A director of a Residents Management Company (RMC) recently asked us the following question,
“We’re considering what would be the approximate percentage that should be allocated to reserves within the annual budget. I have three sets of comparative accounts – all out of date – and a range of between 5% – 9% is evident. Our managing agents are charging 5% (last year and current).
Could you gave me an opinion on this matter? What % are you other clients setting aside? Can you benchmark us against your other clients?”
Our response was as follows,
“A % of budget allocation basis for allocating contributions to reserves may be considered a reasonable way to arrive at annual reserve contributions. However, it might be better to arrive at reserve contributions on a more rational basis. From a review of your lease most of the material expenditure items that a reserve fund might be used for in the future would be covered by a well thought out planned maintenance programme. If this exercise is carried out by a Chartered Surveyor, then their professional opinion will add credibility to support the amount requested for reserve fund contributions.
You also need to be mindful of the case of Syed Balakhi v Southern Land Securities  UKUT 0239 (LC). The outcome of this case was broadly, that the burden of proof on determining the reasonableness of reserve fund contributions rests with the Landlord or the RMC directors. A % contribution based on budgeted service charge expenditure may turn out to be an unreasonable basis to use if the cost of the major works in the future turns out to be significantly less than the amount collected.
Go back to the Managing Agent and ask them to carry out a Planned Maintenance Programme and then to let you know the following,
- A description of the future works to be carried out
- A timetable for the works
- The estimated costs
- If a section 20 consultation will be carried out
With regards to the comparison of reserve contributions across different properties, I’m not sure if this type of benchmarking will be useful. The circumstances for each property is likely to be very different and the reserve requirements will depend on a number of different factors specific to each property.”
Major works and the size of reserve contributions to meet those works are often difficult issues that require judgement for directors of RMCs. It’s helpful for directors to be able to turn to competent and experienced professionals to assist them with these matters. At Haines Watts we’re always happy to have an initial discussion with directors to see if we can help in any way.
For advice, information or simply a quick chat about your service charge needs, please get in touch using our contact form