Schedule 3 — Commonhold association
Orders of the Day — Commonhold and Leasehold Reform Bill [Lords] — [1st Allotted Day]
Mr William Cash (Stone, Conservative)
I beg to move amendment No. 68, in page 96, line 25, at end insert—
'(3) Sections 364 and 365 of that Act (annual return (company not having a share capital) and time for completion of annual return) shall not apply to a commonhold association.'.
Mrs Sylvia Heal (Deputy Speaker)
With this it will be convenient to discuss the following amendments: No. 87, in clause 37, page 18, line 3, at end insert—
'(5) Any monies payable by a unit-holder to the commonhold association under:
(a) the commonhold community statement;
(b) the memorandum or articles of the commonhold association; or
(c) regulations made under subsections (1) and (2) hereof
shall be a charge over that unit-holder's unit ("a commonhold association charge") and enforceable as a first legal charge in priority to all other charges or encumbrances over that unit–holder's unit.
(6) The existence or potential existence of a commonhold association charge shall not prevent any person who is restricted or prohibited whether by statute or otherwise from lending money save on the security of a first legal charge from lending money on the security of a charge which, but for the existence or potential existence of the commonhold association charge, would have been a first legal charge.'.
No. 77, in clause 38, page 18, line 11, at end insert—
'(ba) enabling the directors to add to their estimate any sum which a unit-holder was previously required to pay under this section but which remains unpaid despite all reasonable efforts by the directors to enforce payment,'.
No. 78, in page 18, line 13, at end insert—
'but permitting the directors not to allocate any part of a sum added under paragraph (ba) to the unit to which it was previously allocated but unpaid,'.
No. 79, in page 18, line 23, at end insert—
'(3)(a) Payment of any sum allocated to a unit under this section shall be secured on that unit in priority to all other sums secured on it;
(b) The Registrar shall note the effect of this subsection on the register relating to each unit.'.
Mr William Cash (Stone, Conservative)
Amendment No. 68 relates to some of our earlier arguments. In our experience, tenant co-operative companies—freehold companies that are closely analogous to commonhold associations, the members of which are long leaseholders—are notorious for neglecting formalities such as filing annual returns. [Interruption.] I know that the Minister has to attend to other matters, and I do not criticise him for that, but I hope that he will listen to this point, which relates to a distinction drawn in current companies legislation. I almost referred to it as the Companies Act 1948, which would have betrayed my fine knowledge of that Act. Of course, the legislation has been amended many times since.
Tenant co-operative companies are notorious for neglecting the rules, and formalities such as filing annual returns, precisely because they are not of the same nature as other shareholder companies. They number among the most common types of companies that are struck off the Companies House register for neglecting to file. It is most undesirable that that should happen to commonhold associations. Although formalities exist to enable reinstating the registration of such companies, they take time and are costly. The need for them could quite unnecessarily undermine the commonhold system's reputation. From a practical point of view, we should beware of the fact that such companies have a strong record of non-compliance with the requirement to file returns. If a similar situation arises in respect of commonhold associations, which are companies limited by guarantee, there will be a problem.
Importantly, the Law Society considers that no reason exists to insist on associations' filing returns. In other words, there is resistance to unnecessary regulation, or a deregulation arrangement, as it were. Full information will be available internally to members. They will give it freely to prospective buyers of units, and to people with whom they wish to contract. There is no wider general interest.
Amendment No.87, which would amend clause 37, is important. It attempts to remedy the question of enforcement, which is one of the Bill's most glaring holes. Every commonhold block needs to be kept in repair, and the only source of funds for repairs is the commonholders themselves. The efficient collection of service charges from the unit-holders will be essential to the success of commonhold. In leasehold blocks, a very efficient method—the sanction of forfeiture—exists to ensure that lessees pay their service charge. Forfeiture is a draconian remedy, and we will propose an important amendment when we discuss the relevant part of the Bill on Wednesday.
The critical feature of forfeiture, however, is that the landlord has a remedy against not just the tenant, but the tenant's mortgagee. If the mortgagee does not pay, the lease is liable to be forfeited and the mortgagee loses the security. Accordingly, it is generally the mortgagee who can be prevailed upon to pay the service charge if the tenant becomes impecunious. Those are the practicalities, which I have already discussed with the British Property Federation and others.
The Government do not propose any special remedy for commonhold associations against defaulting unit-holders. They propose that, if a unit-holder does not pay his service charge, the commonhold association should bring proceedings in the usual way in the county court, recover judgment and use ordinary methods of enforcement to recover the judgment debt. In particular, the Government envisage the commonhold association's obtaining just a common or garden charging order over the commonholder's unit.
Just about everything in that idea is deficient. First, county court proceedings are slow, and anything to do with service charges is particularly slow. Secondly, the commonhold association would almost certainly be out of pocket on the legal costs associated with bringing any county court proceedings. Thirdly, the association would have a remedy against only the unit-holder, not his mortgagee, although the mortgagee benefits from repairs carried out with the service charges because the value of the security is maintained.
Fourthly, unit-holders who do not pay are likely to be impecunious. A charging order is worthless if no equity exists in the property over which the charging order is granted. The commonhold association would rank lower in priority to the mortgagee. I address that point to the Under–Secretary in particular, because she knows what I am getting at. [Interruption.] Apparently, so does the Minister who is responsible for this part of the Bill. Excellent—now we have two Ministers who know what they are talking about.
The effect of those deficiencies is significant. First, it will place an unfair burden on those unit-holders who pay their service charges. All the money for running a commonhold block comes from the commonholders. If one commonholder does not pay, the other commonholders must pay—an effective and cheap way of enforcement. Secondly, one of the questions that mortgagees always ask solicitors to confirm when someone takes out a mortgage is whether satisfactory arrangements have been made for the repair and maintenance of buildings. Any solicitor who considers the matter in relation to a commonhold development would be bound to answer no. If one unit-holder refuses to pay service charges, then—for the reasons I have outlined—the commonhold association will have a job getting the money in. There is the substantial risk of a domino effect starting, when other unit-holders see the ease with which service charge obligations are avoided.
If solicitors were unwilling to confirm to mortgage lenders that there were proper procedures in place for the proper collection of service charges, that would inevitably mean that commonhold units became unmortgageable. Without being melodramatic, it can be readily seen that the consequences of that would be disastrous for the commonhold concept.
The amendment would meet that point in a simple way. Moneys owed to the commonhold association by a unit-holder would become a first legal charge on the unit. Critically, that charge would arise automatically without any court proceedings and, equally critically, it would take priority to any mortgage over the unit, so that the commonhold association could—as with forfeiture—in practice obtain payment from the mortgage lender.
The proposed new subsection (6) in amendment No. 87 is simply a technical provision. There are still some bodies that are restricted in their ability to lend, so that they can lend only on the security of a first legal charge over land. The subsection makes it clear that the proposed commonhold association charge does not affect those lenders' ability to lend. In other words, a first legal charge will remain a first legal charge even when there is a commonhold association charge in priority to it.
Amendment No. 87 is important in ensuring that commonhold works as we want it to work, so that defaulting unit-holders are properly held to account and so that other unit-holders who honour their obligations are not left paying for their defaulting neighbours' debts. I commend the amendment strongly for those reasons and I hope that, even at this late stage, we can deal with those serious and practical points.
It is essential to the solvency of a commonhold association that every unit-holder pays his share of the association's expenses, in the form of the service charge. Because there is no landlord and tenant relationship, and therefore there can be no threat to forfeit the unit if the unit-holder's dues are not paid, there is a serious risk that there will be defaults. That problem lies at the heart of the amendments to clause 38. Payment of the service charges will not be a condition precedent to the sale of the unit, so there will be no incentive for an incoming unit-holder to ensure that his predecessor has made all the payments to date and there will be no incentive for mortgagees to insist that their mortgagor/unit-holder pays. While it is true that if the association has to take proceedings to recover the debt, it will be able to obtain a charging order secured on the unit as an enforcement measure, that will not greatly alleviate the position because the order will rank in priority after existing charges—in other words, existing mortgages would take precedence.
The Law Society considers—and I agree—that securing the service charge automatically, and with priority to other mortgages, is important for the smooth working of the commonhold system. I am trying to be constructive and positive. The provision should not be regarded as prejudicial by mortgagees: their practice in leasehold cases is to make payments when necessary and assess the amounts to the mortgage debt. Those dealing regularly in the residential market have a clear interest in ensuring the continuing viability of commonhold associations.
Amendment No. 78 addresses the relationship of directors to the strict limitation of liabilities. The Law Society considers that strict limitation of liability is not appropriate for commonhold associations, and is likely to harm the viability of the commonhold system. I have dealt with the issue of contractors and I have already made the case on strict liability. It would not be appropriate to regard the company limited by guarantee, and the strict limitation of liability that goes with it, as appropriate models for commonhold associations. We need the flexibility that will relieve directors of the strict liability that a company limited by guarantee would require.
On amendment No. 79, it is essential to the solvency of a commonhold association that every unit-holder pays his share of the association's expenses, in the form of the service charge. Because there is no landlord and tenant relationship, and therefore there can be no threat to forfeit the unit if the unit-holder's dues are not paid, there is a serious risk that there will be defaults, as I have said before. Payment of the service charges will not be a condition precedent to the sale of the unit, so there will be no incentive for an incoming unit-holder to ensure that his predecessor has made all the payments to date and there will be no incentive for mortgagees to insist that their mortgagor or unit-holder pays. I made those arguments in respect of a previous amendment and I conclude by repeating that those dealing regularly in the residential market have a clear interest in ensuring the continuing viability of commonhold associations.
Mr Michael Wills (Parliamentary Secretary, Lord Chancellor's Department; North Swindon, Labour)
This is an interesting group of amendments, and Mr. Cash made a good job of outlining them. However, we will reject all of them. Amendment No. 68 would amend paragraph 15 of schedule 3 by adding to it an exemption for commonhold associations from the requirement to supply annual returns to Companies House.
Incidentally, the hon. Gentleman mentioned the numbers of Companies Acts and feared that he might not have been up to date with them. He may be right, because the Companies Act 1985 has been amended by the Companies Act 1989, and the sections that apply to the duty to deliver annual returns and that governing their contents are new sections 363 and 364 respectively. However, the substance of his argument remains.
We do not accept the amendments because the information required is not onerous to provide and it is important that it should be provided. There are very few disciplines imposed on commonhold associations by outside agencies. One is the production and submission of annual returns. There is a prescribed form and the return has to be submitted within 28 days of the appropriate due date. The contents of the report include—the list is not exhaustive—the address of the registered office, the type of company it is and its main business activities, the name and address of the company secretary, names and addresses of directors and certain other information relating to them, and where the register of members is kept if that is different from the registered office. All that information is important—if not essential—to people who may be thinking of buying in to the commonhold. It is therefore essential that it be kept up to date and readily accessible.
For the great majority of associations, the provision of the form will be a simple and routine task year after year, but will provide important information for all those with an interest in it. For those associations that are large and complex enough for it to be a more significant task, the provision of the information becomes even more important. I hope that that explanation has persuaded the hon. Gentleman to withdraw the amendment.
Amendments Nos. 87 and 79 return to ground that has already been extensively trodden. Both would secure moneys payable to the commonhold association by the unit-holder by way of first legal charge. We are opposed to both amendments. Although they are of rather different scope and effect, both would impose on unit-holders in a commonhold strictures that do not exist for similar purposes elsewhere. Although it may be argued that that is itself a pity, we are convinced of two things. First, if commonhold is hedged around with unnecessary special requirements, it will not prove popular; the need to sell the concept and to popularise it has been a recurring theme from Opposition Members at all stages of the Bill. Secondly, ample routes to the settlement of debt are available in law at present. The hon. Gentleman mentioned some of the problems with the routes available. The fact is that they are available in other areas of life, and we see no reason for commonhold to be given any special provision. Indeed, for the reasons that I have just stated, we believe that that could be damaging.
Amendments Nos. 77 and 78 are unnecessary. There will be detailed best practice guidance to directors and company secretaries of associations in due course. I assure the hon. Gentleman that we will consider whether it is necessary to spell out the matters that have been raised. Until that time, I hope that he will feel able not to press those amendments.
Mr William Cash (Stone, Conservative)
The Minister has said in his usual pleasant manner that under no circumstances will the Government take notice of what we are saying. I am equally obdurate in my determination to ensure that the Bill will be improved. We have made some progress and we have even more progress to come. No doubt we can all reflect happily on the fact that the Government's amendments in part reflect the deliberations in Committee and the representations that have been made, so the process continues to improve the Bill. However, in this particular case, I have every intention of dividing the House.
The Minister knew that this was coming. I noticed that there was a certain amount of discussion between him and the Under-Secretary, who will deal with the leasehold arrangements of the Bill. Some aspects of this issue will recur when we get on to those on Wednesday this week, but we intend to divide the House. We believe that we are right. Only time will tell.