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Lord Kingsland: I am disappointed but not in the least surprised at the Minister's response. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 148B not moved.]

Clause 87 agreed to.

Clause 88 [Notices relating to management contracts]:

[Amendments Nos. 149 and 150 not moved.]

On Question, Whether Clause 88 shall stand part of the Bill?

Lord Kingsland: I rise to speak to the Question that Clauses 88 and 89 shall stand part of the Bill. I am not convinced that the Government's intentions with respect to these provisions are clear, and I think they will pose practical problems. I appreciate that the intention of these arrangements is to ensure that an RTM company is not bound by what are called "sweetheart contracts"--to prevent a disgruntled landlord from shackling the RTM company with unsuitable contracts during the handover period.

We understand that the Government's intention is that existing contracts will transfer to the RTM company, when the right to manage is exercised, only if both the company and the contractor agree; but we are not sure that this is clear from the Bill as drafted.

Clauses 88 and 89 deal with the service of notices relating to management contracts but do not make clear what happens to those contracts once the notice is served. Landlords will be required to serve notices on their contractors at least one month before the handover of management so that the contractor has time to make any arrangements in the light of the changing circumstances and negotiate as necessary. It would be extremely helpful to have clarification from the Minister as to his understanding of the position relating to compensation as a result of a contract being frustrated.

We are not convinced that the Government have appreciated that contractors may be influenced in their decision as to whether to continue a contract by the financial strength of the RTM company. A contractor may be happy to deal with the landlord who has a track record and real assets; he may be less certain in dealing with an RTM company. We wonder whether

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contractors will accept a contract from an RTM company if they do not believe that the company will be in a position to pay.

We are also concerned that the Government have not considered the impact of buildings withdrawing from the landlord's bulk purchasing arrangements on those leaseholders who remain under the landlord's management. It is quite possible that they, through no fault or decision of their own--or indeed the landlord's--will find themselves forced to pay more for services because the landlord is unable to obtain as good a deal with a smaller portfolio.

As to insurance matters, as I understand it, it is not possible to frustrate insurance contracts under the present law because of the continuity of the insured interest, which is not affected by management arrangements. The circumstances appear rather closer to that of a novation or assignment where the freeholder must be specifically released from the obligation. I beg to move.

The Earl of Caithness: I am grateful for this opportunity to stand up and get the circulation going in this rather cold room in which the Committee is being conducted. I agree with what my noble friend said about this clause. I find it highly unclear and it is a very important section that needs clarification.

The purpose of Amendment No. 151, which is grouped with the clause stand part debates in respect of Clauses 88 and 89, is designed to write into the Bill what I think the Bill is trying to say. It is not trying to add to the Bill; it is merely clarifying the situation.

I need the Minister to do that for me. What will happen to existing contracts at the handover of the management, and what will happen to frustrated contracts?

7 p.m.

Lord Goodhart: Amendment No. 152 is also part of this group. Clause 88 and 89 undoubtedly require clarification. Having read the clauses and having looked at the Explanatory Notes, I came to an entirely different conclusion from the noble Lord, Lord Kingsland. My understanding was that the existing contracts would be continued but simply transferred from the landlord to the RTM company. Indeed, it seems generally appropriate that that should be the case. Let us take, for example, a contract with a gardening contractor in respect of which there is no problem. If that contract is only terminable on, let us say, six months' notice given on either side, I see no reason why the change from the landlord to the RTM company should have the effect of terminating the rights of the gardening contractor.

For that reason, I would on this occasion be unable to support Amendment No. 151 which would treat all contracts entered into by the landlord as being null and void and frustrated. The effect would be that somebody who had entered into a contract and who might have incurred expenditure on the basis of that contract continuing for a period of time, would have no right whatever to compensation.

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We have come up with a different solution. We recognise that there can be a problem with existing service contracts. Sometimes, as the noble Lord, Lord Kingsland, said, there is a sweetheart contract, a contract with an associated company of the landlord or some element of mutual back-scratching. However, we believe that there is no reason why there should be an automatic termination or why the RTM company should have power to terminate a fair and reasonable contract. We believe there should be a power to terminate the cause, and Amendment No. 152 first suggests that any contract entered into after the RTM claim notice has been served should be subject to review. Once the claim notice has been served, of course, the landlord is on notice that he is not in a position to enter into long-term contracts without the risk of the RTM company disclaiming them when it takes over the right to manage. That would prevent contracts being dished out by the landlord to his associates.

Amendment No. 152 gives a power to terminate contracts entered into before the claim notice has been served for a cause. We have suggested what those causes should be: where the money payable to the contractor party is too much, where the services to be provided are inappropriate--for example, services that do not actually need to be done-- where they are done to an excessively high and expensive standard, or where the contractor party is not a fit and proper person to provide the services. We believe that those are matters to be dealt with in the opinion of the directors, but that opinion must be a genuine opinion before the power to terminate can be entered into. We would be perfectly happy if this amendment was accepted on the basis that it should be not only a genuine but a reasonable opinion. We believe that this amendment is the right solution to what is obviously a somewhat complicated problem.

Lord Whitty: This is certainly a complicated problem about which there is some misunderstanding. I shall try not to add to that. The Bill allows normal contract law to apply where the right to manage is acquired. Under contract law, contrary to what the noble Lord, Lord Goodhart implied, the reality is that a contract will normally fall as frustrated where one of the parties is placed in a position where he or she is no longer able to fulfil the obligations. Hence, a contract which relates to the management of a property will normally be frustrated where the right to manage is acquired for that property, because it will take away the existing manager's management functions and his ability to fulfil his side of the contract.

As far as concerns compensation, which was raised by the noble Lord, Lord Kingsland, under normal contract law at the point where a contract falls frustrated the contractor can recover the costs already incurred under the contract, but there is no entitlement to further compensation above that respective compensation. We believe it right that when the RTM company takes over it should not have to take over all the contract. We, therefore, do not want to interfere with what would be the normal operation of contract law.

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We recognise, however, that there are a number of other considerations. First, it would not be fair for contractors simply to lose their business without having had notice. There will also be contracts which the RTM company will wish to take over. It is for that reason that we have not provided in the Bill that contracts must always be frustrated. That would be too inflexible and counter-productive. In many cases the RTM company will want to take over those contracts. We also want to give landlords the opportunity to re-negotiate contracts which perhaps apply to more than one property, such as a gardening contract, or whatever.

In the light of those considerations, the Bill makes provision for notices to be served in good time to make everyone aware that the right is to be acquired and the legal position which follows, and to make the necessary adjustments. I should also make clear that nothing in the Bill overrides the employment rights of anybody concerned, including those under TUPE. There is nothing in the Bill which causes a right-to-manage company to be obliged to take over a gardening contract, or any other, unless it has agreed to do so. There is, therefore, no need for the powers envisaged by the noble Lord, Lord Goodhart.

I also have some trouble with the amendment tabled by the noble Earl, Lord Caithness, which provides that all contracts are automatically frustrated once the RTM company acquires the right to manage. This would mean that the RTM company could not, by agreement or whatever, take over any of the landlord's existing contracts. It would, therefore, be put in the position of always having to start from scratch, whatever was the most sensible situation. It would also leave a landlord who had more than one property, and a contract covering more than one property, with the requirement to re-negotiate the existing contract but to exclude the RTM property in all circumstances. We have designed the provisions in these clauses and elsewhere to prevent such ridiculous situations arising.

Amendment No. 151 tabled by the noble Earl, Lord Caithness, also purports to provide that the normal rules of contract law shall continue to apply. That is the case but it has the consequences which I spelled out rather than the ones which the noble Earl, Lord Caithness, and the noble Lord, Lord Goodhart, spelled out. It is difficult and complicated and we have taken careful advice. If we were to state it in such broad terms in the Bill, it could be misleading. Instead, we would have to set out in all detail what the application of contract law means.

Members of the Committee will appreciate that we are not all that keen to undertake such a significant expansion of the Bill. However, normal contract law will apply where the right to manage is acquired. It has the consequences I have tried to spell out, and there are good reasons why the fact that it applies should be implicit rather than explicit in the way that the amendment of the noble Earl, Lord Caithness, would suggest. Given the complexity, for the purposes of

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both the landlord and the putative RTM company, this issue will also need to be spelled out in detail in the guidance.

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