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Baroness Farrington of Ribbleton: My Lords, the 20 minutes for questions are now complete.
Commonhold and Leasehold Reform Bill [H.L.]
4.43 p.m.
[Amendment No. 127 not moved.]
Clause 90 [Duties to give notice of contracts]:
Lord Kingsland moved Amendment No. 128:
- Page 46, line 8, at end insert--
The noble Lord said: In my submission, if this amendment does not become part of the Bill, there will be potential for injustice to the contractor party. Contracts will have to be renegotiated, and the landlord or contractor may be left with substantial claims or onerous liabilities as a result of non-performance or breach arising out of the actions or inactions of the RTM. For example, let us consider a cleaning contract which provides continuing services over a fixed period. The contractor has priced it on the expectation that the contract will continue for that period. The RTM may have other ideas but would be able simply to refuse to allow the contractor to continue and refuse to pay for services already rendered. As a consequence, the contractor may well suffer serious losses. He would seek to recoup those losses by suing the landlord management company, which is bound--
Lord Williams of Elvel: I apologise for interrupting the noble Lord, Lord Kingsland. Is he also speaking to the other amendments in the group, including his opposition to the Question whether Clause 90 stand part, or is he degrouping the amendments?
Lord Kingsland: At the moment, I am speaking to Amendment No. 128.
Lord Falconer of Thoroton: The group includes Amendments Nos. 128, 129 and 130 and the Questions whether Clauses 89 and 90 stand part. I assume that that is the area that we shall now debate.
Lord Kingsland: Is the noble and learned Lord suggesting that I am not addressing myself to Amendment No. 128?
Lord Falconer of Thoroton: No, I was simply indicating the contents of the grouping. The noble Lord appears to be saying that he is addressing only Amendment No. 128. If he will indicate what group he believes that he is addressing, that will clarify the issue.
Lord Williams of Elvel: The grouping starts with the Question whether Clause 89 stand part.
Lord Kingsland: I continue. I say again that the contractor may well suffer serious losses. He would seek to recoup those losses by suing the landlord management company, which is bound by the contract but has been statutorily deprived of the means to perform.
The other side of the coin concerns the contractor who takes the opportunity of the appearance of an RTM to break a contract which may have been entered into following approval by the LVT on the application of the tenant on the basis that, as the RTM is not a party to the contract, it cannot enforce it. The Contracts (Rights of Third Parties) Act 1999 is unlikely to be of any assistance as the RTM did not exist at the date that the contract was entered into. Such a contractor would hike his prices accordingly. Clearly there must be an opportunity to agree a parting of the ways or suitable variations while enabling and compelling the RTM to step into the shoes of the previous manager if no agreement can be reached.
Members of the Committee will recall that this and connected matters were debated at great length in the Grand Committee and, I believe, to a lesser extent on Report. The noble Lord, Lord Whitty, who spoke for the Government at the time, freely and honestly admitted perplexity in the face of the problem. If my memory serves me correctly, he said that he would reflect on the matter and perhaps return with some further thoughts on it. I do not know to what extent the Government have had such thoughts over the summer break. However, I hope that at least they will accept that there is a real problem here which requires more specific confrontation than exists on the face of the Bill. I beg to move.
Lord Goodhart: We and the noble Lord, Lord Kingsland, take very broadly the same view on this matter. It became apparent in earlier debates that there was a good deal of uncertainty about the effect on management contracts of the takeover of management by an RTM company. It appears that the Government assume that all management contracts will be terminated by frustration. It will of course then be open to an RTM company to enter into a new contract with the same supplier of services, but the RTM company may have to renegotiate the terms and the supplier may wish to discontinue the supply.
We believe that such an outcome is neither necessary nor desirable and that the correct principle to apply is that management contracts should be novated. That means that the RTM company should step into the shoes of the landlord. It is entitled to the services of the contractor party under the contract and it is bound by the obligations of the landlord under the management contract. Under the law, contracts cannot be novated without either the consent of the parties on the one hand or a special statutory provision on the other.
Our amendment and that of the noble Lord, Lord Kingsland, propose that there should be such a statutory novation. We see no reason why a contract to, for example, service a boiler in a block of flats, clean the common parts or maintain a garden, should be terminated by the switch in management from the landlord to the RTM company. That is potentially unfair to both sides. A porter or gardener who provided perfectly proper services, whether as an employee or an independent contractor, should not have his contract discharged by frustration. Equally,
However, we recognise--in this respect, our amendment may be preferable to that of the noble Lord, Lord Kingsland--that the landlord may have entered into what Americans describe as a "sweetheart contract", pending the transfer of management. For that reason, we believe that a limited right for the RTM company to cancel the contract is needed. We propose that that should be capable of being exercised where the contractual charges under the contract are excessive, where the services that are provided are not required or where the provider is not a fit person to provide those services, either because he lacks qualifications or perhaps because he may be too close an associate of the landlord.
Lord Williams of Elvel: I shall speak to Amendment No. 130, which is, so far as I am aware, part of the group that is before us. It touches on the same subject that the noble Lords, Lord Kingsland and Lord Goodhart, raised. We are concerned that the Bill's current wording does not make it entirely clear what would happen to existing contracts at the handover of management. The amendment is designed to state, to be frank, what I believe are the Bill's intentions.
Further clarification is also necessary in the case of frustrated contracts. We assume that the law of contract will enable contractors to recover frustrated commitments against capital expenditure. When the unexpired term of the contract includes recovery of the capital already expended, they will be able to do the same. I hope that my noble and learned friend will be able to respond positively.
Lord Falconer of Thoroton: This is an important issue, in relation to which three points of view are possible. The first, which is in the Bill, is that the normal law should take its course. The second view is espoused by the noble Lords, Lord Kingsland and Lord Goodhart, who, in slightly different ways, want to force the old contract on to the RTM. The third view is that of my noble friend Lord Williams of Elvel, who states that the arrangement should be null and void in every case once RTM has been passed or accepted as the way forward. I shall set out what I submit is the current position under the Bill and then deal with the conflicting propositions.
There was some confusion about this issue when it was discussed during the Committee stage of the previous Bill. Where a party to a contract is placed by events that are outside his control in the position of no longer being able to fulfil his obligations or role under that contract, the normal effect of contract law will be that that contract falls as frustrated. That is effectively what the noble Lord, Lord Goodhart, said. One such case is that in which the operation of law intervenes to prevent someone from being able to fulfil his part of a contract. Whether that will happen with RTM companies will depend on the facts of each case.
Leaseholders have the right to take over management, subject to having met the qualifying rules. A landlord will not be able to prevent a qualifying group from doing so. Acquisition of RTM is therefore a compulsory, not a voluntary, transaction. Furthermore, Clause 95(2) provides that, following the acquisition of the right, the landlord cannot continue to exercise any of the duties that have become "management functions" of the RTM company. Operation of law will therefore mean, for example, that the landlord will no longer be responsible for the maintenance of the property. Frustration may be the outcome. I do not of course suggest that that would necessarily be the position in each and every case. The application of the law of frustration and the law of contract generally will of course depend on the circumstances of the case.
Where a contract is frustrated in the circumstances that I have described, each party to that contract will have the right to recover moneys due to them under it 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 now be carried out. Neither party will have any right to seek compensation for any profits foregone or other such matters as a result of the frustration of the contract. We think that that is both right and fair.
The noble Lord, Lord Goodhart, suggested, during this Bill's Committee stage and during the previous Bill's proceedings, 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 that that will be the result of employment law, and particularly of the rules that relate to the protection of employment following the transfer of an undertaking--TUPE--rather than of general contract law. As my noble friend Lord Whitty said during the Committee stage of the previous Bill, nothing in the Bill overrides such employment rights; nor would we wish it to do so.
Whether a particular employee or contractor would pass to the RTM company depends on whether the acquisition of the right to manage constitutes a transfer of undertaking for those purposes. As noble Lords know, this is a complex area and the application or otherwise of TUPE will depend on the individual circumstances of the case. However, we are perfectly content that, when it does apply, the employment of the individual in question should be part of the right to manage the company.
The noble Lord, Lord Kingsland, asked today and during our debate on Tuesday what would happen to contractors, such as builders, who repair the property. Clause 94(5) makes it clear that repairs will be one of the management functions of the RTM company where the right to manage is acquired. That will be another function that the landlord will be debarred from continuing to carry out by virtue of Clause 95(2).
As for maintenance, contracts by which the landlord delegated his responsibilities for repairs would normally be frustrated. I also make it clear to the noble Lord that because repairs will be a matter for the RTM company once the right to manage is acquired, a repair contract of the kind that he described would be a management contract, as defined by Clause 89(2).
I have set out at some length what the Bill's current effect would be--it is important to do so. In effect, its current effect is that the normal law will apply to determine what happens to the contracts after the RTM company takes over.
I now turn to the individual amendments and shall begin with Amendment No. 129, which was spoken to by the noble Lord, Lord Goodhart. He took the view that all contracts should be novated, but without necessarily having the consent of all parties. Such an approach would, on the face of it, have some merits. It would ensure that the RTM company was supported from day one by a network of existing contractors, such as cleaners, gardeners, lift maintenance companies and so forth. At the same time, it would give existing contractors certainty that their services will continue to be required, at least, initially after the management of the block changes hands.
We also recognise that the RTM company will sometimes be perfectly happy to work with the landlord's contractor, and vice versa. Where that is the case, our Bill provides an opportunity for that to happen. Clauses 89 and 90 together make provision for notices to be served to ensure that contractors know that the right to manage is to be acquired and that the RTM company knows who those 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 under the contract, thereby allowing it to carry on after the acquisition of the right.
However, this is where we part company with the noble Lord. We do not want to force the RTM company and the contractors into a contractual relationship against their will, and that is the effect of the amendment. Amendment No. 128 in the name of the noble Lord, Lord Kingsland, similarly would require a contractor to carry on a contract if the RTM company will not agree to release him from it, as well as tying in an RTM company if the contractor will not release it. Again, we do not believe that that is the right approach.
There has been some discussion of what is right for the RTM company. We also have to consider what is right for the contractor. He will have contracted with the landlord, and may not want to carry that on, or at least not on the same terms, with the RTM company. We have to allow for that possibility, and to recognise that contractors also need to have rights in this situation to decide what is in their own best interests.
We believe that our approach strikes a fair balance in this respect. The machinery set up by Clauses 89 and 90 allows the contractors and the company to decide in advance of the RTM being acquired whether they
I should also add that to our minds the approach proposed by the noble Lords, Lord Goodhart and Lord Kingsland, would have one further disadvantage in practice. Under the right to manage, a third party appointed manager by the lease would lose the management responsibilities to the RTM company. As noble Lords will appreciate, that is essential in order for the right to manage to work. A third party may also, however, be appointed manager outside the lease as an agent of the landlord. The amendment would automatically preserve the contract of that manager, but not one appointed under the lease. That does not appear to us to be right. Therefore, we do not support Amendment No. 129 in the name of the noble Lord, Lord Goodhart, or Amendment No. 128 in the name of the noble Lord, Lord Kingsland. We also do not support any notion that Clauses 89 or 90 should not stand part of the Bill.
I turn to the amendment tabled by the noble Lord, Lord Williams.
Lord Williams of Elvel: Unless my noble and learned friend has resigned from the Labour Party, I am his noble friend and he is my noble friend, as the Companion states.
"(8) Unless the contractor party and the RTM 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 and not with the manager party, save that the RTM shall have no liability under it for breaches on the part of the manager party occurring prior to the acquisition date."
5 p.m.
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