This isn't the place for a family reunion

The Housing Bill proposal that grant be paid to developers and arm's-length managers has alarmed some registered social landlords. They fear that they will be at a competitive disadvantage because RSLs' regulatory regime is so much stricter than that for developers.

Take schedule 1 of the 1996 Housing Act, which regulates conflict of interest for board members and employees so they and their families cannot derive any "benefit" from their position in the RSL.

The intention is perfectly proper and the Housing Corporation can make general exemptions; so far there are nine exemptions, including modest gifts and non-contractual payments to chief executives. The corporation can also make special exemptions for particular contracts or benefits.

There are grey areas in schedule 1 that can affect companies contracting with RSLs. Strictly, the schedule applies to industrial and provident societies and non-charitable companies. It says RSLs cannot make any payment or grant a benefit of any kind to a business trading for profit in which a board member or employee is "directly concerned". This also applies to "close relatives" of staff and people who were board members or employees in the previous 12 months.

Who is a "close relative"? Who is "directly concerned in the management" of a business and what is a "benefit" anyway?

The guidance notes give the corporation's view and examples but, because schedule 1 is imprecise, the guidance is tendentious. On "close relative", the guidance lists people who "would be included", which suggests that this list is not exhaustive. The guidance also refers to "family" instead of "close relative" and "involved" rather than "directly concerned" in the management, which seems to widen the statutory language.

Drastic consequences
The consequences of a breach are drastic – if schedule 1 strictly applies to the RSL, a major building contract would be at risk because, unbeknown to both the RSL and contractor, an office junior in the former is the grandchild of a long-separated (but not divorced) middle manager in the latter.

So what is the risk? Here again, there is uncertainty. Is the contract void, which means the law says it never existed? If so, it must be questionable whether the corporation can make a special exemption to revive it. Or is it voidable, which means it is valid unless and until the RSL, either itself or acting under the direction of the corporation, terminates the contract for the schedule 1 breach?

A major building contract would be at risk because an office junior working for the RSL is the grandchild of a middle manager in the contractor

The latter must be the correct view, as it is difficult to see how a void contract can be retrospectively made valid by a special determination. For the innocent contracting party hit by a schedule 1 breach, the guidance on when the corporation will validate the contract seems to ignore the contractor's position and look only at the RSL.

For instance, one factor for refusal would be the corporation not being satisfied that the RSL has taken measures to avoid repetition. This is no comfort to the unwitting contractor that will have to go to court to seek restitution, which on a contract in breach of statute is not assured. Either way, restitution, recoveries of monies paid, liabilities of board members and senior staff would be a lawyer's dream ticket.

It's one rule for us …
Businesses contracting with a private sector company don't have to worry about an office junior's grandparents – it has to be serious fraud to upset a private sector contract. Arm's-length management organisations, too, are private sector companies even though they are wholly owned by councils. Even local authorities can self-certify the contract to protect the contractor.

From anecdotal reports, the problem of the unexpected relation is causing concerns to RSLs. The Housing Bill might be the opportunity to reconsider it. Schedule 1 and its guidance are designed to prevent abuse but it is more draconian than even requirements for charity trustees and its effects are severe.

Of course, to keep the playing fields level, the corporation could make it a grant condition that any grant recipient, including developers, should comply with schedule 1 but, since private companies have been brought in because it is believed they will be cheaper and quicker and their incentive is profit for which the directors get performance bonuses, that would not work.

One way forward may be a general determination that enables the RSL itself to give a certificate of compliance to protect the contractor. Corruption could be covered in the way local authorities do, by putting a specific termination clause in the contract.