50% of the annual service charge budget, although this is a general guideline and the actual requirement will vary depending on the age and condition of the building.
Typical Percentages and Contribution Levels
For a well-maintained modern block, contributions of 10% to 20% of the annual service charge may be sufficient in the early years. For older buildings with ageing components such as roofs, windows, and communal boilers, contributions of 30% to 50% or more may be appropriate.
The key factor is the anticipated cost of future major works and the number of years remaining before those works are needed. A building with a roof due for replacement in five years needs significantly higher annual contributions than one with a new roof.
Calculation Methods
The most reliable method for calculating reserve fund contributions is component-based budgeting. This involves identifying each major building component, estimating its replacement cost, determining its expected lifespan, and dividing the cost by the remaining years to establish the required annual contribution.
For example, if a roof is expected to cost £60,000 to replace and has 15 years of remaining life, the annual contribution for that element alone should be approximately £4,000 per year, split across all contributing leaseholders.
A professional building surveyor or experienced managing agent can prepare a detailed PPM schedule to ensure contributions are set at the correct level.
For detailed guidance on preparing annual budgets including reserve fund contributions, see our service charge budget guide.
Section 42 Trust Requirements
The Landlord and Tenant Act 1987
Section 42 of the Landlord and Tenant Act 1987 imposes important obligations on how service charge funds, including reserve and sinking funds, are held by the landlord or their agent. This legislation provides essential protections for leaseholders by requiring that their money is safeguarded properly.
The Act applies to most residential leases where leaseholders pay a variable service charge, and its requirements are legally binding on freeholders and their appointed managing agents.
Holding Funds on Trust
Under Section 42, all service charge contributions, including reserve fund monies, must be held on trust by the landlord. This means the funds are not the personal property of the freeholder and cannot be used for any purpose other than the costs for which they were collected.
The trust requirement also means that the funds must be held in a designated bank account that is separate from the freeholder's or managing agent's own business accounts. If the freeholder becomes insolvent, the funds held on trust are protected from creditors.
This is one of the most important leaseholder protections in English property law and provides significant reassurance that reserve fund contributions are secure.
Leaseholder Protections Under the Act
- Funds must be held in a trust account at a recognised financial institution
- Reserve fund monies are protected if the freeholder becomes insolvent
- Leaseholders can request a summary of the trust account at any time
- The freeholder must notify leaseholders of where the funds are held
- Interest earned on the trust account belongs to the fund, not the freeholder
- Failure to comply with Section 42 is a criminal offence
For more on the legislative framework governing service charges and leaseholder rights, visit our Landlord and Tenant Act 1985 guide.
Investing Reserve Funds
Interest-Bearing Accounts
Reserve fund monies should ideally be held in interest-bearing accounts to help preserve their real value against inflation. RICS guidance recommends that managing agents place reserve funds in accounts that offer a reasonable rate of return while maintaining easy access when funds are needed for works.
The interest earned on reserve fund accounts belongs to the fund itself and should be credited back to the service charge account. It is not income that belongs to the freeholder or the managing agent.
Bank Account Requirements
The Section 42 trust requirements mean that reserve funds must be held in accounts at recognised financial institutions. The accounts must be clearly designated as client trust accounts or similar, ensuring the money is identifiable as belonging to the leaseholders rather than the managing agent.
Many professional managing agents use FSCS-protected accounts (Financial Services Compensation Scheme) which provide cover of up to £85,000 per banking licence. For blocks with large reserve funds, it may be necessary to split the funds across multiple institutions to ensure full FSCS protection.
Fiduciary Duty
The freeholder and their managing agent owe a fiduciary duty to leaseholders when managing reserve funds. This means they must act in the best interests of the leaseholders, avoid conflicts of interest, and exercise proper care and diligence in how the funds are invested and managed.
Reserve funds should never be invested in high-risk products such as stocks and shares. The priority must always be capital preservation and liquidity, ensuring funds are available when needed for building works.
For more information on the financial management of blocks of flats, read our block management accounting guide.
Reserve Funds and Major Works
Using Reserves for Planned Maintenance
The primary purpose of a reserve fund is to pay for planned maintenance and major works. When a significant expense is due, such as external redecoration, window replacement, or roof repairs, the managing agent can draw on the accumulated reserve rather than issuing a large one-off demand to leaseholders.
This approach is far less disruptive for leaseholders and represents one of the main benefits of maintaining a healthy reserve fund. It also allows the managing agent to plan works proactively rather than waiting until components fail.
Section 20 Consultation and Reserve Funds
It is important to understand that the existence of a reserve fund does not exempt the freeholder from the Section 20 consultation process. Even when funds are available in the reserve, the landlord must still comply with the statutory consultation requirements before committing to any qualifying works costing more than £250 per leaseholder.
The Section 20 process requires the landlord to issue a notice of intention, invite observations, obtain multiple estimates, and give leaseholders the opportunity to comment before proceeding. Failure to follow this process can limit the amount recoverable through the service charge to £250 per leaseholder, regardless of how much is held in the reserve.
The key distinction is that the reserve fund is a financial mechanism for collecting and holding money, while Section 20 is a procedural requirement governing how expenditure decisions are made and communicated.
Planning Ahead for Major Works
- Commission a condition survey to identify works needed over the next 10 to 30 years
- Prepare a costed planned preventative maintenance schedule
- Set reserve fund contributions based on anticipated expenditure timelines
- Review the fund annually and adjust contributions as building needs change
- Begin Section 20 consultation well in advance of planned works
- Keep leaseholders informed about fund levels and upcoming expenditure plans
Learn more about the major works process in our major works guide and Section 20 consultation guide.
Leaseholder Rights Over Reserve Funds
Right to Inspect Accounts
Leaseholders have a statutory right to inspect the accounts relating to their service charge, including the reserve fund. Under the Landlord and Tenant Act 1985, leaseholders can request a written summary of costs, and they have the right to inspect the underlying documentation, receipts, and bank statements.
This right enables leaseholders to verify that their reserve fund contributions are being held correctly, that interest is being credited, and that expenditure from the fund has been properly authorised and documented.
Transparency Obligations
Good block management practice requires transparency about reserve fund balances and expenditure plans. The managing agent should provide leaseholders with regular updates on the fund balance, anticipated future costs, and the rationale for current contribution levels.
Annual service charge accounts should clearly show the reserve fund as a separate line item, including opening balance, contributions received, interest earned, expenditure made, and closing balance. This level of transparency builds trust and reduces the likelihood of disputes.
What Happens to the Reserve Fund on Sale
When a leaseholder sells their flat, their share of the reserve fund is not refunded. The accumulated contributions remain in the fund and the benefit passes to the new owner of the lease. The purchaser effectively inherits the reserve fund balance attributable to that flat.
During the conveyancing process, the buyer's solicitor should review the management information pack provided by the managing agent, which will detail the current reserve fund balance and any planned future expenditure. This information is important for the buyer in assessing the true cost of owning the property.
In some cases, the seller may negotiate an adjustment to the sale price to reflect recent large contributions to the reserve fund, but this is a matter for negotiation between the parties rather than a legal entitlement.
For a full overview of your rights as a leaseholder, see our leaseholder rights guide.
Frequently Asked Questions About Reserve Funds and Sinking Funds
What is a sinking fund for flats?
A sinking fund for flats is a dedicated savings account built up over time through regular leaseholder contributions, typically collected as part of the annual service charge. The purpose is to accumulate sufficient funds to cover the cost of major works and significant repairs, such as roof replacement, external redecoration, or lift refurbishment, so that leaseholders are not faced with large one-off bills when expensive maintenance is needed.
How much should a reserve fund be?
RICS guidance recommends that a reserve fund should hold between 25% and 50% of the annual service charge budget, although the ideal amount depends on the age, size, and condition of the building. A properly prepared planned preventative maintenance schedule should be used to forecast future expenditure, allowing managing agents to set appropriate contribution levels that build up adequate reserves over time.
What happens to a sinking fund if I sell?
When you sell your flat, any contributions you have made to the sinking fund remain in the fund and transfer with the property. The new leaseholder inherits the benefit of accumulated reserves and the obligation to continue making contributions. There is generally no right to a refund of sinking fund contributions upon sale, as the fund is held for the benefit of the building as a whole rather than individual leaseholders.
Is a sinking fund a one-off payment?
No, a sinking fund is not a one-off payment. It is built up through regular, ongoing contributions that are typically collected annually or quarterly alongside the service charge. The contributions are spread over many years to ensure the fund grows steadily, reducing the need for large unexpected demands when major works are required.
Do all flats have a sinking fund?
Not all flats have a sinking fund. Whether a reserve or sinking fund exists depends on the terms of the lease and the decisions of the freeholder or managing agent. While RICS best practice strongly recommends maintaining a reserve fund for all blocks of flats, some older leases may not include provision for one. Where no fund exists, leaseholders may face large ad hoc demands to cover major works.
What are the disadvantages of a sinking fund?
The main disadvantages of a sinking fund include the fact that contributions are not refundable if you sell your flat, there can be disagreements among leaseholders about appropriate contribution levels, and funds held in bank accounts may lose real value over time due to inflation. Additionally, there is a fiduciary risk if the freeholder or managing agent does not hold or manage the funds correctly, although Section 42 trust requirements provide important protections.
Need Help Managing Your Reserve Fund?
Our experienced block management team can help you establish and manage a reserve fund that protects your building and gives leaseholders confidence. From preparing planned preventative maintenance schedules to ensuring full compliance with Section 42 trust requirements, we provide professional and transparent fund management.