Finding funding for unexpected work

Sometimes, you’ll need to do major work on your property at relatively short notice.  Unexpected or unplanned work projects can be financially problematic – the funding needs to come from somewhere – and either you or your leaseholders will need to pay up.  In the latter case, you’ll need to evaluate your options for making demands of your leaseholders.

How to begin gathering funds

Your first and most important point of reference is your lease or contract, and what it says regarding the issuing of demands.  Are services charges to be demanded in arrears? In advance? Or is it entirely the leaseholders’ responsibility to carry out the work between them?

In the case of service charges being demanded in arrears (ie. after the works are completed), you need to establish who has responsibility for the works and subsequently how they will be funded.

Under section 20 (s.20) of the Landlord and Tenant Act 1985, the law requires that leaseholders paying variable service charges must be consulted before a landlord carries out qualifying works.

A common misconception associated with s.20 is that a property manager can issue a demand for payment as part of this pre-work consultation process.  In actual fact, this demand can only be made in advance of the works if the lease permits it.

Furthermore, some leases may have a clause that allows the property manager to make a one-off demand for payment for unprecedented works, meaning that at least some of the funding can be received upfront.

The importance of a reserve fund

A reserve fund can be set up by the property manager to collect a non-repayable amount from leaseholders in advance of major scheduled works, or as a fund for any emergency maintenance that needs to take place.  If the reserve fund covers the cost of the works, leaseholders need not be harried for supplementary contributions, easing and shortening the consultation process.

Whilst most leases contain a provision for a reserve fund, the property manager may not have implemented it.  We strongly advise putting the reserve fund into action at the earliest opportunity – most likely the next budget year.

It would be prudent to advise all leaseholders well in advance of the demand being raised, so as to indication why you’re making the demand, how it will benefit them, and, if applicable, quoting the clause in the lease.  This should work to alleviate any questions from leaseholders when the increase demand is implemented.

It’s important to keep the demand realistic and reasonable – just as leaseholders can challenge their service charge, reserve funds can come under similar scrutiny if deemed inappropriate.

Not having the relevant clauses in the lease makes issuing demands for payment in advance of works starting much more difficult – even if s.20 consultation has been fully implemented.

What if your lease doesn’t have a reserve fund clause?

You may want to vary your lease in order to accommodate a reserve fund.  You should immediately contact your First-tier Tribunal to make a request for reserve fund lease provisions – FTTs generally view reserve funds as sensible practice, so you should have no problems in making an application.

If major works projects are due in the short term (ie. the next financial year), you will need to ensure that your demands are in line with the service charge clause in the lease and that s.20 procedures are being followed.

Plan ahead!

Once your lease does contain a reserve fund clause, subsequently implementing a rolling five-to-ten year schedule of works for any routine maintenance or works would be prudent practice.  By planning works in advance, you can accurately gauge their costs and consequently make accurate demands for the reserve fund.

It’s said that prevention is the best form of cure, and the same can be said for managing generating funds for works projects.  There will almost certainly be unexpected or unplanned work to be undertaken, but some advance planning will help circumvent the difficult issues surrounding short-term fund demands.