Upper Tribunal decides in favour of tenants in service charge reserve fund dispute

Effective usage of reserve fund

Caribax v Hinde House Management Company [2015]:

Upper Tribunal decides in favour of tenants in service charge reserve fund dispute.

Seven tenants of flats in a 34-unit development brought this case against their landlord, arguing that the landlord should have used the service charge reserve fund to fund various maintenance items, rather than additionally charging the tenants.

Under the leases, the service charge payable was to include an amount towards the costs of maintaining common parts such as plant, equipment and other items which would prove costly to repair, maintain and replace. The landlord covenanted to hold service charge monies on trust and to meet the expenditure on these items out of a designated trust fund.

During 2010-2012, £48,203 was charged to tenants by way of service charge in respect of repairs and maintenance, with a sum of £30,000 budgeted for in the 2013 accounts.

The Law

The landlord held two reserve funds, neither of which was a designated trust fund and the landlord acknowledged that it was in breach of its covenants under the lease in this regard. In addition, section 42 of the Landlord and Tenant Act 1987 requires landlords to hold service charge monies on trust in a designated account at a relevant financial institution.

The Decision

At First-Tier Tribunal, a decision was made in favour of the landlord on the basis that there was no obligation on it to use reserve fund monies for repairs and maintenance, the reasoning of the Tribunal being that reserve funds were not held in a designated trust fund.

The tenants’ appeal to the Upper Tribunal centred on the argument that the landlord should not have charged them under the service charge for repairs and maintenance and that instead these should have been funded from a reserve. Regardless of whether the monies were held in a designated trust fund account, the tenants argued that the monies were nevertheless available.

The Upper Tribunal agreed and the landlord conceded that it was obliged as a trustee to invest service charge monies for the purposes stated under the lease. Even though there was no designated trust fund established, a reserve fund was present in the landlord’s accounts and it was obliged to use that for repairs and maintenance before requesting further sums from tenants.

Moreover, the Upper Tribunal was highly critical of the landlord’s ‘extremely unattractive’ argument which, had it been successful, would result in the landlord benefiting from its own wrongdoing.

Commenting on the case, JB Leitch’s Stuart Miles says:

“Where a lease requires a landlord to hold a reserve fund, and the landlord is contractually required to use it for a certain purpose, this case serves as a useful reminder that leaseholders’ annual service charge portion should be eased by effective usage of the reserve in the first instance.”