Block reserve funds being introduced for leaseholders

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Now that actual bills have been sent out, we have received many queries from leaseholders faced with high initial contributions. We are pleased to confirm that we are modifying the scheme and we will accept if leaseholders in genuine hardship do not pay their contributions to their block reserve. In these cases, we will treat the missed contributions as an arrear and give an undertaking not to pursue the arrear, provided that all other service charges on your bill are paid in full in the usual way.

Background to the introduction of block reserve funds

Eastbourne Homes Limited (EHL) is discontinuing individual ‘Major Works Funds’ (MWF) from 1 April 2018, in favour of a more effective, method of funding future major repairs which is recommended by the Royal Institution of Chartered Surveyors (RICS). 

We commissioned The Housing Quality Network (HQN) to assist us in developing this new approach. We sought the views of members of the Leaseholders Panel and  EHL’s Board considered and approved the proposal. The switch to reserve funds is good news in the long term for leaseholders as it gives visibility to leaseholders on future major repairs expenditure to their block and also allows them to budget effectively and build a fund to finance the cost of major repairs. It also helps to ensure leaseholder’s blocks are regularly and properly maintained thus protecting asset values and marketability of the dwelling and the block when it comes time to sell. 

Like all flat owners, Eastbourne Borough Council's (EBC) leaseholders are responsible for paying towards the cost of maintaining their blocks. From 1 April, EBC will start using a new approach to helping its leaseholders budget for Block Reserve Funds which are supported by costed forecasts for major repairs. The new funds we’ve put in place work like a long-term savings account that leaseholders  contribute to. This builds up every year and should pay for major works to the block, such as replacing a roof. 

Previously, leaseholders have received bills after major work to their block was completed. The old system did not give leaseholders a long term forecast of costs or means to make provision for major repairs. In future, Block Reserve Funds will be collected in regular amounts ahead of when the work is needed and according to a clear forecast of future major repairs. This means leaseholders can budget properly for works rather than paying in one large lump sum. 

The funds are held in trust for each block and will accrue interest.

We appreciate that this will mean an increase in the amount leaseholders will be asked to pay up front to ensure the quality and value of their property is maintained. However, there is no increase in the actual cost of the work. The funds are simply collected in a new, more planned and certain way. 

We understand that in some cases this change will result in a significant increase because of major repairs of a high value that are needed within the next few years. We can reassure those leaseholders affected that their contributions will be adjusted once essential high value work is complete. EHL is offering support to those leaseholders who feel the new charging method is unaffordable, including offering flexible options for payment. 

What is a block reserve fund?

The definition from the Royal Institution of Chartered Surveyors is: “A reserve fund is a pool of money created through the payment of service charges which are not immediately needed towards repairs, maintenance or management…but which are collected and retained to build up sums which can be used to pay for large items of infrequent expenditure…and for major items which arise regularly”.

  • Reserve funds have been developed in response to leaseholders having difficulty funding their contributions to major repairs in their blocks.
  • All blocks require major repairs from time to time. Leaseholders are obligated under the terms of their leases to pay a contribution to the repairs undertaken to their block i.e. new roof, external redecoration, painting of communal hallways.
  • There is a reserve fund specific to each block of flats. The money leaseholders put into reserve funds for their block is held in trust by EBC in interest bearing accounts.
  • The amount paid into to reserve funds is based on when major repairs are likely to occur and how much those repairs are likely to cost.
  • The costs are estimates based on information gathered from condition surveys which are undertaken by a specialist surveying practice.
  • The same method and calculations are used by EBC to estimate what the Council needs to set aside to fund its own contribution towards major repairs that cover the rented flats. 
  • EBC does not benefit from leaseholders’ block reserve funds.

Further information

For more information about the new reserve funds please see the revised Leaseholders Handbook:

Alternatively you can contact Kim Sanderson, Leasehold Officer:

Questions and answers

We have already been asked a number of questions by leaseholders and these are shown below. If you have any further questions, please forward them to Kim Sanderson (see contact details above) and we will respond to you and add to the list below.

Why have you changed from the old system of billing?

To make longer term budgeting for major repairs contributions to blocks easier for leaseholders. Under the previous ‘pay when done’ system, leaseholders could be faced with sudden exceptionally high bills. The new method will reduce the potential for serious arrears and provide leaseholders with information in advance on the cost of future major repairs and when the repairs are likely to be done.

What was wrong with the Major Works Fund (MWF)?

Paying a nominal £125 per year bore no relationship to the real costs of undertaking major repairs to blocks. The annual contribution for major repairs will differ from one block to another depending on age and condition.

What about money I have in my Major Works Fund?

Any monies in an individual’s MWF will be used to offset current or future service charge bills. The adjustments will be made within the 2018/19 financial year.

What’s the difference between a Reserve Fund and the Major Works Fund?

Put simply, the MWF was held in a leaseholder’s service charge account; the Reserve Fund belongs to the block.

What happens to my contributions to the Reserve Fund if I move?

Each block has its’ own unique fund which belongs to the block and not an individual. Your purchaser will get the benefit of past contributions to the fund and your Solicitor and Estate Agent will take account of this at time of sale.

Will these high contributions to the Fund will make it harder to sell my flat?

If anything, it will make a sale easier. Purchasers are reassured that provision is being made for funding major repairs and the current value of the fund would be taken into account (by your Solicitor and Estate Agent) at time of sale. The Block Reserve Funds ensure that every leaseholder pays their fair share towards the long-term upkeep of the property, whether or not their occupancy coincides with any upcoming major works. 

Can you legally do this (introduce Block Reserve Funds)?

Yes. The lease allows for the collection of reserve funds.

The Leaseholders Panel does not support the proposal as per a letter dated the 14th November 2016.

This is untrue. The letter dated the 14th November 2016 was a summary of observations made by a small number of leaseholders who attended an informal forum to discuss issues of common concern and feed back to the Panel. The Panel shared the comments with fellow leaseholders and reviewed the responses. After careful consideration the Leaseholders Panel understood the principles and benefits of introducing Block Reserve Funds and fully supports the proposal.

Why should I pay for works before they are done?

The lease actually requires payment, in advance, on estimate in 2 six-monthly instalments.  

Why do you have to do major works?

To preserve the building fabric and its services for the use and enjoyment of the residents and also to protect the asset value of dwellings and the freehold block. 

I already pay for repairs every year based on an estimate of the last 5 years - doesn't this cover major works?

This amount is for is for responsive (day to day repairs) and other communal services such as service contracts for lifts, grounds maintenance, cleaning etc and not major repairs.

Why don’t tenants pay for major works?

The costs of all works are proportioned by the number of flats in a block, irrespective of whether it is leasehold or tenanted. Leaseholders will only pay a proportion (%) of the block annual cost as per the terms of their lease. The contribution for the tenanted properties is paid by EBC, funded entirely from tenants’ rents and with no contribution whatsoever from Government or other grant. 

Why should I pay the cost of tenants’ windows?

The lease makes you jointly responsible for all external elements (except your own entrance door and window glazing repair, which are your responsibility). The repairing obligations of each party are set out in more detail in your lease. Taken to an extreme, a ground floor resident could question why they have to pay for the roof and a top floor resident could ask why they have to pay for the foundations?

Does 'Section 20' still apply?

The introduction of Reserve Funds in no way impacts upon our statutory duty to consult with you under s20 procedures when major repairs become necessary.

How can you know the cost of something in 30 years time?

We cannot forecast that with 100% accuracy. We can, however, estimate using well established methods for undertaking condition surveys supported by purpose built IT systems. We employ professional surveyors to estimate the cost of future major repairs using present day values.  We factor in an assumption that interest accruing in the reserve fund will help to offset price increases occurring through inflation. When leaseholders are asked to pay charges for major repair schemes EBC also has to set aside money to cover the tenanted flats. It is therefore in everyone’s best interests that the estimated costs are as accurate as reasonably possible so all parties can budget. 

What happens if there is not enough money in the Reserve Fund when works are carried out?

We will try and avoid this by not under estimating the future value of works. If, however, it does happen you will be expected to pay your relevant proportion of the shortfall.

How do I know you are not allowing too much in your estimates?

Estimates are prepared by professional surveyors based on known current costs which are checked against published industry rates for undertaking work on similar building types in the region. You must, however, remember that they are only estimates. We will regularly review each individual fund when works are carried out and also at no more than 2 yearly intervals. All assumptions and estimates will be recast as part of the regular review to maintain the currency of the fund.

What if the works are not carried out when planned?

This may well happen. We base our future calculations on the expected lifespan of each element of the building. If, nearer the time, the works are not required and the lifespan of the element can be extended we will do this. Contributions to the fund will be adjusted accordingly (downwards).

What if I feel my expected contributions to my block’s fund are unaffordable?

For those leaseholders with high demands, EBC will discuss options for repayment with you direct. If regular contributions to the fund are unaffordable, then the leaseholder will need to set up alternative means of financing in order to meet the bill when due.

My contribution to my block fund this year is £1,000. Does that means with your 30 year average you are going to charge me £30,000?

This would not be the case. The Block Repair & Redecoration Programme is on a 7 year cycle. Your contributions are calculated so you have enough money in the fund to meet the expected cost of works at each cycle. If works are expected at your block in the first few years, your contributions will naturally be higher. If you look at the estimate sent to you, add up the total of the penultimate column (total due per element per block), divide this by 30 (years) and divide the result by the number of flats in the block, this will give you your average contribution over 30 years. We will ensure that future estimates include this information more clearly.

How do I know my Reserve Fund is being properly managed?

EHL is adopting the Royal Institution of Chartered Surveyors Service Charge Code of Practice to operate and implement the reserve funds. This is considered to be good practice. There are strict procedures within the Code regarding handling the contributions, including complete openness and transparency.

How do I know I am getting value for money?

The Council obtains maximum value in its procurement of repairs and maintenance services through competitive tendering and by using its buying power in the market place for the benefit of tenants and leaseholders.  

Why do my contributions have to be estimated over a 30 year period? Why not 5 or 10 instead?

We work to a continuous 30 year plan to manage EBC’s properties. This is standard practice within the sector. Operating a 10 year plan, for example, would only capture regular items such as redecorating and we would miss the opportunity to gradually contribute towards longer term items such as the roof.

Can I stop paying in to my Block Reserve Fund?

A fund now exists for every block. If your circumstances change and you can no longer afford your contribution to the fund it will be treated as an arrear and dealt with as outlined elsewhere. 

The following questions and answers apply if you have decided that you cannot currently pay into your block reserve fund

Please note in the first case, we would encourage you to discuss your circumstances with EBC’s Account Management Team who are ready and willing to assist you.

How long will my service charge arrear be on my account?

Until you have cleared the arrears.

What happens with my arrear if I want to sell my flat?

As with all arrears, this must be settled as part of the sale. In reality, this would not have a dramatic effect on your sale as we are legally required to inform your purchaser of the anticipated cost of future major works and they would account for this in their offer to you.