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Lord Kingsland: 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.

Lord Selsdon: 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.

Baroness Gardner of Parkes: 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.

Lord Bach: 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

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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.

Baroness Gardner of Parkes: 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.

Lord Bach: We dealt with Amendment No. 64 when we discussed Amendment No. 65.

Baroness Gardner of Parkes: 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.

The Earl of Caithness: 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.

Lord Bach: 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.

The Earl of Caithness: 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.

Lord Kingsland moved Amendment No. 66:

    Page 17, line 20, at end insert--

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("(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.

Lord Goodhart: 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.

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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.

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