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Lord Richard: Amendment No. 239A stands in my name. It is an addition to the proposals in the earlier draft Bill and requires separate accounts for service charge moneys and greater accounting information for leaseholders. The issue has been raised on a number of occasions and is well known.

Lord Goodhart: Our Amendment No. 240 is in this group. We support all the other amendments in the group. The amendments seek--certainly Amendment No. 240 seeks--to bring back into the Bill one of the proposals in the consultation paper, which was mentioned by the noble Baroness, Lady Hanham.

The reforms are important for two reasons. First, they are important for the purpose of transparency, in order that all the tenants in a block subject to a single service charge will be able to find out what is in their fund.

[The Sitting was suspended for a Division in the House from 5.5 to 5.15 p.m.]

Lord Goodhart: I now return to the oration that I was about to deliver on this subject. This group of amendments concerns one of the proposals set out in the consultation paper published in August last year. Indeed, it goes back beyond that, as the noble Baroness, Lady Hanham, said. The proposals are important for two reasons. First, they are important for the sake of transparency, so that all tenants in a single unit that is subject to a single, collective service charge know, when they have paid services charges in advance, what is in the fund. For that reason, they will find it easier to notice whether anything has been wrongly taken from it. As the consultation paper pointed out, if funds from different blocks are put into a single account, neither group of leaseholders acting independently of each other would have any way of knowing what sum ought to be in the account. They would therefore be unable to realise whether any money had gone from it improperly. The safeguards for fraud are indeed inadequate. Although the consultation paper suggests that there might be some additional costs--and there possibly would be--such costs would be modest in comparison with the benefit of ensuring greater transparency. I doubt whether the costs are likely to be substantial because a large leaseholder with a number of accounts would very probably be able to negotiate a deal with the bank holding the accounts, under which all the money for the payment of interest was treated as a single, global account.

Secondly, the proposals give better protection from insolvency for the landlord or manager. Money in a client's account belongs to the client, not to the

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account holder. If the account holder is insolvent, then it cannot be used to pay the creditors. If it is part of a general fund, even if technically trust money, then normally it may well be accessible to the general creditors. In such a case, the tenants would be in a position of having to claim for their money back as unsecured creditors. Moreover, as unsecured creditors almost always are, they are unlikely to be able to get back any of their money.

For both those reasons, it is good practice to require advance service charges to be paid into a client account. We believe that that obligation should be made compulsory.

Lord Selsdon: As I said previously, the Bill is about money. One of the most difficult areas we are about to confront is the letting loose on the property world of thousands of amateur managers. With that goes the problem of liquidity and lack of funds. The possibility of a building failing to have proper lift insurance, failing to observe health and safety regulations and all the standard matters that professional managers know about is a real worry.

Finance and adequate resources can help. It is often the case that one tenant in a building will fail to pay the service charges but the manager does not notify the others. No penalties can be charged against someone who fails to pay and the other tenants have to cover the costs.

Without a sink fund or an adequate reserve, there is a serious possibility of management organisations becoming completely liquid. Service charges in general are calculated with a budget in advance by a professional manager to show the expenditure that will be required during the coming 12 months for regular maintenance of the building, but not the exceptional maintenance that is often required for external or roof repairs that may take place under certain leases every four or five years, or internal redecoration of common parts. Depending on where the buildings are--for example, listed buildings in London-- such charges can be extremely high and often place a severe burden on the poorer residents of a building. The richer ones will say "I would rather pay as and when the bill comes up". Other people would like to have the opportunity to save something on account for the future.

It is difficult to legislate for that and it is difficult, too, to get banks to adopt these smaller kinds of account. But in general it is reasonable to point out that between 15 and 20 per cent of an annual service charge should be set aside for a reserve fund. The point has been made by my noble friend that if the reserve fund becomes too large, people try to spend it and then in come the professional charges. "Of course, my dear chap, you must have a surveyor to survey it. You must have an engineer as well". They then send a four-page letter with all the standard scales and before you realise it, 25 per cent of the expenditure has gone out of the window. They must, of course, obtain three or four quotations and there is a duty on them to take the lowest one, though often the lowest one is not the best. It is a worrying area, but I do not see how it can be

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legislated for. There should be an obligation on people to put aside a percentage of each annual service charge, which should be budgeted in advance.

This is fairly easy to do, because most of the buildings that we are talking about will have been in existence for a long time and there will be a record of what the expenditure has been. Many will be in default under their leases when they try to extend the refurbishment outside for a further two years because it may have been done properly before. They try to make short cuts from time to time to save money. It is all about money. If the management companies do not have an adequate reserve, they are bound to fail.

Lord Whitty: We have some understanding of the concerns which lie behind this group of amendments. The lead amendment, Amendment No. 238ZA, seeks to protect leaseholders' interests by, among other things, requiring managers to set up separate reserve funds. Amendment No. 240, standing in the name of the noble Lord, Lord Goodhart, would also require managers to use separate accounts and, moreover, would provide that leaseholders could not be held liable for charges unless they were paid into such accounts. Amendments Nos. 239A, tabled by my noble friend Lord Richard, and Amendment No. 239B, tabled by the noble Baroness, Lady Hanham, are intended to improve the existing arrangements for accounting for leaseholders' money.

This is a delicate area and the use of property money by people unused to managing it, as the noble Lord, Lord Selsdon, said, will be a new phenomenon. In our consultation paper last August, we put forward proposals to improve the accounting regime. It is only considerations of time and space that have prevented their inclusion in the Bill. We therefore have general sympathy with much of what has been said today. While I cannot make any firm commitments, we will consider carefully the views that have been put forward and perhaps return to them at a later stage. That is not an unqualified view. There are parts of some of the amendments that we would not, in any circumstances, be prepared to introduce in quite the way proposed.

The lead amendment tabled by the noble Baroness, Lady Gardner, would put landlords under an active obligation to set up reserve funds, to plan ahead and to demand regular advance payments from leaseholders. That is all very good practice, but requiring managers to prepare and present plans is quite a limited use, unless there is some means of controlling the quality of the plans, which is necessarily very complicated, and indeed of enforcing their implementation, which is even more complicated. Nor would it necessarily achieve much to insist that managers demand advance payments, if one cannot ensure that those payments are set at the right level and at the right frequency and that they are used to fund repairs in a timely and appropriate fashion. The amendment would probably go too far from anything that we would look on favourably. We understand the more rule of thumb formula proposed by the noble Lord, Lord Selsdon, and might consider it. It would be important to ensure

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that any requirements introduced could be enforced in a practical way. However, with regard to some of the intentions of the amendments, particularly of the lead amendment, we have difficulty in seeing how that could be done. Where managers neglect their responsibilities, we have an LVT procedure, which could replace them. We are also considering ways in which we could improve the standards of accountancy--of the presentation of the accounts and of the accuracy of the accounts--as addressed by the amendments of my noble friend Lord Richard and the noble Baroness, Lady Hanham. The whole issue could be looked at in that context, although much of it, as the noble lord, Lord Selsdon, said, is difficult to deal with through a simple legislative requirement.

Nevertheless, we will look at much of this area again. With that assurance, I hope that the amendments will not be pressed.


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