The reserve fund: what it's for, and how much is enough

Every building has a bill it isn’t ready for. The roof, the lift, the outside decoration that’s due every few years and costs five figures when it lands. A reserve fund is how you stop that bill arriving all at once.

The idea is simple enough. Instead of asking everyone for £8,000 the year the roof needs doing, you collect a bit each year and build up a pot. When the work comes, the money is already there. The people who lived in the building over the years the wear happened all chip in, not just whoever happens to own the flat the month the scaffolding goes up.

That last part matters more than it sounds, and it’s worth being honest about. Without a reserve, the cost of twenty years of wear falls on whoever owns the flats in one particular year. A reserve spreads it, which is fairer, and it means nobody gets a demand they can’t pay.

First: does your lease even allow one?

This trips people up, so start here. A reserve fund only exists if your lease provides for it. If the lease says nothing about reserves, you generally can’t collect them, and that holds whether the building is run by a managing agent, an RMC, an RTM company or a resident-owned freehold. The lease is the authority. No clause, no fund.

So before anything else, check what your lease actually says. It will usually tell you whether there’s a reserve, and sometimes how much you have to pay in. If it sets an amount, that’s the amount. If it doesn’t, the level is a judgement call, and the contributions still have to be reasonable.

Worth knowing, too: the money you pay in doesn’t come back to you when you sell. It stays with the building. You’re paying towards the building’s future, not into a personal savings account you cash out on the way out.

Setting a sensible level

If the number is left to you, the honest answer is that there’s no single right figure. It depends entirely on what your building is going to need, and when.

One rule of thumb you’ll hear in the sector is that a reserve of somewhere between a quarter and a half of your annual service charge budget is a reasonable holding. That’s a guide, not a law, and on its own it doesn’t tell you much. A far better approach is to work from what the building will actually need.

That means looking ahead. What are the big-ticket items, and roughly when are they due? External decoration on a cycle. The roof. The lift, if you have one. Windows, boilers, communal heating, whatever your building has that’s expensive and won’t last forever. Professionals do this as a planned maintenance schedule running ten years out, sometimes thirty. You don’t need anything that formal for a small block, but you do need the list, rough costs, and rough dates. Once you have that, the right contribution is fairly obvious: enough that the pot is there when each job is.

A word of caution the other way. Don’t over-collect for the sake of it. Money sitting in a reserve is money out of residents’ pockets, and if you’re holding far more than any foreseeable work needs, that’s worth questioning too. The aim is enough, not as much as possible.

Judging whether yours is healthy

Here’s the mistake almost everyone makes. They look at the balance, see a big number, and assume the building’s finances are fine.

The balance on its own tells you very little. A reserve of £40,000 sounds reassuring until you find out the roof is failing and will cost £120,000 in three years. A reserve of £15,000 might be perfectly fine in a small block with no lift and nothing major on the horizon. £500,000 in the bank isn’t automatically better run than £50,000. It depends what’s coming.

So don’t judge the fund by its size. Judge it against the building’s future needs. Two questions get you most of the way:

What’s the fund likely to have to pay for in the next five to ten years, and roughly what will that cost?

Does the current balance, plus what you’re collecting each year, get you there in time?

If the answer to the second question is no, better to find that out now, while there’s still time to adjust contributions gently, than to discover it when the surveyor’s report lands and you’re short by a year’s worth of collecting. For a resident-run building especially, this is less about picking over old spending and more about not getting caught out later.

One practical point. If the reserve is going to pay for a major job, you still have to run the formal Section 20 consultation before the work goes ahead, even though the money’s already sitting there. Having the funds doesn’t remove the process.

The quiet thing that goes wrong

Most reserve-fund problems aren’t dramatic. They’re just drift. Nobody set a level based on anything, contributions stayed flat for years, the maintenance schedule was never written down, and then a big job arrives and the pot is half what it needs to be. The fix is boring and it works: know what’s coming, know what it costs, keep the fund and the contributions matched to it, and write it down where everyone can see it.

Our guide to running service charges covers the wider money side, and the first 90 days of running your building covers getting the basics in place if you’re just starting out.

This applies to leasehold buildings in England and Wales. What your building can collect, and for what, depends on your particular lease.