HC Deb 09 February 1993 vol 218 cc858-78

(1) The price payable for a house and premises on a conveyance under section 8 above shall be the amount which would be payable for the house and premises pursuant to Schedule 5 to the Housing and Urban Development Act 1993 upon the assumption that the house and premises are specified premises and the valuation date for the purposes of that Schedule is the date when notice is given by the person acquiring of his desire to have the freehold.".'—[Sir Jerry Wiggin]

Brought up, and read the First time

Sir Jerry Wiggin

I beg to move, That the clause be now read a Second time.

Madam Deputy Speaker (Dame Janet Fookes)

I understand that it will be convenient to discuss at the same time the following: New clause 6—Purchase price (No. 2)—

'[]. In Section 9 of the Leasehold Reform Act 1967 there shall be inserted the following— 1(D) Notwithstanding the other provisions of this section the price payable for the house and premises shall be increased to take account of—

  1. (i) any diminution in value of any interest of the vendor in other property resulting from the acquisition of his interest in the house and premises,
  2. (ii) any other loss or damage which results therefrom to the extent that it is referrable to his ownership of any interest in other property, and
  3. (iii) provided that any examination in value shall be ignored to the extent that the loss or damage to the vendor which results from the acquisition of his interest in the house and premises is reduced by the imposition of restrictive covenants and easements.".'.

New clause 7–Price payable under enfranchisement—

  1. '-.(1) Notwithstanding any other provision of this Act, the price payable for the freehold and any other interest in property acquired under Chapter I or III of Part I of this Act (including any house and premises acquired under the Leasehold Reform Act 1967 pursuant to modification to that Act made by Part I of this Act) shall be the sum of:
    1. (a) the difference between the value of the freehold with vacant possession and the value of the purchasers' former leasehold interest or, in the case of collective enfranchisement, the aggregate value of the new interests to be held by the participating tenants and the value of their existing leasehold interests after deducting the value of any interest to be granted to the freeholder in accordance with section 32 and Schedule 8 (which provide for leaseback to former freeholders), and
    2. (b) any amount of compensation for loss resulting from enfranchisement payable under subsection (2).
  2. (2) Where the landlord or, in the case of collective enfranchisement, the freeholder or the owner of any intermediate leasehold interest will suffer any loss or damage (including loss of development value in relation to the specified premises) by way of:
    1. (a) any diminution in value of any interest in other property resulting from the acquisition of his interest in the specified premises or his interest in other property pursuant to section 1(2)(a) or (4) or section 18(4),
    2. (b) any other loss or damage which results therefrom to the extent that it is referrable to his ownership of any interest in other property,
    there shall be payable to him (and whether or not, in the case of a freeholder, the grant of a lease in accordance with section 32 and Schedule 8 has or could mitigate the loss or damage) such amount as is reasonable to compensate him for that damage.
  3. (3) In this section:
the new interests" means the interest of each qualifying tenant in the relevant premises after enfranchisement assuming that they jointly own the freehold and taking into account their potential ability to have new leases granted to them without payment of any premium and without restriction as to length of term.'

Amendment No. 25, in clause 28, page 37, leave out lines 28 to 31.

Amendment No. 27, in schedule 5, page 175, leave out from line 15 to end of line 38 on page 181.

Amendment No. 15, in page 175, line 44, at end insert— `( ) In addition to any sum payable by virtue of sub-paragraph (1), where, within the period expiring 5 years after the valuation date, the nominee purchaser or any person to whom the freehold is transferred grants or agrees to grant to any person other than a participating tenant a new lease in respect of any part of the specified premises at less than market value, he shall also then be liable to pay a sum equivalent to the difference between the market value of the new lease and the price paid or to be paid for it.'.

Amendment No. 28, in page 177, line 22, after the second 'the', insert `qualifying tenants assuming that they are all'.

Amendment No. 26, in clause 61, page 64, leave out lines 38 to 47.

Amendment No. 13, in page 64, line 44, leave out from `shall' to end of line 45 and insert 'be determined in accordance with subsection (ID) and (IE) below

(ID) Notwithstanding any other provision of this Act, the price payable for a house and premises to which this subsection applies shall be the aggregate of—

  1. (a) the value at the relevant time of the freehold to be acquired by the purchaser less the value of his existing interest in the property,
  2. (b) any amount of compensation for loss resulting from enfranchisement payable under subsection (IE) below.

(IE) Where the landlord will suffer any loss or damage (including any loss in value of an interest in premises which is attributable to the possibility of demolishing, reconstructing, or carrying out substantial works of house and premises) being loss or damage by way of—

  1. (a) any diminution in value of any interest in other property resulting from the acquisition of his interest in the house and premises,
  2. (b) any other loss or damage which results therefrom to the extent that it is referable to his ownership of any interest in other property,
there shall be payable to him such amount as is reasonable to compensate him for that damage.'.

Mr. Jopling

On a point of order, Dame Janet. It occurs to some of us that the later grouping of amendments headed by No. 14 could be taken with this group. If that is convenient to the House, it would be helpful in the interests of progress.

Madam Deputy Speaker

That is all right so far as I am concerned, but I am in the hands of the House. If all are agreed, then, we will also discuss the following amendments: No. 14, in schedule 5, page 175 line 41, leave out from first 'the' to 'marriage'.

No. 16, in page 177, leave out lines 7 to 16.

No. 19, in schedule 12, page 200, line 21, leave out from first 'the' to 'marriage'.

No. 20, in page 201, line 25, leave out sub-paragraph (1).

Sir Jerry Wiggin

At the start of the Bill's progress through the House, I drew the attention of my right hon. and learned Friend the Secretary of State to a major anomaly—the fact that the provisions in clause 28 and schedule 5 give leaseholders the right to make windfall gains at the expense of the freeholder.

I argued that, unless the provisions are amended, they will amount to the expropriation of private property. I believe that they have no place in a Conservative Government's programme. The 1992 Conservative party manifesto committed the Government to extending home ownership. It offered residential leaseholders the right to acquire. Instead, this Bill gives any investor the right forcibly to acquire the assets of another investor.

The hon. Member for Greenwich (Mr. Raynsford) read to the House a list of the tenants in a street in his constituency. I beg his pardon if I have not got it precisely right, but it was a strange list of leaseholders who will benefit as a result of the Bill. It is nothing to do with the wretched leaseholder harassed by the wicked landlord which we heard about earlier. I was rather surprised by the hon. Gentleman's remarks, considering that he spoke on that amendment and the one by which such fortunate companies and others will be precluded from gaining the advantage of enfranchisement.

Clearly, the Bill's provisions are confiscatory. They originate from the commendable concerns which have been expressed by Conservative Members and which I mentioned during debate on an earlier clause.

I know that my hon. Friend the Member for Kensington (Mr. Fishburn) has been prominent in the defence of leaseholders in London and is much admired by hon. Members on both sides of the House for his single-minded concerns for those tenants. He is aware that I shall refer to a letter which he wrote to Daniel Smith and Partners some three years ago, in which he said: There would be no element of compulsion". He was discussing a Bill on leasehold reform proposed by the then Lord Chancellor. With proper indignation, he wrote: Such provision would have been confiscatory, anti-Tory,another piece of state bossiness in Britain's property laws, which is the last place it is needed. I am distressed that those commendable and excellent views should have altered somewhat in the past year or two.

Mr. Fishburn

I am delighted that my hon. Friend reads my correspondence so carefully. Late at night when I answer letters, I shall note that I have one more keen reader. The remarks that I made at that time were to do not with leasehold reform but with commonhold reform. When the commonhold Bill is introduced, as it will be by the Government next year, there will be no element of compulsion in it.

Sir Jerry Wiggin

It would have been much better if the supporters of the Bill had waited for the promised legislation, which, I am glad to hear, my hon. Friend the Member for Kensington will steer through the House, presumably with the co-operation of the Government of the day.

One of my complaints about the Bill is the major change effectively in eliminating leaseholds. My right hon. Friend the Minister of State said that the object of the Bill was to eliminate long leaseholds, although there appears to be a slight difference of opinion in the Government as to precisely how long and how definitive such an objective might be.

I diverge from the purpose of new clause 5, which deals with the amount of compensation to be paid after the Government have forced the freeholder to sell his rights to the leaseholder. Investors have the right, first, to buy properties which are not their homes; secondly, to force freeholders to sell properties at a discount; thirdly, to exercise the right of expropriation at any time in the future. That will enable investors to make windfall gains from a resale of an asset which has been forcibly confiscated.

On 12 November 1992, my hon. Friend the Minister of State conceded in Committee: the tenants will have forced the sale and determined its timing".—[Official Report, Standing Committee B, 12 November 1992; c. 73] On 19 November 1992, he said that the leaseholder will receive an asset worth more than the price paid. Surely that admits our contention. As the Bill gives those persons the right to expropriate property at a time of their choosing, my hon. Friend's proposals for compensation are, by definition, inadequate. After all, the forced sale of the freehold is being upheld by the law. Therefore, there can be no willing seller, even though there may be willing, even eager, buyers. I am not surprised that that should be the case, given the profit which will accrue to them.

In Committee, the Government argued that clause 28 and schedule 5 provide a valuation based on the normal market practice. The forced sale of assets, upheld by the law, is not in anybody's fair mind normal market practice. However, it is current practice for leaseholders and freeholders, in negotiation, to take into account the potential gains to be made by the leaseholder. The gains that could be made will vary with the length of the lease. I have heard figures quoted as high as £275,000 on a property in Mayfair with a lease of, say, 30 years unexpired, and a freehold vacant possession value of £1.5 million.

My hon. Friend the Minister told the House that his Department had tried to ask what would happen if the freeholder wanted to sell and the leaseholders wanted to buy. What price would they agree on voluntarily?"—[Official Report, Standing Committee B,19 November 1992; c. 188.] That is all very well, but it does not reflect the reality of the Bill, which is that the freeholder will be forced to sell.

My hon. Friend said that, in drafting the clauses and schedules, the Government tried to build into the statute a formula which would reflect what happens in a transaction between a willing buyer and a willing seller. At the same time, the thrust of this legislation is to force, and then uphold in law, a transaction between an unwilling seller and a very willing buyer. The anomaly at the heart of the Bill is that the Government are forcing a sale. My new clause and amendments seek to correct that anomaly and to provide for as fair compensation as is possible in the artificial property market created by the Bill.

I tabled the amendments not simply in defence of the interests of freeholders but in a broader defence of the property market. To quote my hon. Friend the Member for Kensington, this piece of state bossiness is already disrupting the property world and deterring investors from a market unique in the western world for its lack of flexibility in housing tenure.

At the beginning of the century, rented property made up for 90 per cent. of the property market. Today we differ from the United States and all other European countries in having a property market in which only 7 per cent. of all properties are to rent.

6 pm

The flight of investors from the rented sector was brought about by state interference. The Bill is already deterring investors. Only fair and adequate compensation will encourage them to maintain their interest in housing investment.

I appreciate that the terms of the amendments are complicated and technical, but the concept behind them is simple: to ensure that the compensation is based on the difference between the value of the lessee's interest before he or she acquires the freehold, and the value after. In other words, my amendments will provide for the lessee to pay as compensation for the forced sale the full increase in the value of the property arising from enfranchisement. When a landlord grants a long lease on any property, he effectively gives up some of that value in return for retaining the freehold—a fact which everyone has always recognised in the history of leasehold, yet Which is being blindly ignored on the specious argument that there is no choice.

The Government propose a formula which will not provide for the landlord to get back all that value. It provides for the increase in value arising from the combination of freehold and leasehold known as the marriage value, to be shared between the lessor and the lessee, with not less than 50 per cent. going to the freeholder. That has been interpreted in some quarters as meaning that a 50:50 split should be the norm, but as my right hon. Friend said, the leaseholder would receive an asset worth more than the price paid.

At the same time, the Bill is effectively giving the right to enfranchise to those with very high-value houses excluded by the 1967 Act, and again there will be some fairly substantial windfall gains to lessees.

It appears that the new model Labour party, far from squeezing the rich, is now happy to approve the parts of the Bill that make some of the rich richer still. Conservative Members see no reason why leaseholders should benefit at the expense of freeholders, particularly as a very large number of charities and so on are involved, and we have already debated the merits of those cases. These gains are particularly unacceptable under the conditions of a forced sale.

I know that the Royal Institute of Chartered Surveyors will be dragged into the debate. I understand that it recently wrote to the Department clarifying its position. Mr. Michael Chambers of the RICS makes it clear that it would be wrong for legislation to begin from a premise that a 50:50 split will be the norm". The leasehold valuation tribunals will be resolving any disputes about the allocation of marriage value, and it is the view of the RICS that there will be cases in which all, or virtually all, the marriage values should go to the freeholders, as currently happens in market practice. They should, but will they? That is the question.

I move the amendment in the spirit of accepting the Government's underlying principles of increasing home ownership, but I believe that the compensation clause is a major anomaly in the Bill, to which I object more than I do to the general principle.

Mr. Kenneth Baker (Mole Valley)

Our debate on the valuation of leasehold property under enfranchisement is one of the most important this evening. To say that the law relating to such valuation is complicated is a meiosis. I am sure that my right hon. and hon. Friends on the Front Bench know what a meiosis is—it is not something to which the Government are given; it is a wild understatement. We are dealing with an immensely complicated and arcane subject.

When one attempts to understand the complexity of the legislation on valuation it reminds me of the famous comment that Palmerston made about the Schleswig-Holstein question in the middle of the last century when he said that only three people understood it: one was a German who had been committed to a lunatic asylum, the second was a Danish professor who was dead and the third was himself and he had forgotten about it. I shall try to do a little better and attempt to explain to the House why I have certain reservations about the Bill.

I am not concerned about the principle of the Bill, which is that there should be an extension of leasehold enfranchisement, although I appreciate that some of my right hon. and hon. Friends strongly oppose that principle, but when the Government undertake to introduce a measure that is a means of setting aside agreements that have been freely entered into according to the laws prevailing at the time, and retrospectively set them aside, it is up to the House to ensure that the victims of that action are properly compensated.

I have in mind a particular case involving one of my Constituents whose estate has been in the family for some 400 years. One of the houses was let on a lease some years ago, and he had hoped to return it to the use of the family when the lease expired, but, of course, that will not now be possible. I can understand his considerable annoyance at the proposals in the Bill. Such annoyance can be met by proper compensation.

I shall now deal with houses and the three types of valuation that relate to them. First, there are the houses affected by the 1967 Act which I shall call the 1967 houses; then there are the 1974 houses, which are those affected by the 1974 Act, and then there are the 1993 houses, which come under the Bill.

The basis of valuation for the 1967 houses under the original 1967 Act was that the right to enfranchise was given to those with a rateable value of below £200 in the country and £400 in the town and the basis of valuation of those properties for lessees who wished to enfranchise was described as an investment value, which did not bring in the concept of the marriage value. That was a very good deal for the leaseholder and many people will know of examples in which property was bought for a very small sum and sold on for a substantial profit shortly afterwards.

The 1974 valuation introduced a new concept. First, it extended the ratable value to £750 in the country and £1,500 in the town and the valuation tribunal was allowed to take into account the tenant's bid for the freehold value; therefore, the tenant was given an opportunity to marry his investment in the tenancy with the freehold, and the landlord was allowed a share in that. That was the introduction of the concept of the marriage value.

The houses that will be enfranchised under the Bill will be valued on the same basis as provided in the 1974 Act. So we shall have two bases of valuation for houses on franchise under the present system when the Bill becomes law—the 1967 valuation and the 1974 or 1993 valuation.

The treatment of flats is yet another concept of valuation. Of course, flats are brought within enfranchisement provisions for the first time under the Bill. Schedule 5 lays down the basis of valuation for flats. As those who have been following the Bill closely will know, schedule 5 has three elements. First, there is the investment value, which, in shorthand, approximates to the 1967 type of valuation. Secondly, there is the freeholder's share of the market value, which is part of the 1974 legislation. Thirdly, there is an allowance for injurious affection. That is an allowance for the fact that the value of the remaining property surrounding or next to the property that has been enfranchised may be reduced as a result of the enfranchisement.

The best way to understand the schedule is by giving an example. If the market value of the property was, say, £100,000, the investment value, for the sake of argument, may be £10,000. The freeholder share will be, let us say, £70,000—therefore, amounting to £80,000. The difference between £80,000 and the market value of £100,000 is known as the marriage value. As the Bill says, at least 50 per cent. of that should go to the freeholder.

I have tried to explain to the House that there is an inconsistency between the processes of valuation for houses and flats. The valuation for flats is as I have just described. The valuation for houses starts with the 1967 houses with very low valuation. Some of the amendments seek to include the 1967 valuation in what I shall propose in a moment. I would not seek to do that. Some would say that after 25 years people have had a chance to enfranchise their properties, and, if they have not, they should come on to the new basis. My right hon. and learned Friend the Secretary of State will be pleased to know that I am not arguing that tonight. I am arguing that the basis of valuation for houses and for flats should be the same. That is the purpose of new clause 6.

New clause 6 creates only one basis of valuation for flats and houses. It seeks, first, to incorporate the concept of injurious affection into the valuation of houses. I hope that my right hon. and learned Friend will find that acceptable. I do not see what arguments he can use to say that one can apply the principle to flats and not to houses.

I also hope that my right hon. and learned Friend will be able to accept the principle that flats and houses—by houses I mean the 1974 as well as the 1993houses—should be valued on the same basis as flats. Again, that is part of the principle of new clause 6.

Like my hon. Friend the Member for Weston-super-Mare (Sir J. Wiggin), I wish to refer to the letter from the Royal Institute of Chartered Surveyors. When some of us have argued that when enfranchisement takes place the freeholder should be entitled to the market value—which would be, in effect, 100 per cent. of the marriage value —we have been told two things. First, we were told that the RICS was not arguing the point. Secondly, we were told that the basis that hitherto the Government had tried to defend was the basis for valuation for compulsory purchase. I do not find either argument convincing. I particularly do not find the latter argument convincing.

As my hon. Friend the Member for Weston-super-Mare said, the RICS has now written clearly about the matter. I noticed that my right hon. and learned Friend the Secretary of State was nodding when my hon. Friend read out what the RICS said. Perhaps I could encourage my right hon. and learned Friend to nod further. It said: Under the Bill, any disputes about the allocation of the marriage value will be resolved by the Leasehold Valuation Tribunals. I hope that my right hon. and learned Friend will nod. He nodded earlier. It continued: It will be essential that in reaching their decisions they draw on evidence on what is the current practice in the market rather than begin from a premise that a 50–50 split would be the norm. Another nod. The clearer that this could be spelt out in the Bill, the better. Ah, another nod. That encourages me. It means that we have a listening Government, or at least I hope that we have. [HON. MEMBERS: "A nodding Government.") That is as good.

Mr. Jopling

They were nodding off when they drafted the Bill.

Mr. Baker

No, that is unfair. I am not against a nodding Government so long as they nod to proposals from Conservative Back Benchers and not proposals from the Labour Front Bench.

My right hon. and learned Friend the Secretary of State is nodding again. I hope that what I have said has shown the House that changes are needed. There is genuine anxiety among many people that if contracts freely entered into under the existing legislation are to be set aside retrospectively, the compensation should be the proper market value. I do not seek more than the market value. Some amendments propose that compensation should be the marriage value plus injurious affection.

However, it is reasonable for my right hon. and learned Friend to accept the arguments that when the valuation clauses are amended—I suspect that they will be amended not tonight but in another place—two principles should apply: first, flats and houses should be valued on the same system; secondly, there should be an allowance for injurious affection for houses.

6.15 pm
Mr. Raynsford

We have heard some nonsense this evening, especially in this debate. The suggestion that extensive expropriation of unfortunate freeholders is about to take place is one of the most nonsensical arguments advanced by those people who seek to tighten the Bill to make it entirely ineffective.

Let us think about the circumstances in which most freeholders, and especially some of the large estates, operate. They have owned the land for several centuries. During that period they have been able to extract from leaseholders repeatedly virtually the entire value of the site that has been subject to the lease.

As leases have expired and been renewed, the freeholder has derived a huge premium for extending the lease. During that period the leaseholder has been liable for the maintenance and upkeep of the property and has had to keep it in decent condition, thereby contributing to the increased value.

When Conservative Members suggest that a measure to allow leaseholders to acquire at market value the freehold of the property is expropriation of the freeholder, Opposition Members are astonished at the gullibility of the dukes' men on the Conservative Benches, who have been persuaded by powerful interests to go along with that specious nonsense. Freeholders have lived off the fat of the land for long enough and it is time that the archaic system of leasehold tenure, which is dead everywhere in the world except Britain and one or two other countries, was swept away.

Mr. Alan Duncan (Rutland and Melton)

How can the hon. Gentleman say that the freehold will be bought at market value when it is widely admitted that the measure puts an immediate capital gain into the hands of the leaseholder?

Mr. Raynsford

I am grateful to the hon. Gentleman for that intervention, because it allows me to explain what is involved in the valuation procedure, which seems to me unduly generous to the freeholder, As the hon. Gentleman will know from studying schedule 5, three elements are involved. The first is the value of the freeholder's interest, which will be paid to the freeholder. I accept that. But the second is the freeholder's share of the marriage value. The marriage value is the enhanced value of the property as a result of bringing together the freehold and the leasehold. That is a windfall gain, if there is any. It is a windfall gain which is owed neither to the freeholder or the leaseholder because it arises purely—

Mr. Roger Evans (Monmouth)

Will the hon. Gentleman give way?

Mr. Raynsford

I hope that the hon. Gentleman will bear with me a moment. I am trying to answer the point made by his colleague. I know that he is impatient, but I should like to complete my response.

Mr. David Evans (Welwyn Hatfield)

Get on with it.

Mr. Raynsford

I am responding to an intervention from one of the hon. Gentleman's colleagues. He might have the decency to wait until—

Madam Deputy Speaker

Order. Some of the sedentary remarks are less than charitable.

Mr. Raynsford

Like the lettings policy of some charities.

The windfall gain, in so far as there is one, is, according to the provisions of the Bill, to be shared equally between the leaseholder and the freeholder. That seems to me to be possibly the fairest way of deciding it, but by no stretch of the imagination can this be described as a windfall gain for the leaseholder, because the freeholder is going to get an equal proportion.

Then there is the third element, of injurious affection, to which the right hon. Member for Mole Valley (Mr. Baker) referred. I have to say to him that a completely different circumstance applies to houses from that which applies to flats. It is absurd to suggest that it applies to houses. The freeholder of a flat will be entitled to compensation for any loss he may be able to claim that he has suffered as a result of this process.

So, from the Labour side, the terms look extraordinarily generous to freeholders, many of whom will have received, over many years previously, the full, if not more than the full, capital value of the property on which they are now to get an additional bonus. It seems to me to be unduly generous, if anything, to the freehold interest, and the suggestion that it is expropriation is utter nonsense. I hope that the Government will resist these entirely unjustified and specious arguments.

Mr. Roger Evans

It is always refreshing to have a particularly poignant example of old-fashioned primitive socialist prejudice. The hon. Member for Greenwich has just indulged in one of the more shameless exercises of socialist primitivism. Whether a piece of land was bought 250 years ago or five years ago, in the case of compulsory purchase for public purposes it would be treated, rightly under the rule of law, which some Labour Members appear to regard as evident frivolity, as equal. If one takes a person's property for a public purpose it is irrelevant whether one is a duke or whether the property was acquired yesterday or several hundred years ago.

The issue of public compulsory purchase has always been guarded by the House with the utmost jealousy, and properly, because it is fundamental to the rule of law. This group of amendments goes to the fundamental issue of political morality. The principles of public compulsory purchase, traditionally, whether going back to building canals in the 18th century or dealing with modern local authorities exercising general statutory powers, are as follows: that there is a specific proven public purpose for the aquisition; that no more is taken than is necessary for that purpose; and that full compensation is given. That is what the rule of law is all about. It is fundamental in this country. It has only been in time of war, with requisitioning and matters like Crichel Down, that that fundamental constitutional principle has been removed.

In the present Bill, the Government are in effect setting up by statute a scheme of private compulsory purchase of real interests. There was one previous example of this on the statute book—the 1967 Act—but the fundamental difference between that legislation and this is that, under the 1967 Act, the class of persons benefiting was carefully defined in such a way that a social purpose could be said to be served by the legislation.

If the present Bill creates a situation in which charities may be expropriated by foreign companies, simply by the accident of the general scheme, it is even more important that the compensation provisions for this scheme of private compulsory purchase should be at least as generous as for ordinary compulsory purchase for public purposes. The two cannot, as a matter of general principle, be considered separately or treated in any way differently.

I appreciate that the intellectual Jacobinism of my hon. Friend the Minister of State is fundamental to the principle that there must be leasehold enfranchisement, but if one goes down that path without full compensation, why should one stop where the Government have stopped now? I know that Labour Members will ask why, if leasehold tenure is obsolete, ordinary Rent Act tenants should not be given rights to acquire compulsorily against freeholders. I can see the argument, but fundamental to that proposal is that any adjustment to property rights must be done with full compensation and for a public purpose.

I conclude with this commendation to my right hon. Friends. They will recall that the 1967 Act was challenged years later in the European Court of Human Rights on the grounds that it was a breach of article 1 of the first protocol. There may be those in the House who believe that the European convention on human rights should be part of our law or should take precedence over the will of Parliament. I am not in that category. What I am anxious to do is to prevent my right hon. and hon. Friends from any subsequent embarrassment.

The justification for the European Court's decision was that the public purpose which justified the 1967 Act was the peculiar class of beneficiary. There was a social purpose. Where there is no social purpose of a specific nature, but simply an arbitrary rearranging of property interests, it must follow that full market compensation should be given for compulsory purchase. On that basis I commend this group of amendments.

Mr. Nicholls

This group of amendments gives an opportunity to my hon. Friends to resolve the dilemma to which I referred earlier: how on earth a Conservative Government can expropriate property belonging to somebody else. It does not matter for the purposes of the dilemma whether they are paid the full market amount or not. It will be no defence for Dick Turpin to say, when tried at the assize, "I offered them full market value for their jewellery before I took it and they declined it." In the old classic definition, it would still be theft.

The problem that my right hon. and hon. Friends have to resolve is that there is a conflicting balance of Conservative interests. They conflict because we are in the business of taking away the property of people when they do not want to part with it. It does not much matter for those purposes whether one is a duke or a dustman, or even, dare I say it, a Minister. There is a dilemma and it has to be resolved. Fortunately, there is a way to resolve the dilemma, and that is by making sure that a proper rate of compensation is paid.

I do not particularly concern myself that these amendments are complex. I accept that they are and, as a lawyer, I look forward to that with great relish. The point is that even behind those difficult amendments lies a straightforward purpose: to make sure that a proper level of compensation is paid. The sad thing is that presumably the principle is agreed between the people who signed this amendment and Ministers. That has been clearly understood because, at the outset, the Government said that they were not in the business of allowing people to acquire property at a discount.

As long ago as 6 March 1992, the then Under-Secretary for the Environment, my hon. Friend the Member for Suffolk, South (Mr. Yeo), said: We do not intend that through this legislation leaseholders should be able to acquire assets at a discount"—[Official Report, 6 March 1992; Vol. 205, c. 583.] That was a considered and measured statement. I have not listened to the tapes to see whether that was a throwaway remark by the Minister at the time, but I doubt whether it was. I have a distant memory that it was a familiar house style, and a well-considered statement of Government intention at the time, that property should not be acquired at a discount.

Indeed, my right hon. and learned Friend the Secretary of State, when he opened the Second Reading debate, said: I contend that the Bill provides for proper compensation". So it was admitted and acknowledged that proper compensation would have to be given. My right hon. and learned Friend went on:

As for compensation, the leaseholders will pay a fair market price for their landlords' interest."—[Official Report, 3 November 1992; Vol. 213, c. 154.] I heard it advanced in support of the way in which the Bill provides for compensation that it is a fair market price. It may aim to be so, but it is complete nonsense to talk about a fair market price in the context of a forced sale. A market price is a price agreed by two people when one wants to buy and the other wants to sell. In an imperfect world, there will sometimes be a disparity in the bargaining position, but forcing one person to sell must introduce the ultimate disparity. In such circumstances, it is impossible to talk about the market; all that can be discussed is a fair price.

Ms. Glenda Jackson

The Government introduced the Bill because the basic premise to which the hon. Gentleman refers—relating to fairness and rights—did not exist. That was the basis for the Bill. It was needed only because landlords refused to issue any kind of lease other than a leasehold.

6.30 pm
Mr. Nicholls

Not only do I not understand that point; I am not sure that the hon. Lady understands it either. The reason for the legislation is straightforward and was set out in the Conservative party manifesto. It was all about giving a right to residential home owners. The amendments that we are discussing concern the compensation that should be paid.

It has been said before—no doubt it will be said again in the wind-up speech—that what is being suggested is at least fair, although it is not a market price because no such price can operate in this context. I have even heard it said —although I cannot believe that I shall hear it said today —that it is not a windfall profit, because it arises from market forces. It does not; it arises specifically from the Bill. I have also heard it said that it is not a discount. The fact is that property acquired from an unwilling seller is instantly worth more than the buyer has paid. That is a discount, whatever people may prefer to call it. The amendments aim to ensure that there is no discount and that the level of compensation relates to the value of the property at the time of its acquisition by the new owner.

I am grateful to my hon. Friend the Minister of State for the time and courtesy that he has expended in talking and writing to me on this subject. I hope that he will not consider it a breach of confidence if I cite one of the arguments that he has advanced to me over the months. He has said, effectively, "See my problem: I am pulled in both directions." Indeed he is, as I would expect him to be.

The debate has shown very clearly that our reasons for embarking on this legislative road are not the reasons espoused by the revisionists manques on the Opposition Benches. We are in the business of doing something for residential home owners. For instance, the hon. Member for Greenwich (Mr. Raynsford), who produced the most articulate but also the most bizarre exposition of Opposition thinking, is not in the business of helping residential home owners; he is in the business of attacking and divesting dukes.

My hon. Friend the Member for Monmouth (Mr. Evans) spoke of a possible extension of the legislation. The true socialists on the Opposition Benches were nodding away: they know where the legislation could lead. There is no question of our being able to resolve the legislation on the basis of being pulled in two directions; there is always a ready market for the acquisition of property at less than the full market value. Any self-respecting fence knows that.

If we are to try to resolve the dilemma and to work out how we can adhere to our Conservative principles without breaching one of the most important of all, there is no point in our taking any aid or comfort from the arguments of Opposition Members. We may need their votes tonight; that is one of the occasional embarrassments of being in government. But, in trying to resolve the dilemma, the Government should look behind them and ask what their Conservative supporters want. They should not abandon the legislation; they should ask what was their original policy objective.

The objective was to help residential home owners, not to enable people to acquire property at a discount. That presents a fundamental problem which accepting the amendments—or, at least, the principle behind them—would help the Government to resolve.

Dame Jill Knight

I strongly agree with what was said by my hon. Friends the Members for Monmouth (Mr. Evans) and for Teignbridge (Mr. Nicholls). I urge the Government to accept that the Bill is occasioning a great deal of anger, distress and worry among Conservative Members.

I have always detested compulsory purchase, which is opposed to all the principles in which I believe. I recognise that, in some circumstances, it may be necessary for the public good; 1 also accept that, on occasion, tenants in leasehold properties have suffered—for instance, when the owners and managers of blocks of flats have imposed unfair service charges. That applies to many of my constituents. What I cannot stomach, however, is the House of Commons forcing a private person to proceed with a sale to another private person, although the seller does not wish to negotiate that sale. I ask my right hon. and learned Friend the Secretary of State to make clear the Government's intentions to those of us who have grave worries.

My right hon. and learned Friend has outlined a lengthy catalogue of reforms. I am worried about what was said by my hon. Friend the Member for Monmouth. I cannot see any reason why, if all the arguments adduced today are accepted, we should not move on to allow private tenants to buy their houses or flats from unwilling landlords. Although I think it entirely right for council tenants to have such rights—so does the Labour party now; Labour Members had better listen to this—I feel that, unless we recognise the real need for a privately rented housing sector, we shall be in deep trouble. Unless we understand that we must play fair with owners—whether they own leases orproperties—I can see myself voting against the Government.

Sir Peter Hordern (Horsham)

I will not detain the House for long. I had not intended to speak on this group of amendments and my right hon. and learned Friend the Secretary of State will know what I am going to say, because I have already told him.

As my right hon. and learned Friend knows, I am not happy about the Bill. In particular, I am unhappy about the provision of insufficient compensation. I was struck by my hon. Friends' speeches about that and I think that my right hon. and learned Friend will have to advance careful arguments if he is to counter what they have said.

When I first came to the House, my party was in opposition. We opposed a measure presented by the then Government concerning compensation for the assets of the Burmah oil company. We opposed it partly on grounds of retrospection, but principally because the compensation was inadequate. On both those grounds, the amendments need to be considered carefully.

The point that I wish to make to my right hon. and learned Friend—indeed, I have already put it to him—was more or less resolved in a letter that he wrote to me about one of my constituents, who happens to own a house that has been in his family for some time and which he lets, on lease, to the Foreign and Commonwealth Office. I believe that it is quite well known to some of my right hon. and hon. Friends. In theory at least, the Government are now in a position to buy the house, which the family has owned for some 250 years, at a discount.

If the compensation were adequate, there would be no major concern about the matter, although my constituent is anxious not to sell the house. The point that concerned me—I think that it also concerned my right hon. and learned Friend—was that, had it not been for a technicality, the Bill would have allowed the Government to buy the house at a discount from the market price. That would have been nationalisation at a discount.

It is some time since a Minister resigned over such matters. Years ago, Ministers used to resign on issues such as Crichel Down. I have made the point not for the merit of the case. The Minister has persuaded me that the lease on that house was one year too short for the Foreign and Commonwealth Office to have exercised its right to buy the freehold. So my constituent's problems do not arise on the group of amendments before the House. But imagine had it been one year longer: the Government could have nationalised one of my constituent's properties. While that may not be the case, it does not say much for the nature of the Bill in that it would have represented compensation at well below the market price. I hope that the Minister appreciates the depth of feeling that exists on the Government Benches about compensation at less than market value.

Mr. Howard

The amendments and the new clauses relate to compensation, although the debate has ranged more widely than that. I hope that my hon. Friends who were not here for the debate on the earlier group of amendments will forgive me if I do not go over the ground that I have traversed then, when I explained how this reform fitted into a long tradition of Conservative Governments reforming land tenure.

I shall answer at the outset my right hon. Friend the Member for Horsham (Sir P. Hordern) who, uncharacteristically, was a little unfair in suggesting that the constituency case to which he referred came outside the scope of this legislation as the result of a technicality. It was not simply the fact that the term of the lease was shorter than that which would have brought it within the Bill. Indeed, it is a different kind of lease from that to which this legislation applies. It was not a residential lease, so there are a number of fundamental reasons—I appreciate the concern that my right hon. Friend would have had if it had come within the terms of the Bill—why the description "technicality" should not be applied to that case and why the case does not come within the scope of this legislation.

My right hon. Friend the Member for Mole Valley (Mr. Baker) introduced me to the concept of meiosis. I confess that the concept was previously unknown to me. He was kind enough to define it as "wild understatement" and said that it was not a concept to which the Government were given. It is a condition to which my right hon. Friend is something of a stranger, but I was grateful for his contribution and I hope that my remarks will be of some comfort to him and a positive response to his comments.

I was grateful for the solicitude of my hon. Friend the Member for Monmouth (Mr. Evans), who sought to prevent me from appearing before the European Court of Human Rights at a future date. Should that happen, I hope that my hon. Friend will make his services available to me. He ended with a plea that the basis for compensation under the Bill should be the same as that provided under compulsory purchase. The answer is that it is, though I appreciate that that does not satisfy others of my hon. Friends, and I hope to ally at least some of the anxieties as I respond to the observations of my right hon. Friend the Member for Mole Valley.

The amendments seek to increase the price paid, whether by lessees of houses who are already entitled to buy their freeholds by the 1967 Act or the 1974 Act extension, or long lessees of houses and flats, who will gain the right of enfranchisement for the first time under the Bill.

6.45 pm

The House must address difficult and important issues about valuation, and it may be helpful if I describe the evolution of the proposals in the Bill. When long leaseholders of low-value houses who were paying a low rent became entitled to enfranchisement under the 1967 Act passed by the Labour Government, the price was very low. As my right hon. Friend the Member for Mole Valley pointed out, they had to pay only the open market value of the freeholder's interest in the land, which would have been less than the price for which it could have been sold to a third party.

Labour's policy intention, which the then Conservative Opposition always opposed, was confirmed by the Housing Act 1969, which added a statutory assumption to the valuation provisions in the 1967 Act to the effect that the tenant was not buying or seeking to buy, and that reversed a judicial decision which had the opposite effect by assuming that the tenant was in the market.

Understandably, that was popular with tenants. But we did not accept that it represented an arrangement that was fair to both parties to the transaction. We opposed the 1967 measure on Second Reading, as it was unfair to the landlord. During the passage of the Housing Act 1974, under a later Labour Government, the Conservative Opposition successfully moved an amendment to the 1967 Act to bring medium-value houses within its scope. That amendment was moved on the basis that the price had to take into account the fact that the tenant had a special interest in buying, so that his bid for the freehold was likely to be higher than that of a third party.

That basis of valuation has proved much more acceptable and has worked well in practice for nearly 20 years. It is the basis which we now have for the enfranchisement of medium-value houses. It is a valuation basis which the tribunals dealing with such matters have become well accustomed to interpreting, and it reflects what actually happens in the market. It does not provide statutory favouritism.

When we considered the extension of enfranchisement rights to the relatively few leaseholders of ineligible houses under the earlier legislation, and the 750,000 or so long leaseholders of flats, there was no doubt that they should have to pay no more and no less than the market value of their landlords' interests. The existing legislation delivers that objective. For flats, we have spelt out the way in which marriage value should be calculated and divided. It is not a change in policy. It enables the parties to understand more fully the basis on which the valuation is derived.

We have provided that the price paid to the landlord should comprise the sum of three elements identified by valuers. Those are the open market value of the landlord's interest, at least half the marriage value and compensation for any severance losses. The first two elements add up to the price paid by tenants of medium-value houses—we are just specifying them separately—and naturally, as under the 1974 amendment, tenants must also pay all reasonable landlords' costs.

The first element, open market value, represents the price that the landlord could receive from a third party purchasing the property as an investment. It is fairer than the original valuation basis applied to low-value houses by the 1967 Act because it takes into account the value of the buildings as well as of the land.

Most of the amendments with which we are concerned affect the other two elements. Marriage value is the difference between the aggregate of the values of the freehold and leasehold interests before and after enfranchisement. In other words, it represents the increase in value when the freehold and the leasehold come under the same control. It is how the market puts a monetary value on the tenant's special interest in acquiring the property and it reflects the fact that the former tenant of the house gains an unencumbered freehold, and the factthat the tenants collectively in a block of flats can grant themselves new leases for little or no premium.

It is important that hon. Members appreciate that we have not newly identified marriage value for flats. It is a familiar idea. It exists for houses too, and, as I have explained, the present provisions reflect it. Although marriage value is not mentioned in section 9 of the 1967 Act, the valuation base in section 9(1A), which applies to medium-value houses, takes into account the tenants' interest in obtaining the property. It is because of this special interest that an element of marriage value forms part of the price.

In the marketplace this marriage value is shared to ensure that a mutually acceptable bargain is struck. The market thus acknowledges the mutual financial benefit of selling to leaseholders. Landlords could not obtain all the marriage value save in very exceptional circumstances. The Lands Tribunal, following this principle, has adopted the approach of sharing marriage value between the parties.

Several right hon. and hon. Members have referred to the Royal Institution of Chartered Surveyors, but I do not think that they were necessarily aware that it has today issued a press notice which takes its views somewhat further and makes them somewhat clearer. I will not weary the House by reading it all, but perhaps I may read part of it. The RICS spokesman says: A great deal of confusion continues to surround the concept of 'marriage value'—the additional value which is created when the leasehold and freehold interests are brought together. There have been claims"—we have heard them today— that the way in which this value is shared between leaseholders and freeholders will lead to massive windfall profits for some leaseholders. The RICS believes that many of the concerns stem from a misreading of the Bill. The document goes on to explain its understanding of the Bill and how the windfall will not arise. It also explains —to answer the point raised by my hon. Friend the Member for Weston-super-Mare (Sir J. Wiggin)—that in some cases, because the market would give the whole marriage value to the freeholder, any decision by the leasehold valuation tribunal would also give the whole value to the freeholder. It is not a question of splitting the valuation 50:50 and treating that as the norm. I believe that that was the reassurance sought by my hon. Friend. It is a question of seeking to treat the marriage value in a way that most nearly reflects what the market itself would provide.

Sir Nicholas Fairbairn (Perth and Kinross)

rose—

Mr. Deputy Speaker (Mr. Michael Morris)

Order. Before the hon. and learned Gentleman intervenes, may I point out that it would be enormously helpful if the Secretary of State would speak to the microphone, so that Hansard Reporters can catch every word he says?

Sir Nicholas Fairbairn

Would my right hon. and learned Friend, who is a most sophisticated English silk, explain to a simple Scottish one why the English find it so difficult to do anything simply? In Scotland we either rent a house or buy a house. If we rent it, it belongs to the person who rents it; if we buy it, it belongs to us. We do not have freehold, leasehold or any of this nonsense. Instead of this ridiculous formula to do with marriage value—I have never heard of the marriage value of a house: I have never heard of houses marrying—why not just rent houses and give them back when they cease to be rented, or own them and sell them when they are no longer wanted?

Mr. Howard

My hon. and learned Friend is entirely right to suggest that, if we had followed Scottish practice, we would not have had leasehold and would not be here this afternoon debating this legislation. I am not sure whether my hon. and learned Friend is taking the radical course and suggesting that the legislation does not go nearly far enough and that we should abolish leasehold completelyinEngland—

Sir Nicholas Fairbairn

indicated assent.

Mr. Howard

I see that he is. I am afraid that the Government are not bold enough to follow his advice on this occasion. I suspect that by rejecting that advice I am on the same side—at least in this respect—as my right hon. and hon. Friends who have put their names to this group of amendments.

We have followed the precedent of the 1974 amendment to the 1967 Act and the professional advice that we have received from the RICS and elsewhere in formulating our policy that marriage value released by the enfranchisement, of flats should be shared. I do not consider it right that tenants should pay more than the open market price to enfranchise, but that would be the effect of the new clause and amendments, which would require that all the marriage values be awarded to the landlord. To give the whole marriage value to one party to the transaction would not be equitable. If the landlord were to sell to any other purchaser, the extra value would not be released.

Enfranchisement is effectively maximising the possible gain a landlord can get from his asset. This is because he receives all his marriage value share when the property is enfranchised. If there were no enfranchisement, he would receive it, if at all, spread over a number of years as and when individual tenants wished to extend or renew their leases. All the landlord loses is control over the timing of the disposal, but, as this maximum gain only comes from a sale to the tenants, they in practice dictate the timing in a voluntary transaction, too.

The Bill provides that landlords of flats shall receive at least half of the marriage value. This is a floor, and where the market would have given the landlord a bigger share in a voluntary sale, he can argue for and get more under enfranchisement.

I understand the concern that the landlord will receive marriage value only on the flats of participating tenants. Amendments Nos. 15 and 28 seek to give the landlord extra money by including the element in respect of the non-participating qualifying tenants as well. But it would be very unfair to give the landlord marriage value on the flats of non-participating tenants, because no marriage value is in fact released. It would be false accounting, as the leases of these flats are not being brought under the same control as the freehold. Marriage value arises only when the freehold and leasehold interests are joined under the same control.

My right hon. Friend the Member for Mole Valley raised an important point about the provision of compensation for severance—part of what is known as injurious affection for houses. The Bill already provides it for flats. My right hon. Friend says that it should be provided for houses, too. He correctly takes the view that that would be of some assistance in the constituency case to which he referred. It is important that the House appreciates that "injurious affection" is a precise valuation term to quantify in money terms the loss of redevelopment potential or any other loss of value on land now in the landlord's ownership which he keeps after the enfranchisement of other property. It is not a general compensation to cover compulsory purchase by tenants. It has only that limited meaning.

It is a valid element in the price of blocks of flats, because a development or an estate will often contain a group of blocks. Here the loss of one may prevent the freeholder developing the land between the blocks. It might also make his costs in maintaining the remaining blocks higher due to the loss of economies of scale. That is why the Bill includes special provision for those circumstances. It is more difficult to visualise the need for severance for houses, and it was not provided for under the 1967 Act where the low-value houses which were to be enfranchised were very unlikely to have an impact on the remaining property of the landlord.

I do understand the concerns about high-value houses brought in by that Act. I accept that in these cases there may be a need for severance to be recouped. I therefore propose to introduce an amendment in another place to ensure that all houses brought into the 1967 Act by the Bill should have a new head of compensation to cover severance, in line with the provisions for flats in the Bill.

I cannot accept new clause 6 because it would apply to all houses. I am particularly concerned about the impact on low-value houses, which are already capable of enfranchisement. The addition of severance to the price could add considerably to the cost of enfranchising such property, or could be used by a landlord to deter enfranchisement, which would be unfair. I think that my right hon. Friend the Member for Mole Valley recognised that in his observations.

There has been a full debate on property valuation and I have listened with interest to the arguments of my right hon. and hon. Friends. The Bill builds on the precedent of Conservative policy and provides a basis for transferring property interests from the freeholder and intermediate landlords that is above all fair.

I am prepared to introduce an amendment in another place to deal with severance compensation for high-value houses. I hope that, in that spirit, my right hon. Friend and his hon. Friends will not press their amendments.

7 pm

Mr. Jopling

I have listened with great care to the Secretary of State's reply to the debate. I must apologise to him and to the House as I left the Chamber for a few minutes in the middle of the debate, but I heard all the opening speeches as well as the later ones.

My right hon. and learned Friend's promise to introduce an amendment in another place to deal with the application of severance in regard to injurious affection is welcome. However, I am disappointed that I heard nothing in his speech about the 50 per cent. floor. I understand that he intends to leave that as it is and has not moved towards our view that it should increase to 100 per cent.

I accept that one would not expect the price to be 100 per cent. of the marriage value plus the value for severance. I do not think that any of us would be interested in promoting that, but we want 100 per cent. of the marriage value. I am disappointed that my right hon. and learned Friend has not been able to move on the 50 per cent. figure. He used phrases and words that he used on Second Reading and suggested that, given the figure of not less than 50 per cent. in the Bill, the level of compensation—

Mr. Howard

May I deal with that matter and go somewhat further than my right hon. Friend wanted? In an appropriate case, if the market value were such that the tribunal properly came to the conclusion that 100 per cent. of the marriage value ought to go to the freeholder—I emphasise that it is open to them to reach that view under the provisions of the Bill—and if an extra element for injurious affection were judged appropriate, it would be right for the freeholder to have 100 per cent. of the marriage value plus an additional element for injurious affection. Those two elements are not inconsistent.

If my right hon. Friend will forgive me, I must reiterate that the 50 per cent. figure is intended to be a floor and that the tribunal, if the circumstances justify it, may award a greater proportion of the marriage value to the freeholder, up to and not excluding 100 per cent.

Mr. Jopling

We are grateful to the Secretary of State for explaining more fully. In all humility, I am bound to say that I have never had any experience of values of injurious affection with regard to severance, and thus find it difficult to put a figure on them. His remarks are therefore helpful.

I think that my right hon. and learned Friend said that the figure only applies to high-value houses and—as I understand it—not to flats.

Mr. Howard

indicated assent.

Mr. Jopling

It does apply to flats. That is a move forward, but I am disappointed that my right hon. and learned Friend has not increased the 50 per cent. floor figure.

As I was saying when I gave way to the Secretary of State, we are all concerned that he referred to 50 per cent. of the marriage value as a "fair" figure. That is the crux of the difference of opinion between the Front Bench and right hon. and hon. Members who are unhappy about the proposal. We believe that in many cases 50 per cent. could be patently unfair and we are seeking to improve it.

The House should always remember that the freeholder owned 100 per cent. of the marriage value when he granted the leasehold interest to the leaseholder. He willingly agreed to forgo that as the price for retaining the freehold interest, for the reversion of ownership of the property and for control over it.

After the Secretary of State's speech and the amendments that he has promised, I am still unhappy about the compensation and think that it will be unfair. I should like to think carefully about the implications of his remarks between now and Third Reading.

I advise my hon. Friend the Member for Weston-super Mare (Sir J. Wiggin) that there is not much point in voting on the new clause. The Opposition parties will not vote with us and the result would therefore be a foregone conclusion. However, we must consider carefully the Secretary of State's remarks and, if necessary, we can express our opinions clearly on Third Reading tomorrow.

Sir Jerry Wiggin

I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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