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Service Charge Reserves

QUESTION: I run a shopping centre with a service charge. The leases allow for a reserve fund. A lease has just ended and the tenant wants its share of the reserve fund back. What do I do?

Firstly, I would investigate what exactly the lease says, and look at how the landlord has operated the reserve fund.

In the case of Secretary of State for the Environment v Possfund (North West) and others, 1997, the landlord set up a fund for the replacement of air conditioning equipment. The lease did not say what was to happen to the reserve fund after the lease ended. But, as the equipment’s life span could extend beyond the end of the lease, the court assumed the reserve fund would deal with the replacement of the equipment whenever required. The landlord was entitled to keep the reserve fund.

But in the case of Brown’s Operating System Services v Southwark Roman Catholic Diocesan Corporation, 2007, the lease simply said the landlord could make ‘reasonable provision’ for future expenditure.

The court held that the expenditure incurred was to be treated as the tenant’s money. This case could give real problems to owners of multi-let buildings where the leases have similar wording.

Reserve funds ought to be for specified items of expenditure to spread the cost more fairly amongst tenants.

Each case turns on its facts but clear lease drafting and management practice are key.

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