Commonhold and Leasehold

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Clause 90

Duties to give notice of contracts

3 pm

Mr. Cash: I beg to move amendment No. 60, in page 46, line 35, at end add—

    '(8) Unless the contractor party and the RTM company otherwise agree in writing within a period of 28 days after service of a contract notice, the management contract shall continue in full force and effect from the acquisition date as if it had been made between the contractor party and the RTM company and not with the manager party, save that the RTM company shall have no liability under it for breaches on the part of the manager party occurring prior to the acquisition date.'.

The clause provides that the manager party is under an obligation to give notice in relation to an existing management contract to the contractor party, which is known as the contractor notice, and to the RTM company, which is contract notice. There is a range of requirements about how those two notices must be given and what the contractor notice must do. For example, it must give details to identify the contract, state that the right to manage the premises is being acquired by an RTM company, and give the name and registered office of the RTM company and the acquisition dates.

The clause does not cover one important matter, which my amendment describes. There is a requirement to provide for such a matter and avoid difficulties that would otherwise arise. I cannot improve on the description in the amendment, so I will not try. I will be interested in the Minister's reply.

Mr. Sanders: I will be interested in the Minister's reply too, because it strikes me that the Government are legislating for a clean break. There may be a good case for that, but some contracts could be easily transferred from one entity to another without the break.

Ms Keeble: I shall stick closely to my notes, because the underpinning law is that of contract, with which the hon. Member for Stone will be familiar. It is concerned with that wonderful term ''frustration'', which has an obvious meaning—one often shared by members of spending committees—and a legal meaning. I shall read my response. If hon. Members have particular queries, I would be happy to send them a written response. It would be unwise to discuss the details of contractual law because it could be used in a damaging way.

The amendments relate to what happens to existing management contracts when the right to manage is acquired. If a party to a contract is placed, by events outside his control, in the position of being unable to fulfil his obligations or role under that contract, the normal effect of contract law will be that the contract falls as frustrated. One such case is where the operation of the law intervenes to prevent someone being able to fulfil part of a contract.

That will happen in most instances where the right to manage is acquired. Subject to having met the qualifying rules, leaseholders have the right to take over management. A landlord will not be able to prevent a qualifying group from doing so. Acquisition

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of RTM is therefore a compulsory, not voluntary, transaction.

Furthermore, clause 95(2) provides that following the acquisition of the right, the landlord cannot continue to exercise any duties that have become ''management functions'' of the RTM company. Operation of the law will therefore mean, for example, that the landlord will no longer be responsible for the maintenance of the property. That strongly suggests that a contract delegating that function will tend to be regarded in most cases as frustrated by the acquisition of the right to manage: an event outside the landlord's control. I am not suggesting that that would necessarily be the position in every case. The application of the law of frustration, and the law of contract generally, will depend upon the circumstances of the case.

If a contract is frustrated in such circumstances, each party to the contract will have the right to recover moneys due to them for what has been done up to the point of frustration. The contractor will be able to recover from the other party all sums due for the work that has been done up to the point of frustration. The other party will in turn be able to recover from the contractor any sums advanced prior to that point for works that will not be carried out. Neither party, however, will have the right to seek compensation for profits forgone or other such matters as a result of the frustration of the contract: that is both right and fair.

Some believe that there would be circumstances in which the employment of a particular contractor, such as a gardener, would transfer to the RTM company. We agree, but that will be the result of employment law, particularly the rules that relate to protection of employment following transfer of an undertaking—under the Transfer of Undertakings (Protection of Employment) Regulations 1981—rather than general contract law. Nothing in the Bill overrides such employment rights and we would not want to do so. Whether a particular employee or contractor would pass to the RTM company will depend upon whether the acquisition of the right to manage would constitute a transfer of undertaking for those purposes. It is a complex area and the application or otherwise of TUPE will depend upon the individual circumstances of the case. However, we are content that, if it does apply, the employment of the individual in question should pass to the RTM company.

Amendment 60 provides that, rather than being frustrated, all contracts should be novated. Such an approach would have some merits at first glance. It would ensure that the RTM company was supported from day one by a network of existing contractors: cleaners, gardeners, lift maintenance companies and so forth. It would also give existing contractors certainty that their services will continue to be required, at least initially, after the management of the block changes hands. We recognise that the right-to-manage company will sometimes be perfectly happy to work with the landlord's contractors, and vice-versa. Where that applies, the Bill provides an opportunity for it to happen.

Clauses 89 and 90 together provide for notice to be served to ensure that contractors know that the right

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to manage is to be acquired and that the RTM company knows who the contractors are. Either side will then be able to initiate negotiations for the RTM company to take over the responsibilities and obligations of the landlord and the contract, thereby allowing it to carry on after the acquisition of the right. We do not want to force the RTM company and the contractors into a contractual relationship against their will. Nor do we want to allow the landlord to enter into sweetheart contracts with contractors that would be binding on the RTM company, which would be the consequence of amendment No. 60.

The rights of an RTM company have been discussed, but the contractor's rights are also important. He will have contracted with the landlord and might not want to carry on, at least on the same terms, with the RTM company. We must allow for that possibility and recognise that contractors also have the right to decide what is in their best interest. Our approach strikes a fair balance. The machinery set up by clauses 89 and 90 will allow contractors and the company to decide, in advance of right to manage being acquired, whether to continue a particular contract. Only when they cannot reach an agreement will contracts be frustrated by default. We have given careful thought to this matter and are satisfied that it is the right approach, so I ask the hon. Gentleman to withdraw the amendment.

Mr. Cash: After that dissertation of law, which would have done credit to some of the worthy tomes I have had to study, it is right to pay tribute to the Minister and to those compiling the law behind the scenes. However, when it comes before the courts—and if any subject does, I suspect that it will be this one—the proof of the pudding will be in the eating. Best efforts have been made to resolve the matter—our approach is to go down the route of novation, and I was encouraged to hear the Minister say that it had some merit—but we are now locked into a position. With her hand on her heart, I doubt whether the Minister can say that the provision will produce exactly the desired results. If Lord Denning—or another lawyer, like him, always searching for the essence of differences—were still with us, unpredictable consequences would be expected.

Time will tell. It is the Government's responsibility to get the Bill right, and we have heard the dissertation. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 90 ordered to stand part of the Bill.

Clause 91

Duty to provide information

Amendment made: No. 80, in page 47, line 9, leave out from first 'date' to end of line 10.—[Ms Keeble.]

Clause 91, as amended, ordered to stand part of the Bill.

Column Number: 101

Clause 92

Duty to pay accrued uncommitted

service charges

Amendment made: No. 81, in page 47, line 34, leave out from beginning to 'must' in line 37 and insert

    'The duty imposed by this section'.—[Ms Keeble.]

Clause 92, as amended, ordered to stand part of the Bill.

Clauses 93 to 95 ordered to stand part of the Bill.

Clause 96

Functions relating to approvals

3.15 pm

Mr. Cash: I beg to move amendment No. 73, in page 49, line 18, at end insert—

    '( ) The RTM Company must not grant an approval in relation to the making of alterations, improvements or change use which will diminish the reversionary value of the landlord's interests.'.

The Chairman: With this we may take amendment No. 71, in page 49, line 22, leave out

    'the making of structural alterations or improvements or alterations of use.'.

Mr. Cash: The clause sets out the procedures to be followed under the RTM where an approval is required under the lease. Subsection (1) states:

    ''This section and section 97 apply in relation to the grant of approvals under long leases of the whole or any part of the premises.''

Although I suspect that the words ''reversionary value'' in amendment No. 73 might trigger a state of excitement in my hon. Friend the Member for Solihull (Mr. Taylor), I have now mentioned them. It would be inappropriate—an extraordinary state of affairs—for a RTM company to be able to grant an approval in the circumstances I described which would diminish the reversionary value of the landlord's interest.

In the circumstances described in subsection (2), amendment No. 73 would exclude the making of structural alterations or improvements or alterations of use from the requirement to give 30 days' notice under the provisions of clause 96(4). It is a reasonable proposition given the importance of ensuring that an approval is granted in reasonable circumstances, and I await the Minister's comments on the amendment.

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Prepared 17 January 2002