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Lord Goodhart: My Lords, I am grateful to the noble Baroness for that explanation. What she said was sufficient to satisfy us. I should say that on this issue we are fundamentally in disagreement with the noble Lord, Lord Kingsland. Our view is that commonholds should be designed as a form of collective ownership by those who have a real stake in the property. For that reason we should not consider allowing the re-creation of the long leasehold problem through long leases of commonholds. Therefore we would be strongly opposed to any provision that enabled leases to be granted at a premium or for a term of seven years. Certainly we would be strongly opposed to the proposal of 999-year leases being granted. That would mean that the freeholder, as a member of the commonhold association, for all practical purposes would have no interest whatsoever in the property. That would simply re-create all the problems of absentee landlordism and indeed in an aggravated form.
However, as we are satisfied with the Government's response, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 17 and 18 not moved.]
4.30 p.m.
Lord Kingsland moved Amendment No. 19:
- Page 18, line 18, at end insert—
The noble Lord said: My Lords, in moving Amendment No. 19 I shall speak also to Amendment No. 20. I refer first to subsection (3B) in Amendment 19. We think that the establishment of trust funds is appropriate, first, to protect the unit-holders in the event of the association's insolvency and, secondly, to prevent the misuse of funds.
Contrary to the Government's suggestion, these considerations apply to commonholds which may become insolvent—for example, if they find that they have a substantial uninsured liability for nuisance, such as tree root subsidence to neighbouring land. The potential creation of substantial distinct funds is important. In our view unit-holders would not want to build up a large sinking fund if they thought it might later be eroded by expenditure on other items of ordinary day-to-day expenses.
New subsection (3F) simplifies the transfer of commonholds and prevents commonhold associations having the burden of having to repeatedly collect money when units are sold. New subsection (3G) reduces the administrative burden and costs for commonhold and removes what could otherwise be a disincentive to having sinking funds.
I turn to Amendment No. 20 in Clause 40. The Government's position of requiring unanimity will be an effective block on the enlargement of commonhold, thus preventing the benefits of economies of scale. In addition, needing or requiring unanimity could allow a single unit-holder to hold all the others to ransom. I beg to move.
Baroness Scotland of Asthal: My Lords, Amendment No. 19 seeks to introduce into commonhold a form of fundholding developed for leasehold funds by Section 42 of the Landlord and Tenant Act 1987. The principal purpose of Section 42 was to establish a rule that funds held by the landlord or his agent for future works should be held in trust for the lessees.
As I mentioned in Committee, Section 42 was introduced to improve and standardise the manner in which service charges and sinking funds are managed while they remain in the hands of the landlord. There are two benefits of the statutory trust for leasehold service charges to leaseholders. First, money paid by tenants to the landlord or his agents is safe from creditors in the event of his or their bankruptcy or liquidation. Secondly, it ensures that the landlord or his agent is subject to the duties of a trustee and will therefore be liable for breach of trust if the money is misappropriated or not adequately safeguarded or invested.
Those considerations simply do not apply within commonhold. The commonhold association is a company whose members are those who pay the money into the funds. They appoint and dismiss the directors of the company. They approve the objects of expenditure and the setting of budgets and have absolute control over all aspects of the company under company law.
The directors who act on their behalf are bound by their fiduciary duty to act honestly and bona fide in the interests of the company, and are to act for the proper purposes as set out in the company's constitution and in accordance with any statutory duty. They are also subject to the sanctions available both under the Companies Act and the general criminal law. They must produce accounts and answer for their contents. The funds under Clause 38 are funds of the commonhold association to be established by the directors of the association in accordance with the commonhold community statement for the purposes specified by the Bill.
If a commonhold association decides, with regard to its particular circumstances and following appropriate legal advice, that it wishes to hold some or all of its funds on trust for any reason, then it may do so. We
In the event that a sinking fund were to be liable to meet a debt which is properly referable to it, it can be expected to pay, but otherwise it is protected until the CA is finally wound up. Clause 38(4) provides for the protection and Clause 55 releases the reserve funds at termination.
I turn to Amendment No. 20, tabled by the noble Lord, Lord Kingsland. The amendment would have the effect that a vote on whether to add land to a commonhold would be passed with 75 per cent of the members who vote on such a resolution voting in favour. That currently requires a unanimous vote; that is, all members who vote on the resolution must vote in favour.
We believe that certain significant functions of the commonhold association should be recognised as such by requiring those who compose a resolution to persuade all unit-holders who are voting on an issue that it is the right thing to do in the circumstances. In this case not only is there likely to be capital expenditure from the funds of the commonhold association or a need to borrow, but the associated cost of servicing any loan and ongoing costs of managing and maintaining the new land. Unit-holders may be asked for extra commonhold assessments to cover the cost of new facilities on the added land. In those circumstances, it seems to us that unanimity on our terms—namely, allowing a small number of concerned unit-holders to exercise an effective veto—is not an unreasonable hurdle for those making the proposal to get over. I ask the noble Lord to consider withdrawing his amendment.
Lord Kingsland: My Lords, I thank the noble Baroness for her reply. The difference of view here is an assessment about how commonhold associations are likely to behave in the future. Perhaps, because I am of greater age than the noble Baroness, I am somewhat more cynical about the conduct that is likely to manifest itself. However, I do not consider these to be appropriate matters on which to divide your Lordships' House. In those circumstances I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 69 [The right to manage]:
"(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 on trust 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) to such shares in the residue of any such fund as are proportionate to their respective liabilities to pay a proportion of the levy set under subsection (2).
(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 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."
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