In 2004, Mr Master, a secure tenant, exercised his right to buy his home under the Housing Act 1985. The landlord's section 125 notice notified him, among other things, of structural defects in the building. It also contained an estimate of service charges for work to rectify structural defects and other repairs within and after the initial five-year period. The notice specified that the landlord would hold any contributions intended for future repairs in a reserve fund.

In 2005, Mr Master was granted a 125-year lease of the property. The lease provided that he "pay on demand to the Lessor at such times and in such manner as the Lessor shall direct a fair proportion... of the reasonable costs or estimated costs... of any services incurred or to be incurred by the Lessor... [in performing its maintenance obligations]". However, it did not contain an express provision allowing the landlord to establish a reserve fund.

The Lands Tribunal found:

  • Reserve funds can work both in the interests of the landlord and the tenant. They prevent a right to buy tenant from having to pay large sums of money in one go.
  • As it was 'admissible background', the provisions of the section 125 notice could be taken into account when construing the lease.
  • The wording of the lease allowed the landlord to create a reserve fund (although for clarity an express provision to that effect would have been better).
  • The wording of the lease allowed the landlord to accumulate funds for the costs of repairs not yet incurred. These costs could be incurred at any time (not just within the first five years).
  • The contributions to the fund could be 'no greater amount than is reasonable' under section 19(2) of the Landlord and Tenant Act 1985. Similar wording was also found in the lease. There must be a properly prepared reasonable estimate of the costs of the repairs to be incurred. In the initial five-year period the amount is also limited by Part III of Schedule 6 to the Housing Act 1985 to that specified in the section 125 notice.

Action tip

From a practical point of view, it is advisable for landlords to make express reference to the creation of a reserve fund in both right to buy leases and section 125 notices. The landlord must also accurately set out the estimated costs of all the repairs to be carried out in the first five years in the section 125 notice