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Grand Committee

Volume 622: debated on Tuesday 27 February 2001

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Official Report Of The Grand Committee On The Commonhold And Leasehold Reform Bill Hl

Tuesday, 27th February 2001.

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Lord Ampthill) in the Chair.]

Clause 30 [ Form and content: general]:

Page 13, line 12, at beginning insert ("Save as provided in section 36,").

The noble Lord said: In moving Amendment No. 45, I shall speak also to Amendment No. 46. As the Committee will be aware, these amendments would permit the transfer or indeed the loss of a unit if something were or were not to happen. In reality, they are paving amendments for Clause 36 of the Bill. The intention is, quite simply, to allow the commonhold community statement to provide for a unit-holder to lose the unit if he fails to abide by certain conditions. In effect, it creates a parallel to the existing forfeiture provisions in leases.

There is little in the Bill regarding dispute resolution within commonhold. Whatever is provided, there will almost certainly be a need for some form of ultimate sanction. As with all forms of contractual arrangement, if a party does not abide by its obligations under the contract, that party must expect, ultimately, to lose the benefit which the contract provides in return. I beg to move.

The noble Lord has spoken to two amendments. It seems to me to be logical to take the second of the amendments first. That would remove the word "not" from the subsection, thus making it possible for the commonhold community statement to make a provision for an interest in commonhold land to be lost or to transfer contingent on some future event. The thinking behind subsection (8) is the same as that behind paragraph 3 of Schedule 2 to the Bill, which specifies certain kinds of land that cannot become commonhold. In each case in paragraph 3 of Schedule 2, the estate in the land is subject to a statutory rule which allows or requires the estate to revert to a previous owner if some specified event occurs. Indeed, as I am sure the noble Lord will remember, this is entirely consistent with Clause 7(2)(b) of the draft Bill, on which the previous government consulted in 1996. We have followed the previous government's example.

The commonhold association and the unit-holders in place in the development at any particular time should be in full command of the commonhold land. Plainly, the unit-holder's interest in his unit would be undermined—weakened—by the risk that at some future time, contingent on something happening or not happening, over which he would almost certainly have no control, he was at risk of losing it. In the same way, the commonhold association being responsible for the common parts, it would be bad practice to set up a scheme that would potentially deprive it of any part of its assets at some future time. Any change to the extent of the commonhold should be the result of a decision taken by those in ownership and occupation at the time and not that of a decision taken some time previously, quite possibly by people who no longer have any connection with the development.

The earlier amendment would make amended subsection (8) of Clause 30 subject to the words,
"Save as provided in section 36".
However, we have looked in vain at Clause 36 for any provision which would serve to qualify the power to create contingent titles for which the amended clause would provide. Shortly, we shall come to an amendment to Clause 36, but that does not appear to be germane to this point. Therefore, I shall invite the noble Lord to withdraw that amendment when we come to it. Clause 36 has nothing to do with contingent interests; it is concerned simply with the enforcement of rights and responsibilities within a commonhold; for example, the payment of compensation to a unit-holder from the commonhold association for repairs that may take place in the unit-holder's premises on behalf of the commonhold association. Therefore, we do not believe that Clause 36 is relevant to this issue and we invite the noble Lord to withdraw his amendment.

The Minister has not addressed the central question that I posed. It is not clear to me why there should be no power akin to forfeiture in the system. The most effective sanction against a unit-holder failing to discharge his financial obligations to the association is to charge the unit as security for due performance. Unless the association has such security, its only ultimate remedy is to prove in the defaulting unit-holder's bankruptcy in which it may or may not recover a small dividend.

One of the provisions which might properly be contained in the CCS, pursuant to Clause 36, is a prohibition on the creation of any new charge over the unit unless any debts due to the association shall first have been discharged, or are discharged simultaneously with the execution of the charge. I hope the Minister agrees that the absence of such a sanction is likely to make it very difficult to sell the common hold scheme commercially.

We do not agree, and we are not keen to bring into this field the notion of forfeiture. I am led to believe that it is one of the most hated leasehold powers. I should have said in my initial response that this resolution will be set out in the commonhold community statement. Perhaps the Committee will look at page 16 of the current draft which was distributed yesterday.

I am most grateful to the noble Lord, who is always generous in giving way when a member of the Opposition rises to speak. I understood that a draft was produced 10 days ago. Is there a new version?

In my experience, the noble Lord is always unlucky as far as concern these matters. A new draft was sent to all noble Lords who took part in last week's Committee stage and spoke at Second Reading. We tried to make it available yesterday so that the Committee would have it today. I am sorry if it has not reached the Committee, but every effort was made to provide it.

The dispute resolution will be set out in the final commonhold community statement which is to be found at pages 15 and 16 of the current draft. As to forfeiture, my advice is that it will be possible for the commonhold association to proceed against a defaulting unit-holder, including by charging order and, eventually, possession. Forfeiture is not at present an option.

I am most grateful to the noble Lord for explaining the provenance of the most recent document to be circulated. The noble Lord draws my attention to pages 15 and 16 of the document. Will the noble Lord give the Committee an opportunity to consider proper amendments to those pages since they form the central plank of his response to my amendment?

We shall, of course, listen to any comments that are made about this and take them on board if we think that they are appropriate.

I am most grateful to the noble Lord. I take that remark to mean that we will have an opportunity to deal with these matters on the floor of the House. In those circumstances, I beg leave to withdraw the amendment.

The noble Lord should be careful about agreeing to withdraw the amendment too easily. I did not say that there would necessarily be such an opportunity on the floor of the House. We will listen, of course, in the normal way—through correspondence, through any amendments that are brought forward or at meetings, which we are always glad to hold with any noble Lords who show an interest in these proceedings—but I was not saying that it would be at the Government's instigation that these matters would be debated on Report. I should like that to be absolutely clear.

If I understand the Minister correctly, he will not be giving noble Lords the opportunity to consider, on the floor of your Lordships' House, in public, pages 15 and 16 of the draft CCS—even though he has conceded that they are his answer to the question as to why there are no provisions equivalent to forfeiture in the Bill.

We shall of course respond to any amendment that is brought forward on this issue. The noble Lord, Lord Kingsland, will have to be patient. He will hear my response to an amendment that will be moved a little later in regard to the final version of the commonhold community statement. He will hear my answer to that amendment in due course, and he may be pleased by what I have to say.

It is important for us to appreciate that, if there is any issue on which we feel that documents have arrived too late for us to consider it at this stage, we are of course free to bring it back on Report.

Of course. That is exactly what I am saying. The noble Baroness, Lady Gardner of Parkes, echoes exactly what I said. Of course you are absolutely at liberty to bring it back at Report stage. What I am saying is that the Government do not intend, at this stage, to produce any amendments to that effect. However, if amendments are put down in the proper way, as they will be, then we will of course have to answer them. I hope that there is no misunderstanding about this.

I am still not entirely clear about what the Minister intends. If we are to have the opportunity to consider and table amendments to this document, or to find some way of doing that—for example, by making the document a schedule to the Bill and then amending it—I am, for the moment, content.

I used to do it all the time in opposition. The then government objected very strongly.

I am shocked to hear the latter. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[ Amendment No. 46 not moved.]

Clause 30 agreed to.

Clause 31 [ Regulations]:

On Question, Whether Clause 31 shall stand part of the Bill?

In view of the exchanges that took place in the course of the debate on the previous amendments, I do not need to speak on this matter.

I should like to say a few words. I did not intervene on the previous grouping because it seemed to concern both how documents such as the commonhold community statement were presented to the Committee and the specific point raised by the noble Lord, Lord Kingsland.

Before I ask my question—I suspect that I am making the point for other noble Lords—perhaps I may say that we are genuinely grateful to the Government for circulating documents to us. However, it would be useful if those who were charged with circulating them realised that we are not all full time in this building. I received this morning the letter of 21st February with the drafts which were referred to at the previous day of Committee stage. The final paragraph of the letter said that a second edition of the draft would be available today. I opened the envelope when I was in another building and did not have an opportunity to obtain the other set of drafts. Although it is extremely helpful to have the documents, it would be a step forward if those who circulated them understood that noble Lords are not always in the building to receive them.

My question on the commonhold community statement is based on the previous draft which to me looked very much like a lease and contained many of the provisions that I would expect to see in a residential lease. A good many of them are in square brackets and it is suggested that they should be optional. They relate to such matters as noise: no nuisance is to be created by playing musical instruments, and no pets are permitted without the consent of the commonhold association. Those are important issues. The over-loud playing of musical instruments, radios and so on can be very disturbing to neighbours, but the Government have told us that they hope that commonhold will be as close as possible to freehold. If one lived in a freehold house, possibly a terraced dwelling, close to neighbours who played the radio loudly one would be disturbed. I do not quite follow the Government's approach in the commonhold community statement.

3.45 p.m.

I have not had time to study my document. I am pleased to say that I had three copies and I was delighted to see that the last one shows the second draft, which means that I can put the first two aside. But they all came simultaneously. At least they are well labelled.

I am not clear about the noise. I recall the legislation on local authorities and the situation mentioned by the noble Baroness of two neighbouring houses. But there is recourse in law. Is she saying that there is or is not such recourse in commonhold? Normally one would expect to respect other people's peace and quiet within their own dwelling and it would be perfectly normal to have such a clause, whether in a lease or in a commonhold. I see no reason why it would not be there to protect others. It is usually enforced only if there is a quite outrageous case.

I can give an example. I left my unit for a time and the young man who took it decided that on Mardi Gras day he would put up a notice in the street saying that all were welcome to come to a party. Hundreds poured into his unit, and the other residents were very unhappy. I received a letter from the commonhold management—and rightly so. It is important, therefore, to have good conditions included. However, I have not yet been able to read them.

Perhaps I may give a further explanation. The noble Baroness makes my case for me. I entirely agree that one should not disturb one's neighbours but the legislation to which she has referred seems to me to be the kind that one would expect to apply in a freehold situation. To have a clause creating a particular relationship within commonhold such as one would see in a lease has led me to ask how closely the Government are trying to replicate leasehold rather than freehold.

The interesting comments made by the noble Baronesses, Lady Hamwee and Lady Gardner, strengthen our view that it is appropriate that the commonhold community statement is not on the face of the Bill but is subject to regulation. It is a standard document but each commonhold, when it is set up, will have its own commonhold community statement. It is the distinction that there will be between them that will be critical for the living conditions that those in the commonhold have to agree.

I am very sorry that the noble Baroness, Lady Hamwee, did not receive the draft statement in time and that other noble Lords have not had a chance to react it. We would welcome having the best address for any noble Lord for such correspondence so that we can get it to them as quickly as possible. But I hope that the Committee will give us credit for doing our very best to get these regulations out, as we promised at Second Reading. On many Bills in the not too distant past the Government have come under severe criticism—sometimes justified—for not having done what we have done on this occasion. While we take the criticism on the chin, we think that we have done rather well on this occasion.

I return to the point made by the noble Baroness, Lady Hamwee. The draft commonhold community statement is a template intended to provide the basic framework with room for flexibility for individual commonholds. It is getting that balance right between standardisation and covering the wide variety of circumstances that will occur.

The thinking behind the use of regulations to establish and control the CCS is much as it was for the establishment and control of the memorandum and articles. The document will contain a great deal of detailed information about such matters as hanging out washing, as well as more important matters to do with the rules relating to how default of duties will be dealt with, the setting and collection of commonhold assessments, and so on. Other items that will be dealt with in detail in individual commonholds will be, for example, putting out the rubbish for collection, or, as has already been pointed out, the keeping of pets.

The bulk of the document will be the plans and description of the development, much of which will be dictated by regulations issued by the Land Registry. We think that that kind of detail should be dealt with in regulations. It will allow us to keep up with the market, to amend the rules if they are found in some respects to be unworkable or if times change and circumstances require. We have provided the model documents as invited to by the Delegated Powers and Deregulation Committee.

Before the Minister sits down, I should like him to clarify two points. First, is what is contained in the commonhold community statement a template of best practice or a requirement? Secondly, in the draft that I have certain paragraphs are in square brackets. Are those particularly significant? For example, are those the ones that are best practice and are the rest requirements? I am not clear whether there is any significance in the different typeface and the way that some paragraphs are put in square brackets.

Like the noble Lord, we are feeling our way. We are trying week by week to give a fresh draft of this important statement so that when it comes to putting a final draft to the House, which we will have to do in due course if the Bill becomes law, we have it right. I hope the noble Lord will indulge me by not insisting on an answer to his very direct questions. We are trying to get it right; it is supposed to be a template; they are supposed to be the kind of regulations that will assist, some of which will be standard and others will be open to flexibility.

On the first day of Committee, the noble Lord, Lord McIntosh, said that there were areas on the statement out of which one could not contract. I think that followed up my point that we wanted as simple and standard a document as possible. Perhaps I may suggest to the Minister that for the third draft that he presents to us the items that cannot be changed between the parties, the ones that are absolutely standard for every unit, should be in one typeface, and items that can be changed between the parties and additions should be in another typeface.

I thank the noble Earl for that suggestion, which we will certainly take on board. I am very grateful to him.

Clause 31 agreed to.

Clause 32 agreed to.

Clause 33 [ Constitution]:

Page 14, line 37, leave out subsection (2).

The noble Lord said: In moving Amendment No. 47, I shall speak also to Amendment No. 48. The Minister's response to my noble friend Lord Caithness in the dying moments of the last series of interchanges has helped me to shorten my own contribution to the debate on these amendments.

From what the Minister said, I take it that he is prepared to reconsider the balance between what is in the schedule to the Bill and what might be dealt with by regulations in the content of the memorandum of association and the commonhold community statement. I profoundly agree with my noble friend Lord Caithness that it is very important to have some clear standard provisions on the face of the Bill—even if they are only in a schedule—rather than to leave them to regulations which can be changed from month to month or from year to year by a procedure which does not allow your Lordships' House to table amendments to any document proffered by the government of the day.

Behind the amendments that I have tabled to Clause 33 and Schedule 3 lies a wider concern. It is whether the Government are using too powerful an instrument—that is to say, the memorandum and articles of association under the Companies Acts to deal with a series of problems that may more simply be dealt with by a tailor-made form of association and set of rules.

Some commonhold associations will cover a very small number of unit-holders, where the management problems they face are relatively straightforward. Is it right that they should be faced with the full panoply of the Companies Acts as a framework within which to pursue their management responsibilities? I would go further than that. If the Government insist on using the Companies Acts as the basic framework for the management of a commonhold association, would it not be better to adopt the model of a company limited by shares rather than a company limited by guarantee?

I can see in that situation at least two advantages that would accrue to the commonhold association. First, the association would be able to differentiate between unit-holders who had different degrees of interest in the association, perhaps by having some shares as category A shares and other shares as category B shares.

Secondly, it would provide a simple solution to the problem that I raised when we discussed the first set of amendments; that is, the problem of requiring individual unit-holders to meet their obligations with respect to the common property. A simple provision which prevented the transfer of a share from vendor to purchaser until the vendor had met all his obligations could achieve the same result as a forfeiture provision, or a provision similar to forfeiture of the kind I sought to describe in my earlier amendment. I beg to move.

4 p.m.

Before I speak to Amendments Nos. 78 and 79, which have been included in this group, I shall touch briefly on what the noble Lord, Lord Kingsland, said about the corporate structure. I know this will come up in subsequent amendments but as the noble Lord has raised it now, it might be convenient to deal with it briefly.

I strongly disagree with him about the suitability of company limited by shares, since the whole nature of a commonhold association is that it should be on a one member, one vote basis. There should not be votes weighted by shares or share capital; nor should there be different kinds of shares. However, I wonder whether the Government have considered the possibility of allowing CHAs to be set up—as an alternative to a company limited by guarantee—as a limited liability partnership, under the Limited Liability Partnerships Act passed in the previous Session. It was set up as a "cheap and cheerful" form of incorporation, suitable for small businesses and with very considerable simplification as compared with the ordinary company. This might be suitable for small CHAs, where only four or five people are involved, all of whom wish to take part in the running of the organisation. I would like to think about the matter further and possibly to bring it back at Report stage.

I turn to Amendments Nos. 78 and 79. The former deals with the fact that under Clause 31(1), regulations make provision for the content of commonhold community statements and many "permit, require or prohibit" the inclusion of certain provisions. Under paragraph 2 of Schedule 3, the regulations require to make provision about the form and contents of the memorandum and articles of the company.

The memorandum and articles of the CHA and the commonhold community statement are obviously of central importance to the future of commonhold. I welcome the production of drafts but these are still at a very early stage. They will need a good deal of further consultation and working out. The House will need an opportunity to give them a proper debate.

I accept, and again disagree with the noble Lord, Lord Kingsland, that it is more appropriate to have these matters in regulations than on the face of the Bill. The memorandum and articles and the community statements will require modification from time to time. Indeed, since the Companies Act 1985, even the standard table A (they are now tables A to G) of the various types of company is contained in regulations, rather than being set out in a schedule to the Companies Act. That seems a perfectly suitable precedent for the memorandum and articles of a company of this kind.

However, I have some concern about the memorandum in particular. This seems too long, compared with normal memoranda, and too broad. For example, taking together paragraphs 3.21, 3.22, 3.40 and 3.41, a commonhold association could set up in business as the developers of a beach resort in the Canary Islands or of an office building in Hong Kong, without doing anything contrary to the memorandum.

The community statement also needs vetting. For instance, Article 58, which is obligatory, states that except with the consent of the directors of the CHA, no unit-holder can have in the unit any,
"mechanical, scientific or electrical apparatus other than ordinary domestic electrical appliances".
Thus, permission would be necessary for, for example, a disabled person to keep an electric powered wheelchair in his flat, that clearly not being an ordinary domestic electrical appliance. It would also cover any apparatus that was mechanical but not electrical; for instance, a hand-powered coffee grinder. At least in the second draft the ban on having pets without the consent of the association has been downgraded from a compulsory to an optional provision.

In the draft, of course, some provisions are obligatory and some are optional. I am concerned—in this I follow what was said in the previous debate by my noble friend Lady Hamwee, the noble Lord, Lord Hodgson of Astley Abbotts, and the noble Earl, Lord Caithness—about the status of these optional provisions. Can they be modified? For example, would it be possible to include a requirement that cats could be kept without the consent of the commonhold association but that consent would be required to keep dogs on the grounds that they are noisier and messier?

Can the CHA decide that the community statement should include other provisions—in addition to those that are set out in the drafts—provided that they are not inconsistent with the obligatory rules? That is a very important point. There is no indication on the face of the Bill and we do not know what the regulations will say about that. Is everything prohibited from inclusion in the community statement which is not either required or expressly permitted by the rules?

We need a proper discussion of these matters. I strongly suggest that, although we have had a chance to see them, because of the early state of both the memorandum and articles and the community statement, it would be appropriate for the first set of them to be subject to the affirmative resolution procedure in order that we may, in due course, discuss them properly.

My main experience is as a unit-holder and, therefore, I cannot say that I have ever been much involved in the direct management of the company. However, I phoned Australia a week or so ago to ask about that and to ask, in particular, whether the full obligations of company law came with being the owner of the unit. I was told, no; it came within a slightly different company law. It came under a specific category but you filed your returns and annual accounts in the usual way. I wonder, therefore, whether the Minister could find out more from New South Wales about exactly how this ties in with normal commercial law or company law.

I take issue with the noble Lord, Lord Good hart, on what is a normal appliance. There is nothing more normal, in these days when we are so aware of disability, for someone to want to have an electric wheelchair. If I were a unit-holder, I would certainly defend until the last my right to my electric wheelchair. The noble Lord's coffee grinder and electric wheelchair were not particularly good examples. However, I take his point about cats and dogs.

My own experience is that you can agree anything provided that you attend the management meeting and that those present at the management meeting all choose to accept whatever is proposed. Those who do not attend meetings find that matters go ahead in a way that they do not particularly like. Therefore, the message is that you have to take an active part in your commonhold, to be there and help to make the decisions.

The Minister was most kind in his response to my earlier inquiry. We all agree that commonhold is an idea whose time has come, but there are some of us who fear that commonhold will never happen because leasehold will continue to run on. That has been discussed already.

However, one of the things that will make commonhold happen is for there to be as simple a set of documents as possible. At the moment, there are 47 pages in the commonhold community statement and the memorandum of association and it is an inexorable trend that these documents will become longer as we go on. I hope that the Minister will prevent civil servants from running away with the ball on this. This could become 70, 80 or 90 pages—I remind the Minister of the Political Parties, Elections and Referendums Bill. If it becomes complicated and difficult, far fewer people will seek to use it, because it will just be so complicated to understand.

I take the point made by the noble Lord, Lord Goodhart, about the way that the objects in the memorandum have been set out. I find it extraordinary that, in paragraph 3.31, it should be permissible to lend money or to give credit. I am not quite sure why a commonhold would be lending money and I am not sure that that does not take it into another set of regulations in any case.

With regard to the memorandum of association, is the use only of object clauses and no powers at all intentional? Is that particular to this form of company?

I should declare an interest in that I have enfranchised, as I explained at Second Reading. I then ended up having created a right to enfranchise and a right to manage a company. With the best legal brains in the country, we created our memorandum and articles of association, which are only a few pages long. We had an extraordinarily difficult time, because people who had never been directors of a company were asked to be directors of a company. At an extraordinary annual general meeting, with the right notice being served, we persuaded every tenant to agree to be a director. Then one of them asked, "What happens if someone falls off a ladder? Am I liable?" And then all the anxiety and fears arose, and we had to take out all the extra insurances.

We then found that we had sought permission to file relatively limited accounts. That was fairly complicated but, in the end, we got it down to one page and, 18 months later, we filed the accounts. The whole activity relates entirely to neighbourliness, if that is the word. If you know each other, there is no problem. You explain all the difficulties, such as the problem you may have about the parrot, or the noise on the floors above. However, it is when you are different from each other that the problems arise. I would hesitate to make the point, but the longer documentation is, the more likely it is to make people nervous.

I hope we can make it shorter. Should the Minister feel willing to consider what we managed to do, I shall willingly send him a copy. I feel that the corporate entity of a limited liability company is just as good as that which is proposed at the moment.

Like the noble Lord, Lord Selsdon, perhaps I may make a contribution to the debate based on some experience. I live in a small house in Pimlico. It is held on leasehold and is divided between four tenants. We have had some difficulties in this property. The superior leaseholder had the right to appoint a managing agent who would set up a management company whose expenses we would subscribe to. The management agent he appointed, although a well-known firm, failed to submit the company's return and so it was struck of the companies' register, whereupon the tenants in this house got together and told the landlord that he had appointed a rotten agent. We said we would get the company put back on the register and run it ourselves.

We have done that and it works very satisfactorily—it is very economic—but I am sure that we will approach this legislation in the hope that it will be possible to turn the procedures in the Bill to a vehicle to having the right to acquire the freehold, with the management company playing a part in that. I hope that the machinery in the Bill will be sufficiently flexible to allow all these various different circumstances—we all have slightly different experiences—to be taken into account in a flexible piece of legislation. As I work my way through the legislation, I find it rather difficult to see that that is what would happen.

4.15 p.m.

We have had an extremely useful and interesting discussion on this set of amendments. I am very grateful to all noble Lords who have spoken, particularly those who have done so from their own experiences. One of the great advantages of the Committee stage in this House is that we can gather from people's experiences and what they tell us when we are preparing the documents that will eventually be put before the House.

Perhaps I may ask the noble Lord, Lord Goodhart, about Amendment No. 78. I do not think that he spoke to it. He spoke to Amendment No. 79, with which I shall deal—I hope to his pleasure—in due course.

That was a paving amendment to cover subsections (4) and (5) of Amendment No. 79. It removes Clause 61(2)(e) which makes all regulations under this part subject to the negative resolution procedure. Amendment No. 79 includes a provision in subsection (4), so the first regulations under Clause 31 and paragraph 2 of Schedule 3 have to have the affirmative resolution procedure and then other regulations have the negative procedure.

I am sorry if I misunderstood the noble Lord. We have taken Amendments Nos. 78 and 79, not just to deal with Clause 31 and Schedule 2(3), but also Clause 3(1)(e), Clause 3(2)(f), and Clause 19(4). I want to make sure that I answer his points correctly. The noble Lord has not dealt with the three earlier points.

I believe that my recollection is at fault. I thought that we had covered most of that last time. Briefly, I felt that Clause 3(1)(e)—the power to prescribe classes of person whose consent is required—and Clause (3)(2)(f), which enables the court to dispense with the requirement to consent in specified circumstances, were important powers which ought to be exercised only by the affirmative resolution procedure.

The most important, however, was Clause 19(4) which states:
"Regulations may modify a rule of law about leasehold estates (whether deriving from the common law or from an enactment) in its application to a term of years in a commonhold unit".
That is an extensive Henry VIII power and, in particular, is one which ought have the affirmative resolution procedure.

I am grateful to the noble Lord. The amendments in this group have in common the aim of requiring provision which is to be made by regulations either to be put on the face of the Bill or to be made by way of affirmative rather than negative resolution procedure. Subject to what I say about Amendment No. 79, with a view that all matters covered are appropriate for regulations made by negative resolution procedure, the first three amendments in this group, moved by the noble Lord, Lord Kingsland, would effectively require the model memorandum and articles of commonhold association to be fixed on the face of the Bill.

We believe we have reached a stage of development of the draft model memorandum and articles which makes its likely contents clear, although we are far from having reached any final decisions about the document that we put before the House, and that fixing it on the face of the Bill would, on balance, forsake flexibility and the ability to consult further for minimal gain and certainty.

During discussion on the previous group, I said to the noble Earl, Lord Caithness, that it was not that we would put these matters on the face of the Bill, but that when we drafted our next draft, as it were, we would distinguish between what we saw as something that was definite on all, and those on which there could be options. I think that was clear to him when I said it.

We believe that we have it right in regulations and those first three amendments should not be pressed.

Before I move to the fourth and fifth amendments, the noble Lord, Lord Kingsland, asked why not a tailor-made association or set of rules. We remember that the 1996 Bill to create a free-standing vehicle produced great complexity on the face of that Bill, which came in for considerable—and perhaps justified—criticism and did not produce the simplicity for which we are all searching.

The noble Lord mentioned interest in the idea of making this a company guaranteed by shares. We agree with the point made by the noble Lord, Lord Goodhart, about the essential nature of commonhold being one member one vote. As to his cheap and cheerful suggestion about the Limited Liability Partnerships Act, we will consider that, and no doubt he will consider it further. Our inclination is to say that it is perhaps new and untried and that a company limited by guarantee is a fairly simple and well understood structure. I suspect that we would need some persuading before we changed from such a company limited by guarantee.

I turn to Amendments Nos. 78 and 79. These amendments would subject certain sets of regulations to the affirmative resolution procedure. Subsection (3) of Amendment No. 79 would cover regulations made under Clause 3(1)(e), Clause 3(2)(f) and Clause 19(4). We believe that on balance these are matters of detail of the kind to which regulations are well suited. There is nothing here of significant policy impact. 'They are all powers to enable flexible and targeted provision—where, for example, the shoe pinches—to ease potential blockages or difficulties. For example, while the power in respect of consents may appear wide-ranging, it is intended as a safety net to protect the interests of people in certain circumstances in which the change to commonhold might damage their interests.

As to Clause 19(4), which was described as a Henry VIII power, we do not think that it is as drastic as it looks. It is directed only to rules of landlord and tenant law which may be found to cut across or be inimical to the rules governing leasing within commonholds. Some, if not all, of those rules have already been addressed in consequential amendments, although we cannot be sure that we have caught them all. I say to the noble Lord, Lord Goodhart, that that clause was brought to the attention of the Delegated Powers and Deregulation Committee by my officials—that committee not having spotted that clause—and we were told that the committee was satisfied. I recall his sad account of events last week on that matter.

I turn to subsection (4) of the amendment, which would affect the first set of regulations under Clause 31 which governs the CCS, and Schedule 2(3) which governs the content of the memorandum and articles of commonhold association. We accept that much more work needs to be done on those. That is one of the points of bringing out drafts at proper intervals. When we have reached a conclusion on them, both documents will go out to wide consultation outside the House before they are introduced in the House. I was asked about optional and mandatory. We take the point. We want to have a closer look and to be able to say which we see as which when we come to those final documents.

The report from the Delegated Powers and Deregulation Committee referred to Clause 31 and Schedule 2(3) and stated:
"The House may wish to see a draft or at least the principal elements of the regulations before reaching a decision about the merits of the provisions. Failing that, the House may think it appropriate that the first set of regulations in each case should require affirmative procedure".
We recognise entirely why that very respected committee reported as it did. We have circulated models of the documents—first and second drafts—and those revised drafts will be subject to further refinement, particularly in the light of this debate and other debates that we hold in Committee and elsewhere, and subject to wider consultation. Nevertheless, they are substantial drafts which we believe amply fulfil the requirements of the committee. So we could be excused from going to the second part of the committee's recommendation, which was that if we did not provide drafts we should agree to affirmative resolution. I am happy to tell the Committee that we have taken the view—and I hope that the Committee will agree—that they are such important documents that, in principle at least, there is a good deal to be said for the suggestion that they should come back to the House and be subject to the affirmative rather than negative procedure. That is how our mind is working at present. We recognise the concerns underlying the new subsections in Amendment No. 79. I invite the Committee to allow us to consider in good time for the Report stage whether that approach is appropriate. I make no guarantee but we believe that they may well be appropriate for affirmative resolution.

I am grateful to the Minister for that response. It is a concession that I hope will be made. While I recognise that the Government have done their best to produce drafts and have now produced two versions of the documents, there may well be substantial changes before they become a draft order. There will be a good deal of consultation and it is right that they should come back for affirmative resolution. Unfortunately, it is not possible later to amend them at that stage, but it will be possible to have a proper debate in your Lordships' House.

I thank the Minister very much indeed for his extremely full response not only to my amendment but also to those tabled by others. The contributions from all sides of the Committee have helped to focus on the underlying issues that the amendments sought to reveal.

I draw some comfort from what the Minister said in response to the noble Lord, Lord Goodhart, about the affirmative procedure for the regulations. However, the noble Lord, Lord Goodhart, has rightly pointed out that even with an affirmative resolution, your Lordships' House is unable to amend the underlying document. I regard that as a serious defect. I therefore put the Minister on notice that on Report I shall seek to make both the commonhold association agreement and the commonhold community statement schedules to the Bill so that at Third Reading they can be amended.

I accept that it may be appropriate to retain the use of regulatory procedures for some elements in those documents, but I am convinced that the balance at the moment between what is in Schedule 3 and what is, for example, in the commonhold association agreement is wrong. In those circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

4.30 p.m.

Clause 33 agreed to.

Schedule 3 [ Commonhold association]:

[ Amendments Nos. 48 and 49 not moved.]

Schedule 3 agreed to.

Clause 34 [ Duty to manage]:

Lord Brennan moved Amendment No. 50:

Page 15, line 8, after ("if') insert ("this will not involve any significant financial disadvantage to the other unit holders and").

The noble Lord said: In moving Amendment No. 50, I shall also speak to Amendment No. 52. Both amendments affect Clause 34, which is a critically important clause. It creates on the part of directors of community associations a specific duty to manage. In subsection (1) the primary objective of the directors is to give full effect to the rights and enjoyment of property of each unit-holder. These two amendments seek to improve subsection (3) which creates special considerations for the directors where there has been a failure by a particular unit-holder. The message of this Bill often includes the tedious but occasionally contains some linguistic charm. Last week we debated the concept of the flying commonhold. If one looks at Clause 34(3)(a) one finds the concept of inaction for the sake of harmony, which would surely be a suitable epitaph for the prime ministership of Stanley Baldwin. But considerable care should be exercised when one converts it into a legislative concept, and this amendment seeks to introduce such care.

Why? Let us take the example of 10 unit-holders, eight or nine of whom pay their dues regularly one or two of whom are recalcitrant. As the clause presently stands, the directors, who numerically may not represent the entire force of eight or nine unit-holders who pay, may decide that it is better for all of them to give up on the one or two recalcitrant unit-holders and let them get away with it. That puts a premium on intransigence by such defaulting unit-holders. The amendment introduces into subsection (3)(a) the concept that directors cannot choose not to act where the result would be financial difficulty for the majority who pay. The proposition is a simple one and I hope that it commends itself to the Government.

The second amendment deals with subsection (3)(b) which advises directors to have regard to the desirability of arbitration and other means of settlement, which is an entirely sensible approach. By the insertion of "particular" before "regard" I seek to introduce some emphasis. The Minister may well say that it adds nothing, and I may well agree. I choose the word because it is sufficiently puny to stimulate the parliamentary draftsman into a greater degree of emphasis, whereby directors choose legal representation as a last rather than first resort.

I hope that some form of wording can be introduced to make directors, as consistently as possible around the country, look to non-legal solutions before they approach lawyers. This is especially important if directors put the management of the units into the hands of management companies which may have a financial incentive with friendly lawyers to go to court at the first opportunity. Those are the purposes of the two amendments. I beg to move.

The noble Lord, Lord Brennan, raises one of the more difficult issues; namely, non-payment of service charges and the consequential impact upon the maintenance of the building or upon others. It is unfortunate that as the law stands people who live abroad, or who may be on holiday, always find plenty of excuses as to why certain things have or have not happened. The matter goes far beyond "the cheque is in the post". People transfer their properties and obtain permissions of landlords or companies without having paid their service charges. The problem is that that burden often falls on others, some of whom have retired, who have made careful budgets for the amount that they must pay. There needs to be some protection within the Bill. I am not sure that the amendments tabled by the noble Lord are correct. I had thought that perhaps penalties should be imposed with the right to charge interest at the exorbitant rate charged by many credit card companies. It is a difficult issue and, as the Bill is about money, where money is not paid when it is due the issue should be properly addressed.

Like the noble Lord, Lord Brennan, I found the introduction of the maintaining of harmonious relationships an interesting one to be brought in by legislation. It makes me wonder how this provision lies with the director's normal fiduciary responsibility. Does this provision mean that that normal responsibility is somehow downgraded? I do not know the answer to that and should be grateful if the noble Lord could tell us.

The point raised by my noble friend introduces the subject matter of Amendment No. 51, which is in the next group but should probably have been grouped with the amendments of the noble Lord, Lord Brennan. I am quite happy to take that separately or to take it now, whichever would be preferable.

I can be brief in what I have to say. Those who heard the Second Reading speech of the noble Lord, Lord Brennan, and his praise of the language of the Bill, in particular the phrase "maintaining harmonious relationships", will not easily forget the comments he made. No one has yet sought to delete that phrase from the Bill and I trust and hope that no one will.

As regards my noble friend's two amendments, we are interested in both of them; perhaps more the first than the second. With the permission of Members of the Committee and of the noble Lord, Lord Brennan, I should like to take them away and consider them. If we feel that there is something in them, we will table amendments with which he will not be dissatisfied, perhaps more likely in respect of Amendment No. 50 than Amendment No. 52.

In answer to the noble Baroness, Lady Hamwee, I do not know the answer. Rather than guess, perhaps I may write to her after due reflection as to whether it affects the position on the duty of directors under the Companies Act.

The Minister has been helpful in his reply. In closing on the issue of duty to manage, I suggest that in all the various clauses with which we will deal, the one question that unit-holders when they meet will ask is, "What are we here for?". The clause requires that directors shall manage in the best interests of the unit-holders.

I noticed at a glance, though I have not studied it carefully, that the memorandum of association makes no reference to the duty to manage. That seems unfortunate. Neither does the community statement explain to people who may not be trained lawyers how they should implement Clause 34. I do not wish to extend this document. As the noble Lord, Lord Monson, rightly said, it should be reduced to its simplest form. Those around the Minister in his department could probably do it on two sheets of paper. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Page 15, line 9, leave out from ("of") to ("and") in line 10 and insert ("the commonhold association")

The noble Lord said: I rise to move Amendment No. 51. Perhaps I may take advantage of the relative informality of these proceedings. We had mentioned in the previous debate and indeed in earlier ones of how to take proceedings against somebody who fails to pay up and how to enforce them. Would I be right in thinking that, while there is no provision here for forfeiture, there is nothing to prevent a common hold association, which is owed money by a unit- holder, seeking a charging order under the Charging Orders Act, if necessary using powers under that Act to sell the unit and recover the amount owing which had been unpaid?

I shall now move on to the proper subject of Amendment No. 51. Clause 34(3) appears, at any rate by implication, to allow directors to avoid action only if inaction will establish or maintain harmonious relationships; that is, they say they need not take action in specific circumstances and do not mention any other circumstances.

The noble Lord, Lord Bach, said that he hoped that no one would remove the reference to the maintenance of harmonious relationships. That is exactly what the amendment does. It is of course desirable to maintain harmonious relationships but, first of all, there may be cases where action needs to be taken at risk of damage to relationships. Plainly, the maintenance of relationships is not the only possible justification for inaction.

I give one example. Let us say that one unit-holder, in the view of the directors, is not complying with his obligations. The directors are advised that their view is probably correct, but not certain. The particular unit-holder is known to be extremely litigious, as some of them are, and is likely to challenge any enforcement action; and, if he is successful, the CHA will incur substantial costs. It would be reasonable, therefore, for directors not to take action if the breach of obligation is not likely to have serious consequences for the other members. That is an example of the kind of case that the noble Lord, Lord Brennan, had in mind.

It is a well established principle of company law that directors must act, or refrain from action, in the interests of the company. Why not simply apply the' same principles here and say that the directors must act in the interests of the commonhold association as a whole, it being of course a matter for their judgment as to what the interests of the commonhold association are in the particular circumstances with which they are faced?

I rise to support the noble Lord, Lord Goodhart, because the amendment makes the Bill clearer and the running of an association clearer. Perhaps I may ask the Minister—a well-known lawyer—what his opinion would be if there were a conflict of interest for the directors between establishing and maintaining harmonious relationships between the unit-holders and the interests of the community association. There could well be situations where that arises.

We go back to the point of law mentioned by the noble Lord, Lord Goodhart. It is the primary duty of the directors of the commonhold association to look after that association.

Clause 34 imposes on the commonhold association a duty to manage. Subsection (3) allows the directors of the association to decide not to act against the failure by a unit-holder to do something if they think it would maintain harmonious relationships between unit- holders.

These amendments—I refer to the amendment of the noble Lord, Lord Brennan, in the previous group as well as to all the amendments in this group—provide variations on that theme. The amendment tabled by the noble Lord, Lord Goodhart, and the noble Baroness, Lady Hamwee, would permit no action if it would be in the best interests of the commonhold association. My Amendment No. 54 has a similar effect. The amendment of the noble Lord, Lord Brennan, would allow inaction only where there would be no financial disadvantage to the others as a result. My Amendment No. 53 would disqualify a director from taking part in the decision if he or she were a defaulter.

I have now to choose between my two amendments. I believe that Amendment No. 54 is preferable to the other. Its effect is broader than that of Amendment No. 51, in that it requires the directors to exercise their whole duty to manage in the best interests of the association, rather than just give them discretion not to act. It continues to allow the directors not to act against every trivial infringement if that would maintain harmony in the community. The requirement to exercise discretion in the best interests of the community offers protection against directors not enforcing against their friends when it would be to the benefit of the whole community if they did act.

4.45 p.m.

I am sorry that the noble Earl, Lord Caithness, is not to receive a response to the amendment from a well known lawyer. The response comes from a less well known market researcher, but that is all that he is entitled to. I deal first with the point about charging orders. The noble Lord, Lord Goodhart, is correct that that is available to any commonhold association which seeks to enforce arrears against a recalcitrant unit-holder.

I turn to the amendments in this group. Amendment No. 51 removes the felicitous phrase "harmonious relationships". I would also be sad to see that go. The amendment would tend to blur the distinction between the commonhold association and its members in their capacity as unit-holders. As it stands the subsection is intended to allow the commonhold association to choose not to take formal action against a unit-holder if it seems best not to do so, without forfeiting its right to take action later against the same unit-holder, or any other unit-holder, for that or some other infraction.

We expect there to be two broad types of complaint within commonholds, in the same way as there are now in leasehold blocks or other circumstances in which people live together cheek by jowl. One will be the more formal type in which the association itself considers taking steps to deal with some failure, or compel some action by a unit-holder. The other will be a complaint about one unit-holder that is brought to the notice of the association by another with more or less justification. The association by its directors is already bound to permit or facilitate the exercise by unit-holders of their right to, and enjoyment of, their freehold estate in their units by virtue of Clause 34(1). By virtue of Clause 34(2) it is directed to use the powers created by Clause 36 to deal with infractions or failures by unit-holders.

Clause 34(3) is designed to be a safety valve. If the directors of the association, acting with the best interests of the association in mind—as they are bound to do by virtue of their office—genuinely believe that inaction in the face of a complaint is more likely than not to establish or maintain good relations between the unit-holders, that permits them to exercise some discretion. They may legitimately refuse to take formal action against a unit-holder who hangs out the washing on a Sunday afternoon in contravention of the CCS, thinking instead that a quiet informal word with the unit-holder, perhaps when meeting in the lift or over coffee, would be more conducive to good relations than the legalistic step of issuing the notice that they would be entitled to serve. Therefore, nothing is taken away but something is added. In answer to the noble Earl, Lord Caithness, that does sit with the directors' normal fiduciary duties; it will operate side by side. It will not be possible to decline to take action where inaction will damage the company or unfairly prejudice its members, or any class of them. Amendment No. 51, therefore, misses the point that there is an opportunity on the face of the Bill for directors of the association, who must always have the best interests of the association in mind, to use some discretion in order to help promote good relations between the unit-holders; in other words, to exercise people rather than business skills. After all, without good relations and goodwill no amount of efficient running of the association and serving of notices will make the commonhold a good place in which to live, and that is what Part I of the Bill is about. With some reluctance, we believe that we are better off with the Bill as it stands.

I turn to the three remaining amendments in this group. I shall pass over Amendment No. 53 which is not the preferred amendment of the noble Lord, Lord Kingsland.

In the case of Amendment No. 54, the duty of directors comes under the Companies Act. A director's duty is always to act in the best interests of the company. There is nothing to be gained and there is potential for confusion if that duty appears expressed differently in a multiplicity of places in the statute book. Our decision to opt for a Companies Act vehicle for the commonhold association was not capricious. It was taken in the knowledge that we import with it many useful concepts which fit well with our policy intentions.

Amendment No. 75 imposes explicitly on the directors of the commonhold association a duty which is implicit but perfectly clear from Clause 32 read together with Clauses 11 and 24. The purchase of a part of a commonhold by a compulsory purchaser will give rise to a change in the physical confirmation of the coin rnonhold. Clause 11 provides a definition of a commonhold unit by reference, inter cilia, to plans. Clause 24 defines the common parts as all that land within the commonhold which is not for the time being a unit. In both cases, the definition is made by means of the CCS. It follows that a change brought about by compulsory purchase, or indeed any other sale or purchase, must be recorded in the CCS.

The Minister said that the duties under the Companies Act must be implied into the Bill. However, I wonder how he feels about circumstances in which the duty under the Companies Act would conflict with the contents of Clause 24(3)(a).

I said in respect of Amendment No. 51 that if there were to be a conflict, or if an action would result in damage to the company, the directors would have to intervene. This gives them an additional discretion only to do or not do something without going through the full formality. Nothing takes away either from their rights as directors or from their duties as directors under the Companies Act.

As a former market researcher, perhaps I may help a little. We are talking here about the definition of the phrase "duties of care". There is a mixture of duties of care as a director, but there is a duty of care to everybody as a unit-holder and to take into account their personal circumstances which may vary from one to the other. Perhaps if the phrase "duties of care" could be used, it would be easier for some of us to understand.

too, am a former market researcher. Clearly, I would not be standing here if I still were. My answer would be that the Companies Act applies. I do not have the full volume of the Companies Act in front of me, nor indeed the single volume from the review committee. If "duty of care" was used there, it applies here. If it was not, it does not.

I am grateful to the Minister but I am not entirely convinced by his argument. It seems to me that the maintenance of harmonious relationships may very well be in the interests of the commonhold association as a body; frequently it will be. If so, there is no need for a specific reference. If it is not in the interests of the commonhold association, it would be wrong to refuse to take action simply to maintain harmonious relationships.

The failsafe is the other way. They can always take action in the interests, and indeed they are obliged to take action in the interests of the commonhold association. If there is any question of damage to the interests of commonhold hold associations, they are obliged to take action. This is a let out where there is no issue of damage.

If the Government take that view, and if they are not prepared to accept my amendment, it would be desirable to accept the amendments of the noble Lord, Lord Kingsland, in order to put that point on the face of the Bill and leave no room for doubt in the minds of the court or, more importantly, in the minds of directors or their advisers who may be required to read the Bill and decide what it means.

I should also point out that the maintenance of harmonious relationships may not only be between unit-holders but between occupiers who are not unit-holders. That is another reason why the reference to maintaining harmonious relationships between the unit-holders is inappropriate. Be that as it may, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[ Amendments Nos. 52 to 54 not moved.]

Clause 34 agreed to.

Clause 35 agreed to.

Clause 36 [ Enforcement and compensation]:

Page 16, line 7, leave out paragraph (g)

The noble Lord said: Amendment No. 55 seeks to remove the requirement for the regulations to make provision for a tenant of a let unit to enforce a duty against another tenant, unit-holder or the association. Amendment No. 56 seeks to enable a tenant to pay any moneys owing on the unit to the association if his landlord, the unit owner, were in default, and then to offset that sum against the money that he owed to the landlord in order to avoid any risk of double payment.

Although there is a logic in allowing those who live in the units a right to seek enforcement of obligations against others, we believe, as a matter of principle, that enforcement should remain between unit owners and the association and that subsection (2)(g) should be deleted for that reason.

The problems that this provision seeks to overcome can be dealt with by using other legislation or via the provisions of the tenancy agreement. This provision grants tenants of rented units greater rights than they would enjoy elsewhere. Allowing the tenant to offset money paid to the association from that owed to the landlord enables the tenant to protect his own position if the landlord is in default, while ensuring that the overall effect does not see him double charged. I beg to move.

Perhaps I may ask the Minister or the noble Lord, Lord Kingsland, whether this would cover the kind of situation that has occurred frequently in the past. I refer to a situation where someone might receive an electricity bill which the tenant in the property knew nothing about; the non-resident landlord, who was perhaps overseas, would fail to pay it and the tenant was then at risk of having the electricity cut off. Is that kind of problem covered? It is quite relevant.

Amendments Nos. 55 and 56 affect the rights of tenants. Amendment No. 55 would remove the subsection in Clause 36 that would allow a tenant of a unit-holder to enforce a term of the CCS, the memorandum and articles or some other term of the Act against others in the commonhold. This provision was included to balance the fact that a tenant would be subject, at the minimum, to the terms and conditions of the CCS as part of his lease or other agreement. Clause 19 allows such obligations to be imposed, whatever else the lease may do. It seems to us to be wrong to deny the tenant the protections available in the same document by failing to apply Clause 36(2)(g), which is what Amendment No. 55 would do.

Amendment No. 56 merely duplicates the provisions of Clause 19(3)(a), which provides that any sums paid by the tenant to the commonhold association in default of the unit-holder may be set against sums owed by the tenant, or indeed, under subsection (3)(b), may be recovered from the unit-holder.

There seems to be some sense in Amendment No. 57. If regulations are to make provision for the payment of compensation in certain circumstances, it seems proper that they should be required to say how the necessary calculations are to be made and what provision should be made for late payment. I undertake to come back to the House at Report stage with the definitive answer when we have had an opportunity to discuss this matter with the draftsmen.

As to the point about electricity bills raised by the noble Baroness, Lady Gardner, this part of the Bill applies only to matters arising from the memorandum and articles, the CCS or elsewhere in the Bill. It does not cover other matters.

I am grateful to the Minister for his reaction to Amendment No. 57, but less happy about his response to the other two amendments upon which I shall reflect before Report stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

5.00 p.m.

[ Amendments Nos. 56 to 58 not moved.]

On Question, Whether Clause 36 shall stand part of the Bill?

There seems to be far too much provision in this Bill for matters to be covered by regulations. Clause 36 is dispensable and does not appear to be necessary. In law a memorandum and article constitute a contract between members of the company. They can enforce rights conferred on them by the memorandum and articles against each other as a matter of contract law. Would it not be simpler to provide for the commonhold community statement to be binding, as if it were a contract between all the unit-holders for the time being? It may be necessary to add a little to this, for example to provide that obligations are enforceable by the tenants of the unit-holders as well as by and against the unit-holders themselves. But, surely, it is not necessary to have a massive set of regulations to cover these matters. This is overkill and can be done by a much shorter clause that does not involve the making of regulations.

That is a very interesting suggestion. If some way could be found to shorten both the Bill and regulations without damage we would look at it. My first reaction is that Clause 36 is helpful because it sets out in ways which are available to everybody the principles on which the regulations shall be drawn. If, however, it is felt that, unusually, a greater degree of delegation is required—perhaps it is not unusual given the noble Lord's membership of the Delegated Powers and Deregulation Committee—we are happy to consider the point.

I do not propose a greater degree of delegation; rather, I suggest that this clause can be replaced by a simple one which treats the commonhold community statement as a contract between the members but is extended simply to make it binding on those who buy and on tenants and unit-holders. However, I shall consider that further.

Clause 36 agreed to.

Clause 37 [ Commonhold assessment]:

Page 16, line 22, after ("to") insert ("prepare an annual statement of projected expenses which the association might reasonably expect to incur and")

The noble Lord said: This amendment would require the directors of the commonhold association to prepare an estimate of expenditure as well as income. The present Clause 37(1)(a) is intended to place an obligation on the directors of the association to prepare an annual budget. We believe that simply requiring an estimate of the income needed is inadequate. This provision could be fulfilled by stating a figure without offering any justification as to how or why that figure was reached. The purpose of the amendment is to oblige the directors to provide an estimate of expenditure in order to render the budget more precise. I beg to move.

I do not know why my Amendment No. 60 is grouped with Amendment No. 59, as they do not seem to bear any relationship to one another. However, before speaking to my amendment, I should like to query the amendment of the noble Lord, Lord Kingsland. Is he saying that people will be able to charge on the basis of the projected expenses rather than the actual budget, or is he saying that it will be just a procedure in arriving at the budget? That is quite important as people who have properties in leasehold blocks at the moment often find that people make a budget and charge a great deal of money over what is required. Then at the end of the year they find that the second payment is less but they have been out of pocket all that time on the projected budget.

With regard to my own amendment, it is not connected at all with Amendment No. 59. It deals with a situation that already exists in leasehold property and I believe that it could very easily happen in commonhold. I can quote the instance of a block near where I live where, after 100 per cent of the costs were allocated to all of the people in the building, little niches were discovered, which I believe had been broom cupboards, which were brought into residential use. Those residents had a zero service charge because 100 per cent of the cost was already allocated.

A similar situation occurs where people build another one or two floors on top of a block, which is common practice in London at the moment. It certainly could occur if your commonhold was enlarged. You might be able to extend and build further over what was previously an open space. Therefore, it is most important that, with the inclusion of any additional unit into a commonhold, there should be a complete restructuring of the percentages of costs borne by each resident. Although the noble Lord, Lord Goodhart, made the point about one person, one vote—it should not matter whether the unit is big or small—the share of the property for which you meet the costs is related to the size of your unit. Even if you hold only one unit, if you have a unit twice the size of the man next door, you will certainly be expected to pay more of the general upkeep of the building.

A real situation arises where 100 per cent is already allocated and, when additional units are brought in, there seems to be no power at the moment to bring those into the reckoning. The people already in the block would then, if anything, have their percentage reduced. It might not mean that their payment was reduced but it would be very wrong if they were paying out costs for the other people.

We do not believe that Amendment No. 59 would add anything to the operation of Clause 37(1)(a). At present, that clause requires the directors to make an annual estimate of the income required to meet the expenses of the association. The new words which the amendment would add would require them to prepare an annual statement of projected expenses which the association might reasonably expect to incur. We believe that the added words are implicit in the clause as it stands, because without the projected expenditure, how could there possibly be an annual estimate of the income required to meet that expenditure? We need to be persuaded that the amendment, if carried, would add anything at all to the obvious meaning of the clause. I agree with the noble Baroness, Lady Gardner, that her amendment has nothing to do with the previous amendment, save that it comes in the same part of the Bill. I see the point at which the noble Baroness is driving, but I will do my best to convince her shortly that the job is already done. I invite her to look at Clause 37(1)(c) on page 16 at line 28 and onwards. Any new units in a commonhold must appear as amendments to the commonhold community statement.

The provision to which I have referred requires the CCS to specify the percentage allocated to each unit—and and I emphasise those words, which are in the Bill. That will mean that, however many units there are from time to time, the allocation of the assessment must be made between all of them—always bearing in mind that it is possible to allocate 0 per cent if that is considered appropriate.

I hope that that meets the noble Baroness's point and satisfies—

Will the Minister give way on that point? This is crucial. He did say "any new unit" but what about a part of a unit? Like my noble friend Lady Gardner, I know a number of examples where parts of the building that were once common parts have been absorbed within a leasehold flat. They would now be absorbed within a commonhold unit, thus altering the useable square footage of that unit. Therefore the percentage of the cost payable should be allowed to be altered by any addition, whether it is a new unit or part of a new unit.

I am grateful to the noble Earl.I am advised that what he suggests—taking over a part of what was common parts into a unit—could not be done without the commonhold community statement being altered. In other words, not even that can be done without the CCS being altered.

Despite what the Minister says, I have seen that such blocks exist. The landlord and head lessee have chosen not to allocate any costs whatever to the additional area and that has been very unfair to other people in the block. The view has been taken that if we already have 100 per cent we do not need any more. However, people should have the additional proportion taken into account. I am not entirely satisfied that the wording here will ensure that that happens.

Perhaps I may try to help the noble Lord. This is a very complicated issue. Unfortunately, most of the service charges are based upon the old-fashioned rateable value. That often relates not to the size of a unit but more to the value at that particular time. It takes no account of how a particular unit within a building may have been improved dramatically and have a higher value.

There is a difficulty. If you have 10 units which contribute 100 per cent of the cost in accordance with their lease, you cannot vary their contribution without mutual agreement on every lease and it is practically impossible to achieve that. However, it was originally suggested that you just make it 104, 105 or 106 per cent, and add 6 per cent, or whatever it might be, on to each additional unit. If it were possible within the Bill to amend the historic service charges being related to rateable value, that would be a wonderful achievement—but I believe it would be nigh on impossible.

I rise to support both amendments. I shall deal first with the Government's amendment. When we used to have rateable values, when you extended your home—and it could be an extra floor on an apartment building—someone would come along and re-rate you immediately. In other words, you had to pay a greater share of the rates because of your extension of area. There is no doubt that if in a block of flats a number of areas are either extended or taken into account, which were perhaps not used before, the share of the charges should be varied. I agree it is extremely difficult to vary them between a whole group of leases, but if this amendment enables that to be done I strongly support it.

I turn to the amendment tabled by the noble Lord, Lord Kingsland. I did not fully understand the Minister. The noble Lord said that, obviously, one prepared the estimated income required from the expenditure and that was all that was needed. As a tenant of a block of flats, when one receives the service charges one knows exactly what one is required to pay. One does not look at how the income is derived from all the tenants in the building but how the money is to be spent. If one is to examine what the directors or the management company have decided is necessary, one must look very carefully at the detailed elements of expenditure. Only in that way can one judge fairly whether the income that is required for the building is properly derived.

I agree with the Minister's statement that one cannot arrive at the income without having examined the expenditure, but the preparation of a detailed list of required expenditures which comprise the full amount of the required income is very desirable. Today, the occupiers of any modern managed block—I know several people who live in such property—receive very detailed statements every year, sometimes half-yearly, which show how the expenditures have been estimated and how they are being incurred. I strongly support the amendment.

We are not persuaded by Amendment No. 59, and we believe that our reply to that is satisfactory. It is for the noble Lord to decide what to do with it.

As to Amendment No. 60, there seems to be some feeling about it. I have tried to persuade the noble Baroness in a few words and failed, and she has not yet persuaded me that her amendment is appropriate. If the noble Baroness is good enough not to move her amendment we can perhaps arrange a meeting between Committee stage and Report to try to persuade each other of our points of view.

The Minister said that it was for me to decide what to do with my amendment. As the Minister well knows, there is not very much that I can do with my amendment because the Government have insisted that the Committee stage of this Bill should take place in the Moses Room where we cannot put amendments to the vote.

The Government cannot and have not insisted; the usual channels have agreed it.

As to what the noble Lord does with his amendment, I do not necessarily mean today but in the future.

I am grateful for that clarification from the Minister, which at least gives me some hope. I was much more impressed by the reaction to my amendment from the noble Lord, Lord Jacobs. Nevertheless, since I have no alternative but to withdraw the amendment I beg leave to do so.

Amendment, by leave, withdrawn.

[ Amendment No. 60 not moved.]

Clause 37 agreed to.

5.15 p.m.

Clause 38 [ Reserve fund]:

[ Amendment No. 61 not moved.]

Page 17, line 1, leave out paragraph (b)

The noble Earl said: We move on to Clause 38 which relates to the reserve fund. Amendment No. 62 requires the deletion of paragraph (b). I am very concerned about that paragraph which allows the reserve fund, into which all unit-holders have paid, to finance the repair and maintenance of commonhold units. That is not the purpose of the reserve fund. The purpose of the reserve fund is to deal with the common and structural parts of the building, including internal structural walls which might form part of a unit but which must remain the responsibility of the association. To have a provision such as this will merely encourage those bad leaseholders, as they are at the moment—in future, unit-holders—to be even more intransigent and difficult to deal with because they know that part of the reserved fund can be used for the repair and maintenance of their unit. I beg to move

I listened with interest to the noble Earl, Lord Caithness, but I believe that it is quite important to have a sinking fund or reserve fund. As I understand it, he is suggesting that there should not be one. It is an important part of any unit. When the time comes to sell the unit, whoever is buying will ask about the seller's contribution to the sinking fund or reserve fund. It is used not only for what needs to be done on a routine basis. I have already declared an interest in that I own a flat in a block. There is no reserve fund. We find that a great disadvantage and we would like to have one. The only way to have one would be by getting the agreement of every single leaseholder in the block. It cannot be included at a later stage. I believe that it is important to maintain a reserve fund.

Amendment No. 63 is grouped with these amendments. On mature reflection, I shall not move that amendment. On the other hand, I should like strongly to support Amendments Nos. 64 and 65, which stand in the name of my noble friend Lady Gardner of Parkes.

I had not realised the extent of the sinking fund problem. It ties in with managing agents and irresponsible managing agents, but sinking funds or reserve funds are always held in trust. Presumably they are held in trust on behalf of all the unit-holders. I have worried about a statement in the consultative document on which people have commented. Management is a very trying business and unless it is clear, and unless issues such as this are clear, there is only friction.

Perhaps I may speak to Amendment No. 64 in my name, which seems to have become somewhat muddled with everything else. It is strange how my amendments are being grouped. If someone is making a demand for payment the date on which the payment is due should be quite clear on the document, particularly since, as has been mentioned by other Members of the Committee, we are all keen to charge interest to those who have not paid. It is important to know when one has to pay.

The provision that Amendment No. 62 seeks to delete is not as odd as it might seem at first blush. In a sizeable commonhold development it might be thought convenient to have a caretaker living on site. In a commonhold sheltered community, a warden would be expected to live on site. In a very large commonhold development, the community association or its managing agents might well Find it convenient to use an easily accessible unit as an office. Of course, the unit could be redefined as part of the common parts, but we believe that retaining it as a unit could have advantages of flexibility and adaptability. For example, if one wanted to change where the caretaker's flat was, it would be easier to do so by making it a unit rather than a common part.

A commonhold association owning a unit or units for those purposes must have power to raise funds to maintain them. The power to raise funds in Clause 38(1)(a) applies to common parts, and these units are not common parts; they are units, the unit-holder of which is the commonhold association itself. The commonhold association must be able to meet its responsibilities to maintain and insure such units. That is what Clause 38(1)(b) allows: no more, no less.

Amendment No. 64 seems on the face of it to be entirely reasonable. It would add to the certainty of the collection of levies for reserve funds. Indeed, if the logic of the amendment for this purpose were accepted, consideration should also be given to applying it to the notice to be issued for the collection of commonhold assessments under Clause 37(1)(e). I invite the noble Baroness, Lady Gardner of Parkes, to withdraw her amendment today. I shall undertake to discover whether there are any hidden difficulties that we have not spotted in relation to her suggestion. If there are no such hidden problems, we shall come back on Report with a similar amendment.

I am happy with that. My other amendment, which has already been debated, could be dealt with in the same way and the two examined together. Again, it is a question of the interest running on the money. Amendment Nos. 64 and 65 seem to be connected, although they are not on the list.

I was saying that I shall not move Amendment No. 65 because we have already debated it, and it seems to me that it is part of the same parcel to be looked at later.

I listened with care to what the Minister said, and I should like to read the point more carefully in Hansard. Undoubtedly, where there is a warden, there will be special circumstances. Would the Minister consider an amendment along the lines of,

"to finance the repair and maintenance of any commonhold unit owned by the commonhold association"?
I make this suggestion in order to ensure that the issue is more specific and fair. At the moment, although the Minister said that it means no more and no less, that is not what it says in the Bill. How it can be interpreted? It can be interpreted as any unit in the block or in the development. I wonder whether the Minister would consider the possibility of such an amendment between now and another stage.

Of course we will consider any amendment that the noble Earl, Lord Caithness, puts forward. I would be grateful if he could send it to us in draft at the earliest possible opportunity. It gives us more time to consider it.

I am grateful to the Minister. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[ Amendments Nos. 62 to 65 not moved.]

5.30 p.m.

Page 17, line 20, at end insert—

("(3A) The assets of a fund established and maintained by virtue of this section shall be treated as monies reserved for future expenditure.

(3B) Any sums paid into a fund established and maintained by virtue of this section by a unit-holder, and any investments representing those sums, shall (together with any income accruing thereon) be held by the commonhold association either as a single fund, or, if the commonhold association deems appropriate, as two or more separate funds.

(3C) The commonhold association shall hold any trust fund—

  • (a) on trust to defray costs incurred in connection with the matters for which the relevant contributions were payable (whether incurred by the commonhold association itself or by another person), and
  • (b) subject to that, on trust for the persons who are the contributing unit-holders for the time being.
  • (3D) Subject to subsections (3F) and (3G), the contributing unit-holders shall be treated as entitled by virtue of subsection (3C)(b) above to such shares in the residue of any such fund as are proportionate to their respective liabilities to pay a percentage of the levy set under subsection (2) of this section.

    (3E) 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.

    (3F) On the transfer of a commonhold unit, the unit-holder shall not be entitled to any part of any trust fund, and any part of such trust fund which is attributable to relevant contributions paid in accordance with this section, shall accordingly continue to be held on the trusts referred to in subsection (3C).

    (3G) Any trust fund established under this section shall be exempt from any tax in respect of the contributions made to it by the unit-holders, whether (apart from this provision) a liability to tax may be imposed on the commonhold association or the contributing unit-holder.").

    The noble Lord said: Amendment No. 66 specifies that the reserve fund consists of sums held as future expenditure and are to be expended as such. It should, therefore, be treated as an exempt, tax-free fund, as the sums are held as principle and so should not be subject to tax. Interest on the sum, of course, should be taxed in the usual manner.

    The amendment mirrors the provision of Section 42 of the Landlord and Tenant Act 1987, which establishes similar provisions that service charge contributions in leases are held on trust.

    During the Standing Committee debate on this clause in another place, the then Minister for Housing said that, without a trust arrangement, receipts would be taxable. This implied that with a trust arrangement they would not. Amendment No. 67 is intended to permit sums from the reserve fund to be used to pay debt if that would avoid insolvency.

    We recognise that the prohibition imposed by subsection (4) is probably intended to protect the fund against third party garnishees. However, we consider that the flexibility would be helpful. I beg to move.

    Our Amendment No. 73 is grouped with this amendment. I have nothing to say on the text point. I am not sure that it is quite the same situation, but it may be exempt from tax anyway on the ground of mutual payment. No doubt that is a matter at which the Government will look.

    On looking at the status of a reserve fund, it seems to me that there are two possibilities. The first possibility is that the fund is the property of the CHA, which would mean that if it was not used for the purpose for which it was set up it could be used to meet the debts of the company in the case of insolvency. The other basic possibility is that the fund is a trust fund. If that was not used for the purpose for which it was set up, it would have to be returned to the unit-holders who had contributed to it.

    The Government here respond with something very close to the first of those possibilities. Clause 38(4) restricts the use of the fund to the purposes for which it was set up and prevents the enforcement against the fund for other purposes. However, Clause 54 overrides that and allows the fund to be used to pay the debts of an insolvent CHA.

    The amendment of the noble Lord, Lord Kingsland, goes for the trust fund solution, although it does not specify that the fund under Clause 38 is necessarily a trust fund. If it is, I am a little puzzled by Amendment No. 57 which would enable the reserve fund under Clause 38 to be resorted to in order to stave off an insolvency. Logically, if the noble Lord, Lord Kingsland, is going for a trust solution, he should also object to Clause 54 standing part of the Bill, which he has not done.

    Our Amendment No. 73 goes for the half-way house, which is intended to exempt a reserve fund from going to the creditors if a succession order is made and a phoenix association is set up. That would also require an amendment to Clause 49 to ensure that the reserve fund goes to the phoenix association, along with the common parts. We certainly believe that the reserve fund should go to the phoenix association to enable it to continue to operate. "Phoenix association" is an informal term for a successor CHA which is set up to take over the assets of an insolvent predecessor.

    We believe that our solution is appropriate. I am tempted to go further and support the trust solution, where there is no phoenix association and the reserve fund goes back to the contributors if no succession order is made. However, I also recognise that the position is not quite the same in the case of commonhold as it is between landlord and leaseholder.

    It is quite plain—we will come on to this later with other amendments—that, in the case of a reserve fund which is paid over by lessees to a landlord, there is every reason to insist on that being a trust fund. I recognise that, in the case of a commonhold where the fund is paid by the unit-holders, in effect, to a company which represents themselves, the arguments for a trust fund are not quite so strong. I shall wait with interest to hear what the Minister has to say on that point.

    Again, I do not know why my Amendment No. 74 is popped in here; the pages do not seem to be related.

    I should like to comment briefly on the amendments which relate to reserve funds. Having spoken so strongly in favour of reserve funds, I should mention that I met a woman the other day who manages her own block of flats. which was sold by a Duke to the Wellcome Trust. By the time she bought her flat in the early 1980s, a reserve fund of £100,000 had accumulated. She took over the management personally with the agreement of the other tenants in the block. She has run it since 1985 and has never needed to levy any money for repairs. They are still living on that £100,000. If we have a reserve fund, or a sinking fund, it is important that there should be some control over it.

    Amendment No. 74 has been tabled because I found the provision at page 23 very strange. It states that the property would cease to be commonhold, but it did not state what it would become when that happened. It is very important that, if people are unit-holders, they are owners of that basic piece of property. Even if it was all burnt down, it would end up still being theirs, and I think it should be freehold at that point. This is why I have tabled Amendment No. 74.

    I shall deal first with Amendment No. 66, which would import into the Bill a provision lifted almost bodily from Section 42 of the Landlord and Tenant Act 1987. In the 1987 Act, this provision was designed to protect the interests of tenants paying into accumulated funds by way of service charges, by requiring the landlord or his agent, whoever held the fund, to hold it on trust for the tenants.

    As the noble Lord, Lord Goodhart, recognised, the relationship between the commonhold association and the unit-holder differs in almost every respect from that between a tenant and his landlord or his landlord's agent. Apart from what might be seen as a natural reluctance to import into the Bill the setting up of a new kind of ownership—a provision from the landlord and tenant law—we do not think we need it.

    Because of the relationship between the commonhold association and the unit-holder, there is no need to set up a complex structure designed to provide protection against a problem which will not exist. There should never be a conflict of interest between the commonhold association and its members such that it would be necessary to create trusts as in the 1987 Act.

    So far as tax is concerned, we do not believe that receipts by the company—that is, the commonhold association—would be taxable in the way that the fund accruing under the 1987 Act would be, as it would be a company asset and not a taxable asset of the unit-holder. I will check on that point and I undertake to write to the noble Lord, Lord Kingsland, about it before Report stage.

    The noble Lord did not speak to Amendment No. 67, so perhaps I should not speak to it either.

    I thought I had, and I have been duly reprimanded for what I said by the noble Lord, Lord Goodhart. In the circumstances, I am rather glad that you do not remember.

    If I missed that telegraphic part, I shall have to reply. Amendment No. 67 would make the reserve fund available to a creditor if the enforcement of a debt would render the commonhold association liable to a winding-up petition under Section 24 of the Insolvency Act 1986. A petition leading to winding up can be used as a blunt instrument by an alleged creditor to extract money from an alleged debtor. The essence is that a court can find insolvency not because the commonhold association could not pay its debts (which could be as small as £75) but that, for whatever reason, it did not. A heavy-handed alleged creditor can use the threat of insolvency as a first line of attack on a debtor.

    The purpose of Clause 38(4) is to protect what we acknowledge may not be the most efficiently run companies from becoming easy prey to unscrupulous contractors. Clause 54 provides that where a court has been satisfied that winding up is appropriate, or the commonhold association passes a voluntary winding up resolution, or the court makes a declaration that the land is no longer commonhold, the reserve fund is released.

    As to Amendment No. 73, we recognised that Clause 38(4) gives what some have thought to be an unusual degree of protection to the reserve funds of commonhold associations. In effect, it provides that reserve funds should not be available to judgment debtors to satisfy debts unless those debts arise directly from works or the provision of services for which the reserve fund was established. If you had a garden contractor paid on a weekly basis out of a current account, he would not be able to get at the reserve fund for outstanding fees but a lift engineer, carrying out periodic lift replacement, which is paid for out of the reserve fund, would have access to it. Therefore, we believe that the degree of protection is not unreasonable, but in addition a commonhold association which has been managed in such a way as to face winding up should no longer be protected in that way. It would be grossly unfair to creditors if a commonhold association got away with insolvency and kept what might be a considerable asset intact to be passed on to a successor association. I am afraid that that is what this amendment would do.

    If the commonhold association has got itself into such a mess that the court believes winding up is the way to deal with it, it must pay up and the creditors should be recompensed as fully as possible. If it means that the successor association gets under way with no reserve funds, it is for the directors to find an alternative way to manage things until those funds can be built up again.

    I turn to Amendment No. 74. I apologise that the noble Baroness, Lady Gardner, was not consulted on the grouping. Commonhold land continues to be freehold land when it is registered as commonhold. It must be freehold land to begin with. A unit-holder is defined as the person who is entitled in law to be registered as the proprietor of the freehold estate in his unit. The land takes on certain statutorily defined special attributes during the time that it is registered as commonhold which are, however, in addition to its underlying freehold status. When it ceases to be commonhold for any reason it merely sheds those attributes. Its underlying freehold nature has not been disturbed and it does not need to become freehold again. As the clause provides, it needs to stop being commonhold.

    I thank the Minister for his observations. He kindly agreed to look at the text of my Amendment No. 66 in relation to what he saw as the underlying reality and write to me. In those circumstances, I am content to beg leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    [ Amendment No. 67 not moved.]

    Clause 38 agreed to.

    Clause 39 agreed to.

    Clause 40 [ Enlargement]:

    [ Amendments Nos. 68 to 70 not moved.]

    Clause 40 agreed to.

    Clause 41 [ 100 per cent. agreement]:

    Page 19, line 7, leave out ("community")

    The noble Lord said: In moving Amendment No. 71 I should like to speak also to Amendment No. 72. These are minor drafting amendments to remove the word "community" from the phrase "commonhold community association" to achieve the correct title. I point out to the Committee—perhaps it is a hostage to fortune—that, whereas the Government have received criticism in the past for tabling, even at this stage, a large number of government amendments to Bills introduced in both Houses, in this part of the Bill, as in those parts to come, there are very few such amendments. I believe that that is worthy of mention. I beg to move.

    On Question, amendment agreed to.

    Clause 41, as amended, agreed to.

    Clause 42 [ 80 per cent. agreement]:

    Page 19, line 19, leave out ("community")

    On Question, amendment agreed to.

    Clause 42, as amended, agreed to.

    Clauses 43 to 49 agreed to.

    Clause 50 [ Transfer of responsibility]:

    On Question, Whether Clause 50 shall stand part of the Bill?

    In Clause 50 we move to the transfer of responsibility from an insolvent association to the successor association. Clause 50 as drafted lists a number of matters that the court may include in an order. What it does not say and what it omits is serious. It does not tell us how the funds will be held and what will be done with those members who do not pay. These two items are worthy of regulation, so that it is clear for those who are entering into the association right at the beginning to know exactly what the situation is going to be should there be a transfer of responsibilities. I hope the Minister will agree that a clear statement on these two points is required.

    I am grateful to the noble Earl, Lord Caithness, for giving us notice of his question on this clause. He asked how the debts would be held on transfer to a successor commonhold association and what would be done about members who do not pay. The debts of the original insolvent commonhold association will be its debts and not those of the successor commonhold association. The liquidator will have the full range of powers given by the Insolvency Act to collect the insolvent commonhold association's assets which will include arrears owed to it by unit-holders, and the liquidator will be able to seek a charging order over such unit-holders' property including his unit. That point was made in response to the question posed earlier by the noble Lord, Lord Goodhart. I hope that satisfies the noble Earl.

    5.45 p.m.

    I am grateful to the Minister for that. I should like to consider at more leisure what he has said. I may come back to this matter at a later stage.

    Clause 50 agreed to.

    Clauses 51 to 53 agreed to.

    Clause 54 [ Release of reserve frond]:

    [ Amendments Nos. 73 and 74 not moved.]

    Clause 54 agreed to.

    Clauses 55 and 56 agreed to.

    Schedule 4 agreed to.

    Clause 57 agreed to.

    Clause 58 [ Compulsory purchase]:

    [ Amendment No. 75 not moved.]

    Clause 58 agreed to.

    Clauses 59 and 60 agreed to.

    Clause 61 [ Orders and regulations]:

    Page 26, line 4, leave out from ("regulations') to end of line 5

    The noble Lord said: Amendments Nos. 76 and 77 together simply allow for any regulations made under Clause 58(3) which relate to compulsory purchase to be made jointly by the Lord Chancellor and the Secretary of State for the Environment, Transport and the Regions. I beg to move.

    On Question, amendment agreed to.

    Page 26, line 5, at end insert—

    ("( ) Regulations under this Part shall be made—

  • (a) in the case of regulations under section 58(3), by the Lord Chancellor and the Secretary of State acting jointly, and
  • (b) in any other case, by the Lord Chancellor.").
  • On Question, amendment agreed to.

    [ Amendment No. 78 not moved.]

    Page 26, line 13, at end insert—

  • ("(3) Regulations shall not be made under sections 3(1)(e), 3(2)(f) or 19(4) unless a draft of the instrument containing them has been laid before and approved by a resolution of each House of Parliament.
  • (4) The first regulations under section 31 and paragraph 2 of Schedule 3 shall not be made unless a draft of the instrument containing them has been laid before and approved by a resolution of each House of Parliament.
  • (5) Subject to subsections (3) and (4), regulations under this Part shall be subject to annulment in pursuance of a resolution of either House of Parliament.").
  • The noble Lord said: I shall be very brief. The amendment is by no means the most important we will look at, but an enormous quantity of material will be published and will no doubt frequently be revised. It is essential that commonhold associations act on the basis of the best, current and up-to-date information. I recognise that in practice the best way of doing this is electronically; and no doubt there will be a website where these regulations will be maintained.

    It is worth raising the point that it will be essential for information to be brought to the attention of the commonhold association. One practical way of doing that would be by ensuring that all of them—they can all equally be identified from the Land Registry—receive copies of the regulations free of charge. as soon as they are made or, in the case of draft regulations from the affirmative resolution procedure, before they come into force. I beg to move.

    This amendment would result in commonhold associations being provided at public expense, with documents published for sale by the Stationery Office. It has to be admitted that it would apply only to regulations issued after the first commonholds were set up but not to the first raft of publications because we expect to have those out well in advance of implementation of the Act. In the early stages there will be very few such organisations to be supplied. However, we have to consider the cost to the taxpayers of providing such material free of charge to companies which will levy commonhold assessments on their unit-holders for the very purpose of, among other things, covering the costs of managing the commonhold.

    We are prepared to consider this amendment and will make inquiries between now and Report, at which time I will come back with a more definite answer. It may not be a positive answer, but we would like to consider the point in this amendment, and I invite the noble Lord to withdraw it today.

    I am very grateful for having received more encouragement than I had expected on this point. There are other later amendments which raise similar points in terms of publication of booklets and so forth to inform various groups and RPL organisations what they are going to be saddled with. I think it is important that these complicated matters should be brought to the attention of the CHAs. I beg leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    Clause 61, as amended, agreed to.

    Clauses 62 to 65 agreed to.

    Schedule 5 [ Commonhold: consequential amendments]:

    Page 77, line 17, at end insert—

    ("Housing Act 1985 (c. 68)

    . At the end of section 118 of the Housing Act 1985 (the right to buy) there shall be added—

    "(3) For the purposes of this Part, a dwelling-house which is a commonhold unit (within the meaning of the Commonhold and Leasehold Reform Act 2001) shall be treated as a house and not as a flat." ").

    The noble Lord said: This amendment makes a change to Section 118 of the Housing Act 1985, which relates to a tenant's right to buy from a public-sector landlord. Broadly speaking, if a dwellinghouse is defined as a flat, the only right to buy is the right to buy a long lease. If it is defined as a house and the landlord is a freeholder, there is a right to buy the freehold or a long lease. As it will not be possible to have a long lease of a commonhold unit, it is necessary to ensure that all such units are classified as houses for the purposes of the right to buy provisions, and that is what this amendment seeks to do. I beg to move.

    On Question, amendment agreed to.

    Schedule 5, as amended, agreed to.

    Clause 66 [ Interpretation]:

    [ Amendment No. 82 not moved.]

    Clause 66 agreed to.

    Clauses 67 and 68 agreed to.

    Clause 69 [ Premises to which Chapter applies]:

    Page 29, line 25, at end insert—

    ("( ) they consist of individual houses and blocks of flats comprised in an estate management scheme,").

    The noble Baroness said: I ought to declare an interest because I acquired the freehold of my property under enfranchisement, but it was a long time ago and has had no great effect since, except to make me much happier. This Bill needs to tidy up all the aspects of enfranchisement and leasehold reform. There have been enough Bills over a number of years, and I hope that this is the one that will finally do the deed. If it is going to do that, it needs to include all elements where there can be a right to manage. One of those areas needs to be those properties which have been enfranchised and are on an estate. That does not exist at the present time. There are estate management schemes, but the right to manage does not exist under those schemes.

    This amendment and Amendment No. 190 are designed to ensure that properties enfranchised by their owners, the owners then have the right to manage on the estate. This will probably include areas where there are flats with leasehold, but those owners should not be deprived of the rights of tenants under the Landlord and Tenant Act.

    Many promises have been made during the passage of the Bill. One was made, I believe, by the Minister for Housing, when he conceded some time ago that this measure would be appropriate. I therefore have no doubt that the amendment will be accepted by the Minister. I beg to move.

    My noble friend Lord Richard is unable to be present—he is attending the funeral of Lord Cledwyn of Penrhos in Anglesey—and therefore my noble friend Lady Gibson of Market Rasen and I shall be moving the amendments standing in his name on the Marshalled List.

    Amendment No. 83A is self-explanatory. It is an attempt to extend the right to manage across a whole estate. Within the present definition, where RTM is contemplated for an estate comprising, say, six separate blocks of flats, each building must satisfy eligibility and make application separately. This is unnecessarily bureaucratic, more expensive in legal costs and could cause problems in the management of common areas in estate-wide contracts if only one or two of the blocks proceed.

    It may be convenient if I speak also to Amendment No. 89A, which attempts to define an "estate" for the purposes I have mentioned. The Minister will be aware of the problem and be sympathetic to it, but there will be difficulties in compiling a watertight definition of an estate that will not end up encompassing all the properties in a landlord's ownership. We propose that an "estate" should relate to the service charge for buildings and lands which together comprise 100 per cent of the charge levied.

    The second issue arises from concerns expressed by the Association of Retirement Housing Managers about the possible effects of the exercise of RTM on flats on retirement estates which comprise both flats and bungalows and which have shared facilities—a warden, a common room, a laundry and so on. Again, the application must be estate wide for proper or possible future management.

    I rise to support both the amendments of the noble Lord, Lord Richard. As your Lordships are well aware, the amendments would extend the right to manage to cover estates of buildings. At present it applies only to blocks of flats. The estate is defined as having an appropriate degree of commonality in arrangements and service charges. The buildings must make up the entire estate. Leasehold houses are only included where the estate is designated as a retirement estate.

    Under the Bill as drafted, blocks of flats on estates of linked buildings will not be able to exercise the right to manage as a group. Individual blocks will only qualify for RTM if the common areas, services and service charges can be disaggregated. This mirrors the position in relation to enfranchisement. The crucial question is the degree of commonality between the buildings—that is, the extent to which they share arrangements, areas and services—and the ease with which these can be separated.

    The amendments of the noble Lord, Lord Richard, define the estate so that it applies to estates where the commonality is such that the individual buildings cannot be separated. Even as the Bill stands, there will be estates where there will be blocks of flats able to exercise RTM, leaving the landlord compelled to retain the management of the surrounding houses. If the management of the common areas and services of the estate are linked in such a way that it is unreasonably difficult to disaggregate them, it should be possible for the entire estate to exercise RTM. A whole linked estate would need to achieve the appropriate majorities among the leaseholders. It will be important to clarify whether the qualification and majorities required should be assessed for each individual block or across the entire estate. Otherwise it is conceivable that confusion could arise where there is not a majority for RTM in any individual block but that there might be across the entire estate.

    Our concern with allowing RTM to apply to estates is that it may have a seriously adverse impact on the ability to manage an estate as an estate, particularly if the concept of commonality were drawn widely. This could have a significantly adverse effect, for example, on some of the London estates where, arguably, the ability of the landlord to manage the estate has been an important factor in maintaining the quality of the area, establishing a sense of place and community and preserving and enhancing the value of the leaseholders' assets.

    6 p.m.

    The Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions
    (Lord Whitty)

    As the Committee will have noticed, we have now moved on to the part of the Bill which is the responsibility of my department on the leasehold side. These amendments attempt to extend the people and premises to which the rights to manage apply, from those outlined in Clause 69, to estates or people who are subject to an estate management scheme. They should have the collective right to take over the running of that scheme.

    I have some sympathy with the concerns behind this proposal and with the suggestion as regards the problem that it addresses. Indeed, the noble Baroness is correct to say that Nick Raynsford himself made some general statements recognising that it might be desirable to move in this direction—although he stopped short of giving a specific commitment that it would be possible to do so in this Bill.

    I fear that the Committee will hear me say on a number of occasions that although these extensions may well be desirable they would be extremely complex to implement. It would be very difficult to implement them in the terms of the amendments before us and to resolve the matter in time for measures to be brought forward in this Bill.

    Estate management schemes are intended to preserve arrangements for the management of an estate where leaseholders exercise the right to enfranchise either individual leasehold houses or blocks of flats. In the absence of positive covenants which might run with the land, they are needed to enforce binding obligations on those who own the freehold of their property in order to contribute to the upkeep of common facilities within the estate as a whole. We are therefore left with a mixed community of the original landlord, freehold tenants of individual buildings on the estate and the leaseholders.

    The problem facing us is that we need to consider very carefully the respective rights and obligations of all these parties and how they might inter-relate within what is intended to be quite a simple structure of an RTM company. This is an extremely complex issue. The fact of the matter is that we have not been able to address this within the time available. We would certainly be prepared, as a Government, to consider it in the longer term in the light of experience on the more straightforward premises and rights in this Bill.

    The noble Lord, Lord Lea, on behalf of my noble friend Lord Richard, proposes a more general right to allow the right to manage to be exercised for an estate of properties of all descriptions. Many of the points I have already made relate to this—we have given careful thought to the possibility of creating a right to manage applying to more than one property. That was raised very substantially during the consultation in August and we had to face a number of practical difficulties which, although potentially soluble, could not be satisfactorily resolved in time for measures to be brought forward for this Bill.

    The first and most obvious question was that of the definition of "estate" for these purposes. The amendment tabled by the noble Lord, Lord Richard, makes a helpful suggestion, but there are other issues that would need to be resolved. As has been said, there are estates which consist of a mixture of flats, of maisonettes and of houses. A retirement estate is a clear example of this in many parts of the country. There will be differences between the rights of leaseholders of houses and leaseholders of flats—some as a result of historic accidents and others for more substantive reasons. We need to address both.

    We have to recognise that on a complex estate the question of which services apply to which premises is also complex. Some services may apply to the estate as a whole and all residents contribute to service charges; others may apply only to a particular block, individual buildings or groups of buildings. To make sense of that, we would need rather more complicated amendments to the Bill than are proposed in these clauses. We agree that this is an important issue and that it may be desirable for the right to manage to be capable of being extended to people in these situations. However, one cannot simply extend the rights which apply to people in single properties to those who live on estates. That would be a matter for complex amendment or, in our judgment, a later Bill, by which time we would be able to take account of the experience of the more straightforward application of RTM in individual buildings. I, therefore, hope that the noble Baroness will not pursue the amendment.

    The noble Lord suggested that perhaps he had not addressed my amendment but I believe that he did. As I understood the Minister's winding up, he referred to estate management schemes. I am slightly reassured by the Minister's suggestion that a more complex amendment tabled at a later stage might be received with greater openness. On that basis, and the fact that we may well try again, I beg leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    [ Amendment No. 83A not moved.]

    Page 29, line 30, at end insert (", and

    (d) no part of the premises are let on a tenancy to which Part II of the Landlord and Tenant Act 1954 (business tenancies) applies").

    The noble Lord said: In moving Amendment No. 84 I shall speak to a number of other amendments in the same grouping. This part of the Bill gives tenants the right to manage the block in which their flats are located. It is worth recapping the law at present. Probably, for as long as leases have existed some landlords have ignored their responsibilities for the maintenance of the premises. Historically, the High Court had the power to appoint a receiver of a block of flats where the landlord was in breach of his duties under a lease. Due to the expense this was rarely an attractive option for tenants.

    The Landlord and Tenant Act 1987 simplified the procedure considerably, as many noble Lords are aware. After a number of statutory improvements, the present position is that tenants have the power to apply to the leasehold valuation tribunal for the appointment of a manager. In order to appoint a manager the tenant must show, in short. that the landlord is not carrying out his functions properly, so that in effect there is some misbehaviour on the part of the landlord.

    The leasehold valuation tribunal determines whether the landlord is at fault and it is sensible to appoint a manager. I believe that noble Lords who are familiar with this branch of the law will agree that that has been a useful power to remedy the problem of landlords who have ignored their duties or, in some cases, have disappeared altogether.

    The proposed right to manage, however, is quite different. A perfectly good landlord is liable to have his management function terminated at the tenants' whim. Those on this side of the Committee believe that there is considerable objection to the way that the Government propose to introduce the new power. The landlord has an interest in keeping the property in good condition so that his reversion keeps its value. The problem is likely to be especially acute in cases where leases have only a fairly short time to run. Tenants in such a case, understandably, are likely to be most unwilling to spend money on major items of repair. That is likely to reduce, significantly, the value of the landlord's reversion.

    The effect of the proposed right to manage is that in the country as a whole less money will be spent on building maintenance than otherwise would be the case. We have in this country, in comparison to many other countries, a fairly old housing stock. In order to keep this housing stock in good condition, it is vital that there is regular expenditure of reasonable sums of money on repairs. We are concerned that there is no adequate remedy for a landlord to ensure that tenants who exercise the right to manage carry out proper repairs.

    The second matter is that a landlord's right to manage is a valuable one. Merely by way of example, there is currently a strong demand for freehold reversions, simply for the commission on their insurance premiums. Equally, as regards repairs, the landlord is obliged under current law to obtain competitive quotations for works. Having obtained quotes, there is no objection to a landlord using a building company which he owns to carry out the work, so long as the quote put in by the company is the lowest. The landlord can then, I submit quite legitimately, make a profit on the building work. Taking away the landlord's right to manage is, in principle, expropriative.

    There seems to be a human rights problem here. Article 1 of the first protocol to the European Convention on Human Rights protects rights of property. It is quite true that the jurisprudence of the European Court of Human Rights gives member states considerable leeway in determining the extent to which interference with property rights is permissible. One has only to think of the Duke of Westminster's case, James v. the United Kingdom, where he challenged the Leasehold Reform Act 1967, giving householders holding long leases the right to buy their houses at a low price. The court in Strasbourg held that that was justifiable on social grounds.

    Here, however, it is difficult to see what pressing social need there is to stop good landlords—and I emphasise the word "good"—managing properties in which they hold a reversion. Our approach to this part of the Bill, therefore, is to seek to make improvements in the legislation and to make it human rights compliant.

    The effect of the proposed amendments to Clause 69 is to prevent there being any automatic right to have an RTM company appointed in mixed developments, where there are both residential and business premises. The reason for excluding mixed use developments is this: business premises are usually let on short, or shortish, leases, with a variety of terms as to repairs; Sometimes the business tenant is responsible for repairs; sometimes the landlord is responsible for repairs but is expected to meet these repairs from the rent. On the ending of a business tenancy, there is often a claim for dilapidations from the landlord. In other words, there is a very close relationship between the landlord and the business tenant where great care is taken to set out the precise rights and obligations of the parties between themselves.

    Commercial tenants expect a professional landlord with professional knowledge. The Bill, as presently drafted, will vest the duty to manage business premises in the RTM company. The business tenant will not be a shareholder in the RTM company and will not have any control over the RTM company. The people who control the RTM company will be the residential tenants. The landlord will, on the Government's proposals, be a shareholder in the RTM company but will have no veto and no right even to sit on the board of directors. Therefore, in certain circumstances, it may be unfair to a commercial tenant to have the management of a block taken from the hands of a professional commercial landlord and placed in the hands of the residential tenants. It is doubly so, when the commercial tenant has no say in the conduct of the management of the block.

    Moreover, there are liable to be enormous conflicts of interest between the commercial tenants and the residential tenants. This is most marked in cases where the commercial tenant is paying a rent inclusive of a service charge. The landlord has an interest in keeping the building in first-class condition so that he can keep the tenant at the expiry of the tenant's lease. The residential tenant's interest is keeping the service charge rather lower. The Bill at present provides no means of squaring this particular circle.

    We suggest that the only sensible way forward is to move mixed developments from the scope of the right to manage. The effect of removing mixed use developments from the right to manage will not be to prejudice residential tenants. The reason is that where a landlord is guilty of bad management, the right to have a manager appointed under the Landlord and Tenant Act 1987 will remain.

    It is for this reason that a consequential amendment is proposed to Schedule 13 to the Bill—the repeal schedule—so as to keep unchanged the leasehold valuation tribunal's powers to appoint managers. I therefore commend the amendment to the Committee. I beg to move.

    6.15 p.m.

    I rise to speak to Amendments Nos. 85 to 88, which stand in my name and in the name of my noble friend Lady Hamwee. We have had what could be described as a Second Reading speech from the noble Lord, Lord Kingsland. I understand why he made it because it explains the background to the amendments which he is proposing to introduce, and it is of assistance to the Committee.

    I am most grateful to the noble Lord for giving way so graciously, as he always does. I recall that when I made my Second Reading speech I was accused by the noble Lord, Lord Williams of Elvel, of making a Committee speech.

    I do not propose to speak at length about our attitude to the principle behind the amendments to Chapter 1 of Part II, except that on this matter we support the views of the Government that the right to manage should be extended to cases where there is not necessarily any criticism of the landlord. I should say that we also recognise that there will in practice be many cases where, for various reasons, the tenants or a sufficient number of tenants will be happy with what the landlord does and will not wish to take on the responsibility for the management themselves and will not seek to set up an RTM company. That is perfectly reasonable. But we think it is a matter on which the tenants should have a choice.

    I turn now to the substance of our amendments in this group. The issues raised are similar to the question of flying freehold or flying commonholds which were raised by us in amendments which were discussed on the first day of Committee stage. This is not a case of flying freeholds or flying commonholds because nothing in this group of amendments affects the nature of the interest in the property as such. We wish to see a possibility of dividing the responsibility for management between different parts of the same building if they are self-contained, whether on a horizontal or vertical basis, so that they could apply, for instance, to the flats in a block which had shops below and flats above, the flats being self-contained in the sense of having a separate entrance, separate facilities and not having any common part shared with the shops.

    In that case, if the flat lessees want to form an RTM company, they will obviously take over the landlord's responsibilities for performing the maintenance and other obligations in respect of the flats. What happens to the shops? Of course, under the present legislation, it will be possible to have a single RTM unit if the shop takes up to 25 per cent of the space. However, what we propose here is the possibility of an alternative course which in no way intends to exclude the other possibilities.

    There are two solutions. The first is that the landlord retains the obligations in relation to the shops. That would be workable only if the landlord and the RTM were willing to enter into an agreement for the division of responsibilities. The other alternative would be to allow the RTM to take over the management of the whole building. It might, of course, be a disincentive to forming an RTM company, but there has to be either a single management or co-operative management and we cannot disregard the physical nature of the strategy of the building.

    If flat owners want to exercise the right to manage and are able to enter into an agreement with the landlord or are willing to take over the management of the whole building, one could say, "Why not?". I believe that that could be done without too much additional qualification.

    In speaking to Amendment No. 89, my noble friend Lady Gibson of Market Rasen and I are grateful for the support of the noble Lord, Lord Kingsland. In one respect, the thrust of the approach we set out has also been reflected by the statement made by the noble Lord, Lord Goodhart.

    Whereas the right to enfranchise must take the whole block into consideration, that is quite unnecessary and counter-productive when it comes to the right to manage. The actual management of residential parts in these situations is usually quite separate from the management of the shops or restaurants. The noble Lord, Lord Kingsland, said that there is very little common interest between the shops and the residential parts. Indeed—this could be a point of further clarification and is implicit in what the noble Lord, Lord Goodhart, said—normally there will be separate front doors and separate access and it is normally quite clear from the point of view of service charges that there is a separation between the residential and commercial parts. This could be clarified by surveyors.

    It is true—this is not something one has to concede—it is an obvious ex hypothesi that the freeholder would still appoint the managing agent for the shops. Where is the problem in that? All that would happen would be that the freeholder would be dealing with the same two management categories as at present. At present, he is dealing with the management category "commercial" and the management category "residential".

    Giving the residents the right to manage would give them the right to appoint the managing agent if they wished to take on the responsibilities set out. They may not always wish to do that, but this is the potential right that would be adduced. It also sheds light, as has been mentioned by previous speakers, on the 25 per cent threshold maximum for the commercial share if the RTM right is to be exercised.

    Let me just consider a point made by the noble Lord, Lord Kingsland, whereby the residents consider taking over the RTM option where the share is 20 per cent below the threshold. They have the right to do that, which is set out in Schedule 6. Why should they have to exercise the management right vis-à-vis the commercial parts? There is no reason at all that I can see, and yet we are told that it is essential. Perhaps the Minister would confirm that this is indeed the implication and that those of us who have spoken have not misunderstood that that is what is being said.

    The two amendments would eliminate—we all agree that there are several ways of doing this—the 25 per cent threshold but, more importantly, they would change the basis of the RTM to the residential parts. I put it to the Minister that that would be a far more plausible proposition than whether the figure was 15 per cent, 20 per cent or indeed 40 per cent. Does the Minister disagree with that? That is much more relevant than the percentage.

    Incidentally, the argument that the 25 per cent is needed to identify a division above which the value of the freehold is split roughly 50/50 in value—that is adduced because of the higher value per square foot of the commercial parts—is a concept which seems to have been conceived in the context of the right to enfranchise. I do not know whether someone's word processor has got stuck, and that is why we see 25 per cent appearing on the right to manage, but the logic is quite different. It is inappropriate to adduce that as a consideration here.

    Finally, if it is suggested that this amendment would change the very delicate balance of the Bill between the legitimate interests who have been consulted, I have to say that I have had a good deal of correspondence and many conversations now. The main property interests are not opposing it, as I understand it and, indeed, we have the support which is adduced here today.

    The final subsection of Amendment No. 89 provides for arbitration of any dispute on the extent of residential parts. That does not create a new precedent as this is precisely the sort of demarcation that is necessary for the application of service charges at the moment.

    The Government may have firmly grasped the wrong end of the stick on this point. I hope we can look at this point—and not in the longer term. I know that Members of the Committee will be familiar with the statement by Lord Keynes that, in the long run, we are all dead. That is rather too close to home in this context. But why the longer term? The difficulties have been addressed and there should be time for the Government. We do not know how this will progress in the time set down, and timescales may open up so that this Bill has more room for examination. We do not know what will happen in the next few weeks. But these matters have been discussed extremely thoroughly and there should be some scope to address this point before we reach a conclusion.

    6.30 p.m.

    I have some problems with the amendment moved by the noble Lord, Lord Kingsland. I agree with him that the idea of having the residents of a block of flats being responsible for the management of a commercial undertaking—usually retail shops on the ground floor—is, as I have always thought, somewhat absurd. However, the idea that we should reverse it and allow the landlords effectively to appoint managers for the shops and for the flats would, in my opinion, be going backwards. He mentioned that, at the moment, there is a strong demand for freehold reversionary interest to obtain the insurance commission. Members of the Committee have no doubt read the deeper meaning of that, which means that the landlords should not trouble to get the lowest possible insurance because that would give them less commission. That is not an encouragement and is one reason we want to see flats having the right to manage their own properties.

    I would like to ask the Minister why it has never been possible to separate the retail shops entirely from the residential blocks located above. One could, for example, insert a 999-year lease between the freeholder and the shops, which would make it possible for the shops to be managed separately and the flats to be enfranchised, or whatever, thus providing an alternative structure. At the moment, however, it should remain that the flats have the right to form their own RTM.

    This is an occasion on which all sides of the Committee agree and on which the Government have tried to do things in the interest of harmonious relationship but have probably failed. It is quite idiotic to try to bring commercial and residential management together. The structures that exist historically are not clean and neat. While the residents in the mixed block may well hold a direct lease with the freeholder, sometimes they may hold indirect leases and commercial property may often be on franchises, or let, or there may several intermediate landlords.

    Moreover, usually or from time to time there is a conflict between the residents and those of the commercial property. It may relate to opening hours, to noise, to parking by customers or to signs. It may relate to a whole range of issues. Therefore, if the spirit of the Bill is harmonious relationship, as drafted in terms of right-to-management, it is likely to lead to disharmony. It would seem logical, therefore, to separate the two. The idea of a group of residents in a large block, who have never managed a property in their lives, forming a company and coming together to try to manage it strikes me as very difficult.

    There is an alternative which is within current procedure. If a landlord wishes to appoint a managing agent rather than manage a property himself, he or she is required to choose three alternatives and receive three proposals for management by professional, competent agencies. They are not always obliged to take the cheapest but to take the one that will provide best value. It seems that in mixed development, if one is unable to separate the management of the commercial property from the residential property one should try to adopt some formula like this, where both sides are required or have the right to appoint an independent managing agent.

    These amendments focus broadly on the same area, although that of the noble Lord, Lord Kingsland, ranged somewhat more widely, which may perhaps have been appropriate for early discussions of this part of the Bill. However, I shall resist responding to that part of it and concentrate on the amendments. I was not entirely clear where the noble Lord, Lord Kingsland, stood on this because his name was attached to two amendments that appeared to move in precisely opposite directions.

    Amendment No. 84, to which he spoke, is effectively attempting to propose that the right to manage should not apply to any property to which a business tenancy also applies. On the other hand, his support of the Amendment No. 89, tabled by the noble Lord, Lord Lea of Crondall, is effectively to provide for virtually the same thing. There seems to be some confusion here. It is a complex area and I shall deal with the fundamentalist opposition of the noble Lord, Lord Kingsland, to what is provided here. It is that in certain circumstances where there is a business tenancy we provide for the residential element to have a right to manage the company, whereas the noble Lords, Lord Goodhart and Lord Lea of Crondall, are looking for an extension to that right.

    We all probably agree that apart from the first amendment of the noble Lord, Lord Kingsland, in certain circumstances there should be that right.

    Amendment No. 84 suggests that we disapply the right to manage for all properties with a business tenancy. We have significant difficulties with that. The right to manage is intended to allow leaseholders who have a majority stake in the property—which is our dividing line; I shall return to the issue when I deal with the point made by the noble Lord, Lord Lea—to take over the management of that property.

    Amendment No. 84 would have the opposite effect. Theoretically, at least, it would prevent leaseholders who have acquired 99 per cent of a property on long leases from being able to manage the block simply because of the presence of another 1 per cent which was not in that category. Your Lordships may say that that is a ludicrous situation which would never arise, but it underlines the importance of my point. By saying that one cannot exercise the right to manage any property where there is a business tenancy, one directly creates a tremendous incentive for a landlord to engineer a way of letting a small part of the property on a business lease. At its most extreme, a broom cupboard suddenly becomes an office or an attic becomes a factory. That may seem absurd but, nevertheless, we know that a number of scams have operated. We have to ensure that unscrupulous landlords are not allowed to seize on such a loophole. Amendment No. 84 is therefore not within the spirit of the Bill.

    My noble friend Lord Lea accused us of getting hold of the wrong end of the stick. To some extent, his amendment and the amendment of the noble Lord, Lord Goodhart, also get hold of the wrong end of the stick. It may not be the same stick.

    The position is not that the right-to-manage company takes on the responsibility for the management of the business unit—indeed, subsection (6)(a) has the effect of preventing the RTM company from becoming directly responsible for the management of any flat or unit which is not on a long lease; in other words, a remaining tenanted flat or a business premise, shop, restaurant or whatever—but it will be responsible to everyone, including renting and commercial tenants, for maintaining the common part and fabric of that property.

    It refers to Clause 93. It is not the case that we would be in a difficult situation were the RTM company to take on the direct management of the internal affairs of the business premises; it is only the fabric of the building that we are talking about.

    As to the threshold above which the residential part has the right to manage, my noble friend Lord Lea of Crondall says that the idea that one must roughly assess where the dividing line arises is not appropriate. I believe it is. A rough indication is that the RTM would become available only where the non-domestic element of the block was no greater than 25 per cent. That 25 per cent equates to the 75 per cent which would thereby remain in residential ownership.

    I hope it is possible in this procedure for me to intervene to ask my noble friend a question. Does not his most recent remark depend on the presumption that the right to manage would cover the residential and the commercial sections? One would then have the concept of an equity majority. If we are talking about a separate right to manage, where does the question of the minority dominating the majority—which is my noble friend's argument—arise?

    My noble friend's amendment appears to address the right to manage not only the leasehold flats but all the common parts. I am referring to the outer fabric. The management company would become responsible for the outer fabric of the building and for the services which are common to the building as a whole. The difficulty arises if it is responsible only for less than half the putative value of the property, which was why we arrived at 25 per cent.

    As to the management of the fabric and the common services, it is important that those aspects remain in one pair of hands; otherwise, if responsibility for the integrity of the fabric is unclear there is endless scope for confusion, disputes and risk to occupants. There are also issues to do with insurance and the split between the landlord, or the landlord's agent, as regards the management of the non-domestic parts and the leaseholder as regards the domestic aspects. It is to some extent an arbitrary threshold. However, where they are responsible for more than half the value of the property that is a sensible point at which to establish the threshold.

    To allow the residential leaseholders to take management control over matters which are strictly internal to the domestic parts and closely associated common parts, such as stairways, would not be of huge value, in the sense that again there would be a risk of constant arguments about exactly where responsibilities began and ended.

    I recognise the importance of this issue. Approximately 10 per cent of all leasehold premises are mixed use, but it is not entirely clear whether the whole of that would fall under this criterion. Nevertheless, it is a significant proportion of the leasehold market and, therefore, it may well be desirable that some rights should be extended to everybody who is in that situation. However, these are hugely complex issues. Were we to move down the road suggested in the amendment tabled by my noble friend Lord Lea the complexities would have to be addressed by much more detailed amendments than simply the addition of the set of tenants to the list of those who are eligible. Regrettably, at the moment there is little that we can offer to residential leaseholders in this area where there is a high—over 25 per cent—non-residential component.

    Amendments Nos. 85 to 88 in the name of the noble Lord, Lord Goodhart, produce an even more wide-ranging extension, in that they change the definition of a self-contained part of a building. That would allow the right to management to be extended to a horizontally-separated part of a building provided it had a separate entrance. In certain circumstances that would lead to ridiculous situations. Let us consider a row of terraced houses, each of which is divided into two flats, one up and one down. Theoretically, the amendment would allow two neighbouring top floor flats to combine together to exercise the right to manage, provided that they could have a separate entrance. What happens to the two downstairs flats? How do they address the problem of the fabric or the roof over the top flat which is leaking downstairs onto their own woodwork? Again, it is a question of who is responsible for what and to whom. To extend the right to any geographically adjacent flats compounds the difficulties which are inherent in the amendment tabled by my noble friend Lord Lea. Therefore, I am concerned that we would enter into even greater complexity if we adopted the amendment tabled by the noble Lord, Lord Goodhart.

    Without going into all the complexities, we believe that it is much preferable to ensure that the whole block is subject, as far as practicable, to the same management regime for the fabric of the building. We believe that to make exemptions from that, and to make extensions to different sub-parts of the building, undermines the simplicity of the right and the way in which the building is managed thereafter.

    We hope that, given all these practical problems—we do not disagree with the principle—all noble Lords who are concerned with this group of amendments recognise that they will not achieve what they want, and to achieve more would go beyond the nature of the Bill that we are currently proposing.

    6.45 p.m.

    Of course we understand the Government's desire to harmonise procedures under the legislation as far as possible, and entirely accept the important wish of residential leaseholders to gain greater control of the properties in which they live. But requiring them to take on the commercial elements in a mixed use building adds an unnecessary complication, as my noble friend Lord Selsdon said. I believe that is the view from all parts of the Committee. At Second Reading a noble Lord asked why someone who has a residential flat above, say, a well-known London department store should wish to take on the management responsibilities in relation to property matters of the store itself.

    In my introductory remarks to our amendment I set out the views that we would prefer. I should say in that context that I would not like to give the noble Lord, Lord Jacobs, the impression that I endorse some of the practices that landlords have engaged in with respect to insurance premiums and other matters such as that: I deplore them. I believe, nevertheless, that where a good landlord offers a competitive price for a service to the tenant, that should be something that is properly applauded.

    One aspect which the amendment of the noble Lord, Lord Lea, does not address is the position of older converted buildings where there is a single entrance and access and all the units—whether commercial or residential—have their individual entrances off a single common access. The Minister thought that out rather well.

    If the solution that we offer in Amendment No. 84 is not acceptable, the Minister might like to consider whether it would be sensible to include in the legislation the ability for the landlord to require a lease back of the commercial elements, to mirror the position in relation to the right to enfranchise in mixed use buildings. I shall leave the Minister to reflect on that, and meanwhile beg leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    [ Amendments Nos. 84A to 88 not moved.]

    Page 30, line 2, at end insert—

    ("(5A) This Chapter applies also to a part of a building which comprises flats occupied as dwellings, "the residential part", where the building containing those flats is not solely occupied for residential purposes.

    (5B) The exercise of rights under subsection (5A) includes the residential common parts.

    (5C) The "residential common parts" shall be all of those areas over which the qualifying tenants have rights of use, passage, or other easement or right.

    (5D) Any dispute between the RTM company and the landlord as to the extent of the "residential part" shall be determined by a surveyor appointed by the president of the leasehold valuation tribunal, whose costs shall be met equally by the RTM company and the landlord.").

    The noble Lord said: Perhaps I may say that there are matters which we will have to consider. We shall look closely at Hansard to see how many of the arguments stack up. Points have been made on all sides which require some thought. I have not found totally convincing the Minister's rationale that one could separate out a new demarcation between the service charges for the shops and the fabric of the shops—I think that is what is being said. We need to consider that.

    [ Amendment No. 89 not moved.]

    [ Amendment No. 89A not moved.]

    Clause 69 agreed to.

    Schedule 6 [ Premises excluded from right to manage]:

    [ Amendment No. 90 not moved.]

    Page 78, line 22, leave out paragraph 2

    The noble Lord said: I shall speak also to Amendment No. 93. I have raised the question about paragraph 2 because I do not know what it is about. Why should the fact that two persons own different parts of freehold premises mean that that should be taken outside the scope of the right to manage? I cannot understand why it makes any difference and the Explanatory Notes make me none the wiser.

    Amendment No. 93 refers to paragraph 6(1) of Schedule 6, which says that the chapter does not apply to any premises where the right to manage has been exercised by an RTM company and ceased to be so exercisable less than four years before that time. Why is there the need for a gap? It would seem to me that it should be possible, for example, to form a new RTM company to take over from an existing one immediately, if the lessees consider that appropriate. I should like to hear the explanation for the need for this gap and why four years rather than three or five years is considered the appropriate time.

    I find Schedule 6 quite difficult to understand. In particular, it refers to premises excluded from the right to manage. Paragraph 1(1)(b) states that if you have a garage it should be part of the residential premises. Does that mean that that would be enfranchisable with whatever else one was enfranchising?

    Having prepared a vigorous speech in support of Amendment No. 84A, standing in the name of the noble Lord, Lord Kingsland, which he chose not to move, perhaps I may at least console myself by pointing out that Amendment No. 91A has a drafting error. It should refer to line 17 and not line 18.

    I made a mistake. I thought it was another amendment and that is why I ducked it. If I had looked at the right amendment I would have moved it. I apologise.

    I should like to raise the issue of the 25 per cent, which has a relevance here, but probably an even greater relevance when we come to the right to enfranchise.

    One of the difficulties with the original clause in the previous Bill was that it said "over 10 per cent" and everybody realised that they would need a building of 11 floors—11 storeys—before you could enfranchise. On reconsideration, however, you would in some cases have needed buildings of over 21 floors because, in most cases, certainly in London, retail shops have basements which are usually used for storage.

    There is also the question about garages, as raised by the noble Baroness, Lady Gardner. It would be helpful, whether it is done for this clause, but certainly for the enfranchisement, to look again at the wording to see whether it is possible to exclude from all calculations garages and such spaces but also basement use; otherwise we may have the situation—I am aware of a number of blocks that I have looked at in London—where there is a row of shops and a full basement below but a total of only six or seven storeys. Those would not come within the 25 per cent, because that area has to be taken into account.

    I would therefore ask the Minister whether he could look at the idea of perhaps excluding basement storage or, alternatively, to say that where there is basement storage the percentage might have to be increased.

    I rise to speak to my Amendment No. 91A. Given the arguments that have been put forward as to the benefits of the right-to-manage leaseholds, we do not see why it should not apply to local authority properties, just as for private blocks of flats or those owned by residential social landlords. Local authority leaseholders have been subject to the poor management of their blocks by local authorities and have campaigned hard to gain the benefit of those rights given to others whose situations are identical, except that they are in respect of freeholders and not local authorities. Extending rights under leasehold reform to local authority leaseholders should be seen as the logical extension of the right to buy.

    I shall deal with Amendment No. 91, with which Amendment No. 93 is associated. It provides for two further changes. The deletion in the first part of his amendment would cause me significant concern because it deals with the division of the freehold. Some Members of the Committee may remember a scam which was run by some less scrupulous landlords following the 1993 Act. Their trick was to divide the freehold of a single block of flats into a number of parcels, which effectively—and in some cases quite explicitly—made it impossible to enfranchise the block. For that reason, the Housing Act 1996 introduced provisions to deal with that abuse.

    Those provisions stated that it was not possible to enfranchise a property which was made up of more than one freehold if it was possible to enfranchise each of the freeholds separately. That in turn made clear the converse: that if it is not possible to enfranchise separate freehold parts of a single block, it is possible to enfranchise them altogether. Paragraph 2 of Schedule 6 mirrors the provisions of the 1993 Act. They are therefore needed to ensure that the same sharp practice that was used to frustrate enfranchisement cannot be used in the same way to frustrate the right-to-manage. I hope that explains the first point of this amendment.

    Paragraph 6 of Schedule 6 is there for a good reason. There are a number of circumstances where the right-to-manage will be lost. This will happen mainly where the leaseholders have proved unable to run their affairs properly. Unless we provide otherwise, there would be nothing to prevent those leaseholders immediately embarking on a second or subsequent go at the right-to-manage. It would be wrong to allow for repeat acquisition of a right in this way; an unfettered right to re-acquire right-to-manage would mean that there was no real incentive on the leaseholders to make sure that they were managing the property correctly in the first place.

    That said, one failure should not disqualify them forever. Aside from other considerations, there will inevitably be some turnover in the block and a point will come when there will be a new set of leaseholders who wish to exercise the right-to-manage. For that reason, we have chosen that disqualification should last for four years. This is the typical amount of time taken for a substantial turnover of leaseholders within a block to take place. From that perspective, the seven-year period proposed by the amendment of the noble Lord, Lord Kingsland, would be too long.

    In a case where turnover is more rapid than that, or there are other good reasons why leaseholders might reasonably be allowed a further opportunity more quickly to exercise the right-to-manage, we still have the fall-back position of a leasehold valuation tribunal being asked to dispense with the bar. I hope that that explains the inclusion of those provisions and why there should be no deletion of them.

    Before going on to the amendment of the noble Lord, Lord Kingsland, I shall address the question posed by the noble Baroness, Lady Gardner of Parkes, in relation to the garage. Where the garage is let as part of a flat, its floor area is counted as residential when working out the relative residential and nonresidential parts. Likewise, presumably if the garage is part of the commercial premises it counts on the other side. I agree that there are complexities, as the noble Lord, Lord Jacobs, pointed out, and one might look at a way of expressing that more succinctly. However, the totality of the property which was in the residential part should count towards the residential quota and likewise on the other side of the equation.

    I now come to Amendment No. 91A tabled by the noble Lord, Lord Kingsland. This is probably where I have to declare a personal interest. Indeed, if the amendment were passed, I should probably have to declare a personal interest in many parts of the Bill because my wife is a leaseholder of a local authority property. However, I would hope that that would not be the only reason that he would not press his amendment.

    We want all local authority tenants and leaseholders to influence and take control of the management of their homes. As regards the local authority leaseholders, there is already in existing legislation a range of opportunities to enable them to do this. The Government are working to extend the opportunities for participation through the best value regime and tenant and leaseholder participation compacts, all of which are operating within the local authority sector to improve local housing management and the various options available to tenants and leaseholders in local authority property. We have already broadened the Government's tenant empowerment grants programme to help leaseholders and other tenants to look at the options for involvement, and to support groups which set up tenant management organisations under the existing local authority right-to-manage.

    Because there is such a wide range, therefore, of existing options open to all local authority tenants, including leaseholders, we do not believe it would be right to overlap those with a right which can be exercised by the leaseholders only within those blocks and estates. That would lead to competition between different groups of tenants and leaseholders in a particular block owned by the local authority, and there would also be a legal conflict between the existing broader rights and this one, which would be a narrower one for leaseholders only. That kind of competition and potential conflict would not be to anyone's benefit and certainly not to the benefit of the better management of local authority property with greater tenant and leaseholder involvement.

    The amendments put forward by the noble Lord, Lord Kingsland, also suggest that we should prevent a claim to acquire a right-to-manage being made for a property within two years of an earlier claim having been withdrawn. This relates to my earlier point that we cannot see any justification for doing this. Where the right has been acquired and lost, there will have been some kind of fault or failing and it is only right that, in such circumstances, the leaseholders involved should have to wait. However, the withdrawal of a claim notice would not necessarily mean any fault or failing. The landlord will not have had the management taken away, and will be entitled to receive all the costs incurred in dealing with the abortive attempt.

    I hope that that deals with all the amendments in this group, and that they will not be pursued.

    7 p.m.

    With regard to paragraph 4 of Schedule 4, the Minister spoke about the possibility of conflict. However, there is much potential for conflict now between tenants and leaseholders who often have different interests. He mentioned work that is going on to help tenants in the issue of management. I am not aware of anything like as much energy going into dealing with the position of leaseholders. It is a difficult area and I am obliged to the noble Lord, Lord Kingsland, for drawing our attention to it.

    I wonder whether the Minister knows and, if he does not, whether it is possible to tell Members of the Committee at a later stage what kind of numbers we are talking about. The provision for the number of qualifying flats is a criterion which will affect how leaseholders might fall within—indeed, whether they would or not because—so many blocks will contain a large number of tenants rather than leaseholders. It would be helpful if the Minister could give the Committee some idea of the scale.

    I am grateful to the Minister for explaining the purposes of paragraphs 2 and 6(1)(b) of Schedule 6. I understand the reasoning behind paragraph 6(1)(b). I do see how the explanation of paragraph 2 fits in with its wording. One must have premises which are divided between two or more freehold owners, one of whom owns a part of the building which is itself self-contained. Amendment No. 69 envisages that there is a self-contained building structurally detached which is divided into two or more self-contained parts which are vertically divided.

    The only meaning that I can give to paragraph 2 is that where that set of circumstances arises the right to manage cannot be exercised. That seems to be a long way from the Minister's explanation. I believe that paragraph 2 needs to be looked at again. I understand and support the objective, but I do not see how the paragraph achieves it.

    As to local authority leaseholders, the various activities to improve the management of local authority estates include provision for leaseholders as well as tenants. I cannot give a precise answer to the question posed by the noble Baroness, Lady Hamwee, but of the million or so leasehold flats there are probably 200,000 council leaseholders. I cannot say how many of them would be in blocks or estates where the majority were leaseholders and, therefore, might qualify. The number would be relatively limited. Nevertheless, in those areas the conflict to which the noble Lord rightly refers between those who exercise the right to buy council property in some form or another and those who remain tenants of the council still exists. However, to provide an additional right to leaseholders without a parallel provision to protect the tenants in a situation where the latter are in the minority greatly complicates that conflict.

    We seek to pursue this entirely within the local authority management system rather than borrow something which exists in the private sector and transplant it into the local authority sector. The complications which would arise and the additional conflict created underline that.

    The noble Lord, Lord Goodhart, referred to paragraph 2 of Schedule 6. That paragraph means that if the freehold is split into two or more self-contained parts the RTM will be exercised for each separately. If the parts are not self-contained one can lump them together and exercise the RTM across all of them. The reason for referring to the scams following the 1993 Act is that one moved from the second to the first and thereby avoided any right to manage. That is the loophole that we were trying to avoid with these provisions. It might be helpful to the noble Lord if I were to spell it out in more detail with cross-references to the texts of the 1993 and 1996 Acts. What is intended might then become clearer to him, and probably to me.

    Amendment, by leave, withdrawn.

    [ Amendment No. 91A not moved.]

    Page 79, line 25, leave out paragraph 5

    The noble Lord said: Amendment No. 92 is another of those very rare Government amendments to which my noble friend Lord Bach referred earlier. Together with Amendments Nos. 99, 101 and 108, it seeks to remove the prohibition in the Bill on exercising the right to manage where the freehold has already been purchased by an RTE company under the requirements of Chapter II of Part II of the Bill.

    The amendments also remove the bar which would prevent RTM continuing where a separate company is used as the RTE company. Leaseholders would therefore be able to have separate RTM and RTE companies for the same premises after the enfranchisement had taken place. I believe that is also the intention of Amendment No. 102, which has been tabled by the noble Lord, Lord Goodhart. Having looked at the matter again and after discussing it with the noble Lord and others, we thought it sensible to pursue the amendment. I beg to move.

    I greatly welcome these amendments. A significant objection to the Bill was that RTM and RTE could not co-exist. That would mean that someone who was a member of an RTM company but was not prepared to join an RTE company because of the cost implications would have had to give up the right to be involved in management. The co-existence of separate RTM and RTE companies may make administration a little more complicated, but that is not enough to override the injustice to those involved in management who would have been forced out of that involvement tinder the original proposal.

    I also support these amendments for the reasons given by the noble Lord, Lord Goodhart.

    On Question, amendment agreed to.

    [ Amendments Nos. 93 and 93A not moved.]

    Schedule 6, as amended, agreed to.

    Clause 70 [ RTM companies]:

    Page 30, line 4, leave out ("a") and insert ("an")

    The noble Lord said: The Committee will have observed a large number of amendments in my name proposing that the Bill should refer to "an" RTM company rather than "a" RTM company.

    When the Bill was first proposed, I feared that the Government would try to find some suitable name in keeping with their modernising culture such as "stakeholder co-operative". It was, therefore, a relief to find that the corporate vehicle for the new right would be simply a right-to-manage company.

    Your Lordships will, however, remember the fashion that gripped companies during the 1970s of turning their names into initials. The British Tube and Rubber Company turned into BTR; International Business Machines became IBM; the British Oxygen Company turned into BOC. It was thus, I suppose, inevitable that, by the turn of the century, the Government would decide to call these management companies RTM companies.

    I submit that one naturally speaks of "an" RTM company rather than "a" RTM company. I therefore commend the various amendments which seek to make this phonetic correction. I beg to move.

    Those of us who sat through debates on the House of Lords Bill will recognise this as the amendment of the noble Earl, Lord Ferrers. I thought that "a" hereditary Peer was correct and so we opposed the amendment when it was taken to a Division during the course of the proceedings on that Bill. On this occasion, I entirely support the noble Lord, Lord Kingsland.

    7.15 p.m.

    Faced with a combined opposition on the issues of syntax, I fear that, whatever the merits or otherwise of the amendments of the noble Earl, Lord Ferrers, under a different piece of legislation, that at least had the merit of relating back to the origins of the language as to whether we were speaking Norman French or English, which is always a matter of concern within this House. This issue relates to whether we take the full name of the company or the initials of the company and the pronunciation of the initials. I note that the noble Lord, Lord Kingsland, is disparaging of the tendency during the 1980s to change the names of organisations to their initials. Indeed, I remember myself changing the name of the General, Municipal, Boilermakers and Allied Trade Unions into the GMB. I thought that was an improvement—it certainly saved on the word processor, if we had them in those days.

    In this case we refer to "a" right-to-manage company, which must be correct. When we reduced it to RTM we are referring in reality only to a right-to-manage company. To attach the "an" to R, which is not even a vowel, is putting the spoken word above the written word. We and the parliamentary draftsman are concerned with the written word. I hope therefore that the noble Lord, Lord Kingsland, will not pursue this rather substantial range of amendments, but I must commend his diligence on spotting the point throughout the text of this Bill.

    Before the Minister sits down, when I was a school governor some years ago we installed an ICI ceiling heating system. It was recorded in the minutes as such and we applied for a grant as such. Is he suggesting that we should have said a ICI heating system?

    As I tried to explain, if one spells an Imperial Chemical Industries system would be "an". Therefore, were we to be legislating on such pieces of equipment, I would readily accept the amendment of the noble Lord, Lord Kingsland. However, we are not. We are legislating on a new entity which begins with "R".

    Does the legislation anywhere provide for a right-to-manage company spelt out in full? The definition in Clause 110 refers to Clause 70, which states:

    "This section specifies what is a RTM company for the purposes of this Chapter".
    I do not think we ever call it Imperial Chemical Industries.

    The answer to that is probably no, except there. I am trying to look at what is normally the definitional part of the Bill. The noble Baroness may have a point, but it does not alter the basic fact that this entity is a right-to-manage entity and not Imperial Chemical Industries.

    I am extremely disappointed to hear what the Government have to say. While I am not going to make much of it this afternoon, I fully intend to return to this matter at Report stage, confident that I shall have support from other quarters. Meanwhile, I beg leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    Page 30, line 7, leave out ("guarantee") and insert ("shares with at reast the minimum paid-up capital, divided into "A" shares and "B" shares")

    The noble Lord said: There are two aspects of the corporate structure, proposed by the Government for RTM companies, which potentially make the Government's proposals impracticable and which this amendment addresses. There is a further issue as to the kind of regulation-making powers which should be given by the Bill for matters of central importance to the corporate governance of RTM companies.

    So far as concerns the corporate structure of RTM companies, the Government's proposals are that these companies should be limited by guarantee with residential tenants and the landlord as members. As the Committee is aware, there are three forms of companies which can be formed under the Companies Act. The first is an unlimited company where members have unlimited liability for the debts of the company. The second is the usual form of a company, with liability limited by shares, the feature of which is that each member—that is, each shareholder—has to contribute the nominal value of his or her shares as a capital contribution to the company.

    The third form of company is one limited by guarantee. The peculiarity of this form of company is that its members contribute nothing to its capital. Instead, they are under an obligation whereby if the company limited by guarantee becomes insolvent, they have to contribute up to the amount of their guarantee.

    The Government propose that RTM companies should all be limited by guarantee. In our view, this would prove wholly unworkable. One of the difficulties of commercial life in this country, which results in many small limited companies being unable to pay their debts, is that limited companies are under-capitalised. These RTM companies which the Government propose are not just under-capitalised but, in effect, zero-capitalised. It is essential that RTM companies have adequate working capital. Only in this way will they be able to carry out the important functions allocated to them.

    It is right to consider the possible consequences of an RTM company having no capital whatsoever. A typical scenario, where tenants seek to have an RTM company appointed, will be a background of dissatisfaction with the landlord. There is likely to be considerable bad feeling between tenants and landlord because repairs have not been done or have been done badly or the landlord has tried to charge too much. There may also be bad feeling between one tenant and another. When things become acrimonious, it may well be that one tenant may refuse to pay service charge demands.

    The first thing the RTM company would then have to do would be to sue the defaulting tenant. However, if the RTM company has no capital, there is no money to pay the lawyers to pursue the tenant. Sometimes, though by no means always, a lease will provide for a landlord to recover legal expenses but this is invariably in arrears.

    That is not the only kind of case where difficulties arise. Suppose the RTM company collects service charges with no problem and then employs a builder to carry out repair works. One problem with building works is that costs often overrun. An RTM would have collected service charges; but if the costs overrun would not have enough money to pay the builder in full. When this situation arises at present, a landlord is usually willing to pay the extra himself because he knows he can recoup that expenditure from the tenants. However, an RTM company with no capital itself can do this only if it borrows money.

    Yet it is unlikely that any financial institution would lend money to an RTM company because that company has nothing to provide by way of collateral. It might be possible to demand further moneys from the tenants by way of supplemental service charges; but this takes time and builders are notoriously unwilling to wait payment.

    Another problem concerns the landlord's rights. Where the tenants only have a few years remaining on their leases, there is no incentive to carry out repairs. The landlord would have a claim for the damage done to the reversion by the RTM company's failure to carry out repairs. Yet, under the Government's proposals, the landlord's claim against the RTM company would be worthless because the RTM company would be, literally, worthless.

    What we propose, therefore, is that RTM companies should have some capital. Naturally, RTM companies will cover developments with quite different characteristics: a block could have as few as two flats in it or upwards of 100 flats. Any single figure for minimum capitalisation would either be far too big for the two flat building or far too small for the 100 flat development. A fair method of overcoming this difficulty seems to be to suggest that an RTM company should be capitalised at about twice the service charge and rent payable.

    This would work as follows. Let us suppose that a flat has a service charge of £1,000 a year and a ground rent of £100 a year to pay. The lessee, in order to obtain the right to manage the premises, would have to contribute £2,200 to the RTM company. In a block with 20 tenants, the RTM company would have a capital of £44,000. This proposal gives the RTM company sufficient working assets to meet the problems that I have outlined. At the same time, the amount which a tenant was required to contribute would not be disproportionate. As long as the RTM company prospered, the tenants would be able to pay themselves dividends or set off profit against the service charge payable. So much for the capitalisation of RTM companies.

    The second point, on corporate governance, concerns the landlord's involvement in the RTM company. Although this point appears in the same amendment as the issue about capitalisation, it is in fact quite independent and separate. Under the Bill as presently drafted, a landlord will be a member of the RTM company. In other words, the landlord will give the guarantee to pay £1 to the RTM company in the event that the RTM company is wound up.

    The landlord has an interest in ensuring that the block is maintained properly because the state of repair of the building affects the value of the reversion. It is right, therefore, that the landlord should have some involvement in the property. The problem with the Government's proposed solution is that it does not provide adequately for the landlord's involvement. Under the Bill, the landlord would have the right to appear and vote at a general meeting of the RTM company but the landlord would have only one vote and would therefore be outvoted every time by the tenants. He would have no right to appoint directors and would thus have no practical power to have his interests considered by the RTM company.

    The solution, we propose, is to give the landlord a right to appoint two directors. This would give the landlord a minority on the board of directors and we consider that this meets his legitimate claim. If the landlord were allowed to appoint only one director, there might well be practical difficulties if that director, for example, were unavailable for a particular meeting. The tenants would appoint three or more directors so that they would stay in the majority on the board.

    Of course, a landlord would not have to exercise his right. Many landlords whose reversion only fell in a great many years hence might well have no interest in appointing directors and taking on that sometimes onerous responsibility. None the less, we consider that the landlord should have that option if he wishes.

    The technical way in which we seek to give landlords the right to appoint directors is to divide the shareholding in the RTM company into two types of shares—A shares, to be held by tenants, and B shares, to be held by the landlord. Holders of the B shares have the right to appoint two directors. A further aspect of the A and B share arrangement is to ensure that the tenants are the ones who provide the share capital for the company. The notional value of a B share is £1, so that the landlord does not need to contribute substantial sums to the company.

    I now turn to the power to make regulations. As so typically happens nowadays, the Government propose to give themselves extensive Henry VIII powers. The noble Lord, Lord Goodhart, has already given, at Second Reading, the views of the Delegated Powers and Deregulation Committee, on which he sits with such distinction. Its view is that regulations on central issues should be subject to the affirmative approval of both Houses of Parliament. This must be right in relation to the power to determine the memorandum and articles of association of RTM companies.

    All the proposals which I have put forward in this amendment are matters which, if the Bill were left in its current form, could be introduced by the Minister by way of regulation. For example, the Minister could determine that the guarantee which a member of an RTM company, limited by guarantee, must give, should be not £1, as is usual with companies limited by guarantee, but several thousand pounds. The Minister could equally determine that landlord members of an RTM company should have a right to appoint directors.

    Can anyone doubt that such proposals are precisely the type of issues that should be the subject of public scrutiny and debate? Moreover, who should make the regulation? At present the Bill refers, cryptically, to "the appropriate national authority". The Bill does not, however, condescend to state what this mysterious body might be. I have suggested that it should be the Secretary of State after consultation with the Welsh Assembly. I notice that some Government amendments refer to the Secretary of State and the Lord Chancellor jointly making regulations. There seems to be no objection in principle to that, although it sounds a little cumbersome. I beg to move.

    7.30 p.m.

    Our Amendments Nos. 110, 111 and 119 in this group raise an important issue. Should the landlord ipso facto be a member of an RTM? We think not, so we are on the opposite side to the noble Lord, Lord Kingsland, with the Government somewhere in the middle. We disagree with both points made by the noble Lord, Lord Kingsland: first, the need for paid up share capital; secondly, the landlord's rights as a member of the company. As to the first issue, we believe that a company limited by guarantee is the appropriate form of company and it is inappropriate in these cases to have paid up share capital. Certainly, the proposal of the noble Lord, Lord Kingsland, would make it more difficult to get people to form an RTM if they had to provide a significant sum of capital up front in addition to the service charges which they have been paying, and will continue to pay, to the RTM.

    We also believe that initial paid up capital is no guarantee of continued solvency, because unless it is put into untouchable reserves the effect will be that that fund can be run down. In a year or two it is perfectly possible that the funds will no longer be there. Indeed, it is likely that if the members of an RTM company have had to put money up front they will decide to use it to pay off the first year's service charges rather than pay those service charges in addition to what they have had to pay.

    Secondly, we are certainly not prepared to support the proposal by the noble Lord, Lord Kingsland, that there should be B shares which give the landlord a right to vote and to nominate directors. We might be prepared to accept a formula, if one was put forward, whereby the landlord could be a member of the company with a right to attend meetings, but without a vote. However, that is not on the cards at the moment.

    The purpose of an RTM is to transfer the right to manage from the landlord to the lessee. The landlord retains an interest in ensuring the maintenance of the building in order to preserve the value of his reversion, but over the course of time the interests of the RTM company and the landlord may well conflict. The RTM company will owe an obligation to the landlord which can be enforced by the landlord through proceedings in court, whether it is a leasehold valuation tribunal or a county court. To allow the landlord to be a member of the RTM as well creates a conflict of interest, not only between the RTM as a landlord but within the RTM itself. The landlord, for example, may challenge the decision of the directors. Landlords are likely to be more knowledgeable and have access to better advice. They may be able to paralyse the RTM company through procedural measures. The member of a company can restrain the company from proceeding when it is in technical breach of its own internal rules, for example if decisions have been taken at a meeting at which a quorum is not present. However, a third party cannot do so.

    One cannot prevent a landlord who also holds the lease of a flat, or occupies it in his capacity as a freeholder, being a member of the RTM company. The Government's proposals confuse the relationship between the tenants and the landlord. The RTM company should be the vehicle for the tenants alone. I am aware that this is something about which many tenant organisations feel strongly.

    Under the existing legislation, it is a matter for the tenants to conduct the management. That relates only to cases where the landlord's right to manage has been forfeited because of his misconduct. However, misconduct is difficult to prove. One of the reasons for the present Bill is to make it possible for discontented tenants to get the right to manage without having to go to court in order to prove misconduct.

    In those circumstances, there may be a significant number of cases where the application, the claim for RTM, is instigated by the fact that a landlord is not doing his job properly and is, in one way or another, frustrating the wishes of the tenants. In those cases, it seems to be wholly wrong to allow the landlord to continue as a member of the RTM company; the RTM company and the landlord should remain at arm's length from each other. In those circumstances, I hope that the Government will be prepared to reconsider their position on this significant issue.

    I wish to speak to Amendment No. 110A, which stands in the name of my noble friend Lord Richard. The thrust of the amendment is the same as the thrust of the amendment tabled by the noble Lord, Lord Goodhart. Some adjustment is needed on this issue. Looking at the practicalities of the matter, as I said at Second Reading, it would be very strange indeed if, when discussing sensitive matters, a typical RTM company—which is, to use present day language, the residents' association must—have the landlord present in the room at all times.

    At Second Reading, I made a suggestion which I hope was noted. It may have been a stupid suggestion, but I have not yet heard why it is stupid and that is why I am about to repeat it. There may be a case for having a basic RTM company meeting—whether under the Companies Act or some other legislation—structured to include a part A and a part B. Part A of the meeting should be confined to the residents; this may or may not include the landlord—it would depend on whether the landlord has bought one of the flats—but that is a separate issue.

    It is highly desirable that there is some structured relationship with the landlord. I wonder, quite seriously, whether the Government could think of a route by which a statutory RTM company meeting could be held with the landlord present at a particular stage in the annual cycle; and/or a route by which the RTM company could meet as a residents' association in the normal way every three months or so. It would be for the RTM to invite the landlord to attend on such occasions, but he would have the right to attend once a year, or something like that. To say that there cannot be a properly constituted residents' association meeting—that is, an RTM company meeting—without it being mandatory for the landlord to be there, is going way beyond what is necessary to meet the Government's aims in this matter. I hope that this issue will be given further consideration.

    I support the view of the noble Lord, Lord Lea. There has to be some means by which the landlord can be sure that the building is being maintained adequately, but it would be quite inappropriate for him to ascertain that at the residents' right-to-manage meeting.

    The amendments covered in this group raise some substantial issues on the nature of the RTM company and the rights of the landlord in respect of the RTM company.

    Amendment No. 95 and the associated amendments of the noble Lord, Lord Kingsland, propose that the company should be only a company limited by shares. Part of the rationale of the Bill is that it provides for three different companies: the RTM company, the RTE company and the commonhold association. We consider it important that all three should have the same structure so as to allow leaseholders who wish to move through the three types of companies to do so without other complications. Where they have acquired the right to manage, the leaseholders may wish to use the company as a vehicle to purchase the freehold, and this amendment would prevent that happening because there would be different types of company. In particular, it would mean that leaseholders would always have to set up separate companies to acquire the right to manage and then to purchase the freehold.

    An even more important objection to the amendment tabled by the noble Lord, Lord Kingsland, is that it proposes that the RTM company, as a company limited by share, should have a minimum amount of share capital. Indeed, the formula proposed would suggest that it would have to have quite a considerable amount of share capital. I appreciate that the leaseholders' company which takes over the management of the property needs to have access to funds, but to stipulate that it needs to acquire at the beginning a substantial degree of share capital would price a lot of leaseholders out from the start and create far too great a threshold for them to pass through into the right-to-manage company. Many leaseholders would find it hard to pay the service charge once, and they would find it impossible to have to put forward additional funds as share capital.

    The right to manage is intended to be just that, a right. It is intended to put right the imbalance which prevents leaseholders who have a majority of the equity in a property in terms of the leasehold value having a say in the management of that property. We do not want to hedge that around by establishing a threshold whereby they have to build up a fund first. Leaseholders already have to pay the management for the running of the property, and will therefore exercise a right to manage knowing that they themselves, if they take that decision, will have to meet the costs they run up. The additional requirement is therefore an unnecessary and heavy burden.

    The noble Lord also put forward an amendment regarding how the Government should set about prescribing the constitution of the company. I appreciate that we need to have some idea of what we are intending in this respect. I sent to noble Lords who had shown an interest in this at the Committee stage of this Bill a draft constitution for both the RTM and the RTE company, and those drafts go wider than we would intend in the regulations, so they cover a number of aspects. We have produced full draft constitutions for the two companies in order to make sure that our minimum requirements sit properly within the wider constitution of those companies and the intention of this Bill. We obviously intend to consult further on those drafts, but it is useful that the Committee has that information at this stage when we are dealing with the substance of the Bill. We will have draft regulations before Parliament when the constitutions of the companies come forward.

    The amendment tabled by the noble Lord, Lord Kingsland, referred to the appropriate authorities. They are defined in Clause 155(4) in terms of the Lord Chancellor or the Secretary of State or the National Assembly for Wales. Subsection (1E) of Amendment No. 109 proposes that the Secretary of State should make regulations as they apply to Wales as well as England. There may be good arguments for having the same prescribed requirements, but the National Assembly has clear responsibility for secondary legislation on housing matters and I see no reason why we should change that in this particular instance. The effect of the proposed subsection (1E) would be to do that.

    I hope that the noble Lord will not press that the company should either be constituted as a share company or that these other provisions in his detailed amendment should prevail.

    In relation to the issue raised by the noble Lord, Lord Goodhart, and spoken to my the noble Lord, Lord Lea, that we should restrict the right of landlords to be members of the right-to-manage company, I understand the arguments about conflict of interest. I understand the concerns among leaseholders who would balk at the suggestion that the landlord should have the right to participation in the company. I recognise that that is a contentious part of the Bill. However, as the noble Lord, Lord Kingsland, indicated, this is a process to establish a no-fault right to manage. The landlord is not doing what was suggested by the noble Lord, Lord Goodhart, namely engaging in misbehaviour or failing to meet his obligations. The presumption is that the landlord has done nothing wrong, and it is not intended to be a vehicle to get rid of an exploitative or neglectful landlord. This is a provision to establish leaseholder rights without having to prove negligence on the part of the landlord. Hence, the landlord has forfeited no rights, except insofar as provided for in the Bill.

    7.45 p.m.

    Does the noble Lord accept that, although technically it is a no-fault provision, in a high proportion of cases it is likely that dissatisfaction with the way that the landlord is managing the property will be the reason why the tenants seek the right to manage?

    That may be a motivation in some cases but it will not be necessary to establish that in order to trigger the right to manage. There are existing provisions to deal with neglectful, negligent landlords or those who have ignored their legal or contractual obligations. This provision establishes an entirely new right without going through any fault procedure.

    Is the noble Lord able to clarify whether "landlord" in this sense can be either a head lessee or the owner of the property? Are they both covered by "landlord"? Is it either/or?

    That is so in this case, although there may be points in the Bill where that does not apply. We do not intend to have a procedure that is either anti-landlord or pro-landlord. There is a balance of rights here, and the landlord cannot be entirely cut out of the equation. The landlord has an ongoing interest in the management of the property. At the very least, the landlord has a legitimate reversionary interest; in some cases he will have a greater interest because he may have some flats which are not let on a long lease, or there may be a non-domestic unit within the building.

    In deciding the balance, therefore, we have to take account of the fact that the landlord will have an interest in management, and in practice it is sensible that that is de facto equity in the company.

    I thank the noble Lord for giving way. Does that mean that where the present leasehold system continues and the management is the landlord it is proper for the tenants to have the right to be on the management committee or team? If the landlord is allowed to sit with the tenants under the right to manage, is it not equally fair that where there is no right to manage tenants should have a say about the landlord's decisions in managing the block?

    In practice, the Bill provides for that to happen in most circumstances. Where leaseholders wish it they can establish a right to manage along with the landlord. It is simply the reverse of what we propose here: they can trigger a right-to-manage company but the landlord will still be part of that structure.

    I am sorry to press the point. It is not always necessary for the tenants to manage their own building. If the tenants are satisfied they are unlikely to want to manage their own building. As has been pointed out, if the tenants have the right to manage the landlord should have the right to sit on that management committee and be party to those arrangements. Surely it follows from that that in cases where the tenants do not decide to take over the right to manage themselves they should equally have a representative sitting with the landlords on the management of their building.

    In a situation where people are not eligible for the right to manage under the Act, the noble Lord may have a logical point. However, where the right to manage applies, the way to establish an engagement in management by the leaseholders is through triggering the right-to-manage proceedings. The Bill does not provide for a fall-back position of the type described by the noble Lord, where people have decided not to go for the right to manage. The landowner does not have that choice. If the right to manage is triggered, the provision that he should remain part of the company that manages is to protect his residual right in that property. In some cases it may be large, in others it may simply be a reversionary impact.

    The consultation paper made it clear that the proposals as to how large a landowner's interest in the company would be would be proportionate because circumstances vary. They would be proportionate and not different or unequal. We are therefore not attracted at this stage to A and B shareholders or to members of the company, although such things could be set out in the memorandum and articles of the company. The existing draft does not do that. The structure of statutory meetings as proposed by my noble friend Lord Lea of Crondall would also need to be set out. That would, in effect, imply different classes of membership and at the moment we are not convinced that that should be the case.

    I understand the considerable anxieties about this arrangement. Nevertheless, the landlord has rights in such a situation as well as anybody else with an interest in the ongoing management of the property. Our proposals suggest that therefore the landlord should be part of the company on an equivalent basis to that of others with an interest in the management of the property.

    Before my noble friend moves on to the next point, one of the problems in practice is a great difficulty in arranging meetings in a typical block of 20 or 30 flats. If the landlord is in a position to say that the meeting is inquorate, or is not properly constituted unless he has been properly advised and so forth, it seems likely to be difficult to run this organisation. The weight of requirement on running such meetings is beginning to worry me more and more. I ask my noble friend to look at some way of easing this burden so that not in respect of all meetings is the agenda is so arranged that it is necessary to be able to invoke that provision. That could be a way forward.

    My noble friend makes an interesting point. Were that to be achievable without creating differential classes of member, we might be prepared to look at it in the context of the consultation on the structures of the company. We are anxious that the landlord as a member of the company will preserve some rights in the continuing management of the property. No doubt we shall return to this at later stages in the Bill and I shall say no more now.

    Amendment No. 111 suggests that there should be a right for commercial tenants to have long leases. Frankly, this is not an issue to be members of the RTM company. It is not something that came up in the consultation and the commercial tenants have not indicated any great desire so to be.

    I did not really deal with that point when I spoke earlier. I concentrated on Amendment No. 110. This is a quite different and fairly minor point. Very few commercial tenants will in fact have long leases. If there are any, there is no reason why they should not be members of the RTM along with residential leaseholders if they are all in a building which is a single RTM unit.

    We are not aware that that is a great problem and for the moment I shall indicate my resistance to that position. It also complicates the position of the landlord as a member of the company if the landlord's relationship is with the commercial tenants. In a sense, he represents that part of the building as well in terms of the company. It would be a little complex in relation to having commercial interests involved in the company as such, although, as I understand the amendment, it would be treating a long-lease commercial tenant as if he were a long-lease residential tenant. I cannot see many circumstances in which that would arise, but it is an interesting proposition.

    I resist the attempt to define the RTM company as a share-based company. I also resist the attempt to remove the requirement that a landlord may be a member of the company for the reasons explained. We may well come back, certainly to the latter point, at a later stage of the Bill.

    Although I had no support, in terms, I detected a thin mineral seam in the Minister's response on which I may be able to work between now and Report stage.

    I wish to make one or two detailed observations. I would suggest to the Minister that the noble Lord would not need two companies to move from an RTM to an RTE. It would be quite possible simply to amend the memorandum and articles to change from one type of company to another.

    The noble Lord, Lord Goodhart, made the point that the RTM can run down capital; but in my submission that would ignore the director's duty to raise enough money in service charges to cover the outgoings. A director who deliberately runs down an RTM company's capital would, in certain circumstances, be guilty of misfeasance, and potentially liable to disqualification. There is a built-in disincentive to misbehave financially in those conditions.

    In all the circumstances, and in particular, owing to the fact that we cannot vote anyway, I beg leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    [ Amendments Nos. 96 to 98 not moved.]

    In calling Amendment No. 99, I should point out that if it is agreed to, I cannot call Amendment No. 100 because of pre-emption.

    Page 30, line 13, leave out from ("company") to end of line 14

    On Question, amendment agreed to.

    [ Amendment No. 100 not moved.]

    Page 30, leave out lines 17 to 25

    On Question, amendment agreed to.

    [ Amendments Nos. 102 to 107 not moved.]

    Page 30, line 33, leave out ("1993 Act") and insert ("Leasehold Reform, Housing and Urban Development Act 1993 (referred to in this Part as "the 1993 Act")

    ( )"RTE company" has the same meaning as in Chapter I of Part I of the 1993 Act.").

    On Question, amendment agreed to.

    Clause 70, as amended, agreed to.

    This may be a convenient moment for the Committee to adjourn until Thursday, I st March at 4 p.m.

    Before we adjourn, may I have some indication of the plan for the future? At the moment, we have only one further day for the Committee stage. We have dealt with the first 110 amendments in two days, but we have another 159 to deal with. Will the Government provide a second further day?

    It is not a matter for me. It will have to be pursued through the usual channels. At the moment there are three days, and we will need to consider how far we have come.

    The Committee stands adjourned until Thursday, 1st March at 4 p.m.

    The Committee adjourned at eight o'clock.