The reserve fund: mandatory, misunderstood and poorly managed
The reserve fund of an owners’ community is one of those concepts that surfaces at every annual general meeting, that nobody openly challenges, and which, nonetheless, many communities calculate incorrectly or manage inadequately. The consequences can range from a financial penalty to an inability to meet the cost of urgent works without resorting to an emergency special levy.
In this article we explain everything you need to know: what the reserve fund is, how large it must be, how to calculate it correctly, what it can be used for, and what the most common errors are.
What is the reserve fund in an owners’ community and what is its legal basis
The reserve fund is a mandatory financial provision that owners’ communities must maintain in order to meet the costs of building conservation and repair works that were not included in the ordinary budget. Its existence and minimum requirements are regulated by Article 9.1.f of the Horizontal Property Act (Ley de Propiedad Horizontal — LPH).
The legislation was amended in 2019 by Royal Decree-Law 7/2019 of 1 March in order to increase the mandatory minimum. Since then, the reserve fund must amount to at least 10% of the community’s ordinary expenditure budget. The previous minimum was 5%.
This fund is the responsibility of all owners and is funded by annual contributions approved at the general meeting. It is not optional savings — it is a legal obligation.
How to calculate the reserve fund correctly
The calculation appears straightforward, but there are important nuances that many communities overlook.
Step 1: determine the ordinary expenditure budget
The ordinary budget includes all anticipated running costs of the community: cleaning, electricity for common areas, lift maintenance, gardening, utilities, management fees, insurance, and so on. It does not include special levies or contributions to the reserve fund itself.
Example: if your community’s annual ordinary budget is €60,000, the mandatory minimum reserve fund must be €6,000 (10%).
Step 2: check the current balance of the fund
The reserve fund must be maintained at the minimum level at all times, not only at the start of the financial year. If the fund is drawn upon for an urgent repair and falls below 10%, it must be replenished in the following budget.
If your community currently holds less than 10% in the reserve fund, it is not complying with the law. In that case, the general meeting must approve an additional contribution to reach the minimum level.
Step 3: plan the annual contribution
Each year, the general meeting must approve a contribution to the reserve fund in the budget. The minimum amount is whatever is necessary to maintain it at 10% of the ordinary budget. Many well-managed communities choose to fund the reserve above the minimum — at 15% or even 20% — to have greater capacity to absorb larger unforeseen works.
What can the reserve fund be used for?
This is one of the areas that generates the most confusion. The reserve fund may only be applied to:
- Conservation and repair works on the building and its common installations.
- Rehabilitation of common elements.
- Payment of the building’s property damage insurance premium (included since the 2019 reform, RDL 7/2019).
The reserve fund may not be used for:
- Ordinary running costs (these are charged to the ordinary budget).
- Improvements or new installations that do not constitute conservation.
- Covering deficits caused by arrears.
- Loans or advances to individual owners.
Using the reserve fund for unauthorised purposes may give rise to personal liability for the community president and the property manager.
Where must the reserve fund be held?
The LPH stipulates that the reserve fund must be held in a separate bank account, distinct from the current account used for ordinary expenditure. Many communities hold the fund commingled with the rest of their treasury, which technically breaches the regulations and makes oversight more difficult.
The correct approach is to maintain two accounts:
- Operating account: through which service charges and ordinary payments flow.
- Reserve fund account: where the provision accumulates, held separately and clearly identified.
The 5 most common errors in reserve fund management
Error 1: calculating the minimum against income rather than expenditure
The 10% is calculated against the ordinary expenditure budget, not against charges collected or a total budget that includes special levies. This may seem obvious, but it is a frequent error that leads to under-provisioning the fund.
Error 2: failing to replenish the fund after drawing on it
If the reserve fund is used for an urgent repair, the balance may fall below the 10% minimum. Many general meetings «forget» to include replenishment in the following budget. The law does not forget: the breach continues until the fund is restored.
Error 3: confusing the reserve fund with the available account balance
A very common error: the community has €8,000 in the account and the manager or president assumes that «is the reserve fund». Not necessarily. The balance of the operating account may include outstanding receivables, collected special levies not yet spent, and so on. The reserve fund must be identified and held separately.
Error 4: failing to document use of the fund in the meeting minutes
Any drawdown from the reserve fund must be recorded in the general meeting minutes or, in urgent cases, in the minutes book with subsequent notification to the community. Without documentation, the expenditure may be challenged.
Error 5: provisioning the fund at the legal minimum and never reviewing it
The legal minimum is the floor, not the recommended ceiling. An older building with installations approaching the end of their useful life should hold a reserve fund significantly above 10%, particularly if major refurbishment works are anticipated in the coming years.
The reserve fund in the context of the building inspection report and refurbishment
With the progressive rollout of the Technical Building Inspection (Inspección Técnica de Edificios — ITE) and the energy refurbishment requirements linked to European funding, the reserve fund takes on a strategic importance that goes far beyond mere legal compliance.
Buildings that reach their technical inspections with a robust reserve fund will be able to meet the improvement works identified without resorting to emergency special levies or collective loans. Those that arrive with the fund at the minimum or below it will have to choose between unpopular special levies or deferring works that may be compulsory.
How to present the reserve fund at the general meeting so that it is understood and approved
One of the manager’s key challenges is helping owners understand why the reserve fund is an investment rather than an expense. Some useful approaches for the general meeting presentation:
- Show the historical record of urgent costs: how much has been spent over the past five years on unforeseen repairs? That figure tends to be illuminating.
- Compare the cost of having a fund versus not having one: an urgent repair financed through a community loan typically costs 20–40% more than one paid from an available fund.
- Present the condition of the installations: if the lift is 18 years old, the boiler 12 years old, and the roof is showing signs of deterioration, a robust fund is not a luxury — it is basic prudence.
You may also find these useful
- Annual community budget: a guide to getting it approved without conflict
- Arrears in an owners’ community: what to do step by step
- Request a free FixrOS demo
Reference source: Horizontal Property Act, Art. 9 (reserve fund)
Conclusion: a well-managed reserve fund is the building’s financial safety net
The reserve fund is, in essence, the community’s economic insurance against the unforeseen. A community with a robust, well-documented fund held in the correct account can face any breakdown or urgent repair without crisis, without conflict, and without emergency special levies that create tension among owners.
Managing the reserve fund correctly is part of the property manager’s legal obligations, but it is also one of the highest-value services a manager can deliver to their communities. FixrOS helps you maintain oversight of the treasury and reserve fund across all your communities from a single dashboard. Request a free demo and see it for yourself.