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Lord Kingsland moved Amendment No. 95:

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.

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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.

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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.

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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.

Lord Goodhart: 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

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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.

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