Claire-Elaine Arthurs, partner in Excello’s Property Litigation team, discusses a recent Upper Tribunal decision confirming that a reserve fund cannot be implied into a lease as good practice, or created through a leaseholder’s conduct, but must instead be expressly provided for or introduced by deed of variation or tribunal order.
A decision from the Upper Tribunal (Lands Chamber), handed down on 5 August 2026, has direct relevance for any property manager who administers Service Charges. It addresses an assumption that many managing agents and management companies have relied upon for years without it being tested: that a reserve fund can be justified as good management practice, even where the lease does not expressly provide for one.
The case is Tachkani v Thornfield Hawley Management Co Ltd [2026] UKUT 295 (LC). A leaseholder held a long lease of a flat containing a broad landlord’s repairing obligation and service charge provisions, but no express reference to a reserve fund. The freeholder had, over a number of years, built one up and demanded contributions to it as part of the service charge. The leaseholder was present at an AGM in 2017 at which the use of reserves was discussed, and there is no record that she objected at the time. She later challenged demands made between 2018 and 2025 on the ground that the lease did not provide for a reserve fund.
At First-tier Tribunal level, the landlord succeeded, on two grounds. First, that the repairing obligation carried with it an implied power to collect a reserve fund. Second, that the leaseholder had, through her conduct over time, including her presence at the 2017 AGM without objection, implicitly agreed to a variation of the lease to establish one. The Upper Tribunal overturned that reasoning on both counts.
On the implied term point, the UT confirmed that a term can only be implied into a lease where it is necessary for business efficacy, meaning the lease cannot properly function without it. Desirability is not the test. However useful a reserve fund might be as a matter of financial planning, this lease worked without one, so a reserve fund power was not necessary, and it could not be read into the repairing obligation by implication.
On the variation point, a lease made by deed can only be varied by deed, or by order of a court or tribunal. It cannot be varied by conduct, however consistent, and it cannot be varied by implication over time. Minutes recording no objection at an AGM do not amount to a deed, and years of payment without protest do not either. The FTT’s finding that the leaseholder had implicitly agreed to a variation through her conduct was, on the UT’s analysis, wrong in law.
One further point should be noted, though it does not change the position set out above. The Upper Tribunal also considered estoppel, a separate legal principle from variation. Estoppel does not change the terms of a lease. It prevents a person from going back on their own past conduct where someone else has relied on it and it would be unfair to allow them to do so.
In this context, that means asking whether a leaseholder’s own conduct, such as paying for years without objection, led the landlord to rely on those payments continuing, such that it would be unfair to let that particular leaseholder later reclaim what they had paid. Where this applies, it is a personal bar on that one leaseholder’s claim to a refund. It does not vary the lease, and it gives the landlord no right to keep collecting from that leaseholder, or from anyone else, going forward.
For Landlords and Property Managers, the relevant question is where the power to act comes from, not how sensible the fund is. A reserve fund is not something a Landlord or Management Company can introduce because it is good practice. It is something the lease either provides for or does not.
Where it does, the fund must be administered exactly as the lease describes, since the power to collect and the mechanics of collection sit in the same clause. Where it does not, the fund cannot be created or charged for administratively, however useful it would be. The only lawful routes are a deed of variation agreed with the leaseholders, or an application to the tribunal for a variation order. Consultation at an AGM is not a substitute for either.
Where a fund is already being collected under a lease that does not expressly permit it, the administration of those charges should be reviewed. This decision demonstrates that it is not safe to continue on the assumption that the absence of a challenge to date indicates the absence of a problem.
Landlord or Property Managers who are uncertain whether their lease permits reserve funds, or who have been collecting one without an express power to do so and wish to establish where they now stand, can contact Claire-Elaine Arthurs for more information at cearthurs@excellolaw.co.uk.
