Commonhold and Leasehold Reform Bill [Lords]

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Mr. Taylor: That is an interesting idea and I am quite attracted by it. It had not occurred to me. What occurred to me was something rather different, which could be raised in deliberations on the constitution of commonhold associations. I will leave my mind open as to whether it should be a company limited by guarantee or a limited liability partnership, or whether both options might be available.

Under the current provisions, the commencement working capital of a company limited by guarantee would-if there were 100 members-be 100. That is not very much. In my experience-as we get older, experience is sometimes the only thing that we can claim in aid in an argument-organisations such as commonhold associations should set sinking fund targets from the outset. In that way they can, over time, put themselves comfortably into credit and build up balances that might be hypothecated. A balance may one day be needed to repair the roof. Members of the association may wonder, ''What if the lift breaks down? Do we have the money to employ engineers to repair it because it is a problem for the ladies on the top floor?''

While the setting of sinking fund targets need not be included in the powers under the Bill, it should be clearly stated in good practice publications that people forming commonhold associations would need to build up balances. Those funds will not solve the problem of an intransigent person who will not pay. That remains a problem. However, it is slightly easier to cope with the intransigent person who will not pay if one is also sitting on a balance of 40,000-one has more flexibility in how one deals with him. Will the Minister show his openness of mind to my suggestion? No doubt when the first few pioneers embark on their commonholds, they will turn around and say, ''How do we do this? Are there any instruction manuals? Has anyone gone down this road already? What lessons have been learnt so far? What are the mistakes that we

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can avoid repeating?'' If the Government are to encourage such manuals, as they should, one recommendation should be to start building up sinking funds from the beginning. There will be a rainy day-somebody will find that windows have not been fitted properly, the roof needs repair, the plumbing has gone wrong, or, worse still, the foul drainage has gone wrong. It is a great comfort to know that, despite such an awful problem, at least there is 40,000 in the bank.

Mr. Wills: I have considerable sympathy with the motives underlying the amendments. I accept that they are designed to make sure that commonhold works effectively. Unfortunately, as the hon. Member for Torbay has guessed, we shall have to resist them.

Amendment No. 4 would pave the way for a provision that would allow for the use of limited liability partnerships as an alternative corporate structure. Such an arrangement is not suitable for the purpose, and we shall resist the amendment.

Amendment No. 5 is based on a misapprehension. Several leaseholder groups and others have been active, in advance of the various stages of the Bill, in suggesting that the company structure is too onerous for small commonholds, and that the end result could be a disaster. First, we do not believe that that is the case. The rules that relate especially to small business are not difficulty to apply, and, for all the reasons outlined by the hon. Member for Solihull, we expect to have prepared good-quality, clear instructions for those who will run commonholds.

The limited liability partnership structure was designed for a completely different set of circumstances, and is inappropriate for this purpose. First, it is defined, in its own legislation, as being specifically designed for partnerships that trade for profit. The great majority of commonhold associations will not trade. Secondly, membership of a limited liability partnership is a matter for the partners. Who may join the partnership, who leaves, and on what terms, are matters for the partners. In commonhold, membership of the association is tied strictly to ownership of a unit, and the purchase and sale of that unit defines membership. That is absolutely crucial to the concept of commonhold. Private companies limited by guarantee are generally membership-type organisations that do not trade for profit. That is the profile of the commonhold association, and that is the corporate structure with which we intend to press ahead.

I hope that I have been able to persuade the hon. Member for Torbay that we are addressing his concerns, even though we are resisting his amendments. In the light of that, I hope that he will withdraw the amendment.

Mr. Taylor: I have one other thought that the Minister might consider. Once again, I do not necessarily seek an answer this afternoon.

While the Minister was addressing this question, he rather won me over, and I am more and more satisfied that the company limited by guarantee is the right structure. However, if commonhold associations do not build up the balances that I was commending a

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moment ago-in some cases, they will not-what is the potential for a company limited by guarantee to borrow from conventional lending sources? If I were a banker and somebody came along to me with a company limited by guarantee with 100 shares of 1 each, I would say, ''What is your collateral? Where is my security?''

I was brought up on leaseholds and freeholds, and I am finding commonhold difficult to get my mind round. I do not know whether the commonhold association will own any assets. If I were a banker, I would be comforted if it owned some assets.

The Minister may require inspiration. I can deal with that in two ways. I could tell him that a reply tomorrow will do, or I can continue to talk, like on ''Just a Minute'', until we reach a point at which the Minister is inspired to give an answer.

It is clear what happens in the case of leaseholds. I am dealing with such a situation in my constituency, and I have declared that interest. I own a 125-year lease on an apartment-as it is grandly called; let us call it a flat-as do 12 other people. We are 13 people, which is an awkward number.

When the Bill is enacted, we will be able, by majority-to distinguish this from the commonhold situation-to go to the ground landlord and say, ''Let us buy the freehold for X pounds.'' At that point, our corporate entity, or company limited by guarantee, would have an extremely important asset. It would own the freehold and the right to collect 13 ground rents. The banker would then be in business. He could say, ''Ah, I see that you have something solid there: a freehold title deed. I think that I can lend you money on the security of that.'' That happens if a bunch of leaseholders who act in concert can get hold of a freehold to be owned by their limited liability company. Under their instruction, the company may go to a banker and ask for money. I am not sure whether a commonhold association and its company will have an asset that could be useful.

Mr. Wills: The hon. Gentleman is right to assume that the commonhold association would be able to borrow on the basis of the common parts or the income stream, but not the individual units that are owned on a freehold by the unit-holder.

The hon. Gentleman was right to draw attention to the need for a sinking fund to cover the awful eventualities that he described. Clauses 37 and 38 cover that, and there will be guidance on the matter in the best practice guides that we intend to publish. In the light of our interesting and useful debate, I hope that the hon. Member for Torbay will withdraw the amendment.

Mr. Cash: The debate prompted a number of thoughts while I looked through the draft memorandum and articles of association. The provisions of clause 33 are very short. I have dealt with many-although I do not know how many-private companies limited by guarantee during my years in practice. The clause contains pretty normal stuff.

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The problem with the clause is that it will take time for people to adjust to the mechanics of the new concept of commonhold. A company limited by guarantee will not be lifted off a shelf with an indication of the way in which it is expected to work. Practically, and in conjunction with the commonhold community statement, the clause proposes the regulation of the relationship among all the parties under the memorandum and articles of association. That leads us to the delicate areas that we have addressed in part today, such as default, remedy, and who enforces the regulation and how. It does not behove me to mention yet again the fact that it would have been helpful to have the draft provisions earlier; I do not want to make an issue of that now.

5.15 pm

An important question is involved that relates to the Report stage. We received a helpful explanatory memorandum on the Bill. Examining the guts of the Bill shows that the memorandum and articles of association will govern the regulatory arrangements between the different members. Some provisions deal with the appointment and removal of directors, which might make people wonder how that will operate in practice.

A director need not be a member of the commonhold association. A significant number of provisions relate to the role of the developer, who has special functions, powers and rights to be calibrated with the unit-holders.

The Minister may confirm my assumption that the intention is that people will adopt the proposal as the common form; it is not merely a question of whether people like the proposal. If some of it does not work, a power is provided under the regulations to make adjustments through regulations-a Henry VIII clause.

Let us examine the practicalities of how the provision may work. Article 44 of the memorandum from the association states:

    ''This article shall apply if the Commonhold Community Statement''

-the document that I have here-

    ''confers upon the developer the right to appoint and remove directors of the Commonhold Association.''

Labour Members may wonder exactly what the developer's range of responsibilities, rights and powers will be in that context. Rather than go through the entire constitution, which it would be invidious for me to do now, given what I have already said about timing, it would be helpful to consider whether we could arrive at a mechanism to enable, if it turns out to be necessary, amendments to that common form, which is an important part of the Bill and is subject only to the making of amending regulations later. I hope that I am making myself clear. We are considering draft proposals that, when the regulations are made, will become the manner in which all commonhold associations operate. The proposal is, therefore, just as important as the

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ingredients of the Bill itself, because it will regulate the relationship between all the parties.

I invite the Committee to consider whether, in the interests of people who will be affected by the Bill, we should consider on Report circumstances in which practical or difficult technical or legal questions arise that give us reason to believe that we should amend or make proposals-this is only a draft-in order to ensure that everything fits properly and makes sense in relation to the proposals in the Bill.

A danger is involved in dealing with the guts of a Bill through regulations. We all know that regulations go through like a dose of salts. No one ever bothers to read them. In many cases, there may be some justification for the speedy manner in which they are dealt with. However, the proposal will affect the relationships between all the parties involved.

The Committee wishes the Bill to work effectively. Given that we have had to consider the matter under discussion without the benefit of outside advice, it behoves all of us to think carefully about its implications, and to hold our position open, so that we can return to it on Report, when-as we have to address the scope of the Bill-we could come forward with amendments that would, in effect, say, ''In respect of the regulations that are empowered to be made under the Bill, the following provisions shall or shall not be allowed.'' They would be amendments to clauses 31 and 32, but they would be specific about what may and may not be included.

That is a reasonable attitude to adopt, in the light of what I have said. I look forward to the Minister's response because I know that he is a transparent fellow who has an open mind, and that he wants the Bill to work. Therefore, I am sure that he would not want anything to be included in these regulations-and in the constitution that flows from them under schedule 3-that would prevent them from working satisfactorily.

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