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Service Charge Contribution To Be Held In Trust

Volume 115: debated on Tuesday 5 May 1987

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`(1) This section applies where the tenants of two or more dwellings may be required under the terms of their leases to contribute to the same costs by the payment of service charges; and in this section—

"the contributing tenants" means those tenants;
"the payee" means the landlord or other person to whom any such charges are payable by those tenants under the terms of their leases;
"relevant service charges" means any such charges;
"service charge" has the meaning given by section 18(1) of the 1985 Act, except that it does not include a service charge payable by the tenant of a dwelling the rent of which is registered under Part IV of the Rent Act 1977, unless the amount registered is, in pursuance of section 7(4) of that Act, entered as a variable amount;
"tenant" does not include a tenant of an exempt landlord; and
"trust fund" means the fund, or (as the case may be) any of the funds, mentioned in subsection (2) below.

(2) Any sums paid to the payee by the contribution tenants by way of relevant service charges, and any investments representing those sums, shall (together with any income accruing thereon) be held by the payee either as a single fund or, if he thinks fit, in two or more separate funds.

(3) The payee shall hold any trust fund—

  • (a) on trust to defray costs incurred in connection with the matters for which the relevant service charges were payable (whether incurred by himself or by any other person), and
  • (b) subject to that, on trust for the persons who are the contributing tenants for the time being.
  • (4) Subject to subsections (6) to (8), the contributing tenants shall be treated as entitled by virtue of subsection (3) (b) to such shares in the residue of any such fund as are proportionate to their respective liabilities to pay relevant service charges.

    (5) If the Secretary of State by order so provides, any sums standing to the credit of any trust fund may, instead of being invested in any other manner authorised by law, be invested in such manner as may be specified in the order; and any such order may contain such incidental, supplemental or transitional provisions as the Secretary of State considers appropriate in connection with the order.

    (6) On the termination of the lease of a contributing tenant the tenant shall not be entitled to any part of any trust fund, and (except where subsection (7) applies) any part of any such fund which is attributable to relevant service charges paid under the lease shall accordingly continue to be held on the trusts referred to in subsection (3).

    (7) If after the termination of any such lease there are no longer any contributing tenants, any trust fund shall be dissolved as at the date of the termination of the lease, and any assets comprised in the fund immediately before its dissolution shall—

  • (a) if the payee is the landlord, be retained by him for his own use and benefit, and
  • (b) in any other case, be transferred to the landlord by the payee.
  • (8) Subsections (4), (6) and (7) shall have effect in relation to a contributing tenant subject to any express terms of his lease which relate to the distribution, either before or (as the case may be) at the termination of the lease, of amounts attributable to relevant service charges paid under its terms (whether the lease was granted before or after the commencement of this section).

    (9) Subject to subsection (8), the provisions of this section shall prevail over the terms of any express or implied trust created by a lease so far as inconsistent with those provisions, other than an express trust so created before the commencement of this section.'.— [Mr. John Patten.]

    Brought up, and read the First time.

    4.32 pm

    I beg to move, That the clause be read a Second time.

    With this it will he convenient to take Government amendments Nos. 13 and 14.

    This new clause is a matter of great concern to the hon. Member for Norwood (Mr. Fraser) and fulfils an undertaking that I gave to my hon. Friend the Member for Kensington (Sir B. Rhys Williams), who is not in his place this afternoon, to deal with the way in which service charges and sinking funds are managed while they remain in the hands of a landlord. It provides for the creation of a trust fund and it should ensure that the tax treatment of such funds is more equitable and less capricious than appears to be the case at present. It implements important recommendations in the Nugee report and applies also to leasehold dwellings other than flats where variable service charges are paid.

    It is important that I explain exactly what the new clause is about in a little detail, because important taxation issues are involved, which are of great interest for up to 1·5 million people in Britain who will be affected.

    The clause provides that any contributions to service charges as defined in section 8 of the Landlord and Tenant Act 1985 are to be held in a trust fund. This will include sinking or reserve funds. The establishment of a trust in this way guards against appropriation or the landlord's insolvency.

    The trustee is to be the person to whom the contributions are to be paid under the terms of the tenancy agreement. In most cases, the landlord will be the trustee, but not always. For example, there may be cases where a tenant's management company undertakes the repairs and provides services but does not have an interest in the reversion. The beneficiaries are to be the tenants for the time being under the tenancy agreements. They will have a remedy under trust law against the trustee for breach of trust and would be able to trace the funds under the existing arrangements for trust funds.

    Subsection (5) enables the Secretary of State to provide by order the investment of funds held in such a trust. This is to give flexibility to the arrangements, to ensure, for example, that if the contributions are only to be held for a short period it will be possible to provide for them to be placed on deposit at a bank.

    The clause also deals with what is to happen to the funds if a particular fund is no longer needed or if a leaseholder surrenders his or her lease or at the end of the leases. It does not override—I stress this—any express terms in the leases dealing with these matters. With that exception, the clause is simply intended to override any express terms unless those were entered into before the commencement of this provision. That is the important point.

    We have been careful to draft the provisions as well as we can with an eye to the tax consequences. Putting the contribution into a trust fund, provided that it is drawn or in accordance with our requirements will avoid the situation which can happen at present, where the tenant's contribution can be taxed again as the landlord's income —which can, of course, produce a wide variety of tax consequences, not likely to be helpful to the tenants. Our proposals simply make the tax treatment of service charge money much less variable than has been the case up to now.

    Question put and agreed to.

    Clause read a Second time, and added to the Bill.