New clause

HC Deb 22 July 1996 vol 282 cc77-82

Lords amendment: No. 123, before clause 98, to insert the following new clause—Low rent test: nil rateable values— .—(1) In section 4(1) of the Leasehold Reform Act 1967 (meaning of "low rent")—

1. (a) in paragraph (i) (cases where rent limit of two-thirds of rateable value on later of appropriate day and first day of term applies), for the words from "or (where" to "that date" there shall be substituted ", or on or after 1st April 1990 in pursuance of a contract made before that date, and the property had a rateable value other than nil at the date of the commencement of the tenancy or else at any time before 1st April 1990,",
2. (b) in paragraph (ii) (other cases), for the words from "is entered" to "1990)," there shall be substituted "does not fall within paragraph (i) above,", and
3. (c) in paragraph (a) (definition of "appropriate day" by reference to section 25(3) of the Rent Act 1977), there shall be inserted at the end "if the reference in paragraph (a) of that provision to a rateable value were to a rateable value other than nil".

(2) In section 4A of the Leasehold Reform Act 1967 (alternative rent limits for the purposes of section IA(2) of that Act)—

1. (a) in subsection (1)(b) (cases where rent limit of two-thirds of rateable value on the relevant date applies), for sub-paragraph (ii) there shall be substituted—
1. "(ii) the property had a rateable value other than nil at the date of commencement of the tenancy or else at any time before 1st April 1990,", and
2. (b) in subsection (2), for paragraph (b) there shall be substituted—
1. "(b) "the relevant date" means the date of the commencement of the tenancy or, if the property did not have a rateable value, or had a rateable value of nil, on that date, the date on which it first had a rateable value other than nil;".

(3) In section 8 of the Leasehold Reform, Housing and Urban Development Act 1993 (leases at a low rent)—

1. (a) in subsection (1)(b) (cases where rent limit of two-thirds of rateable value on the appropriate date applies), for sub-paragraph (ii) there shall be substituted—
1. "(ii) the flat had a rateable value other than nil at the date of the commencement of the lease or else at any time before 1st April 1990,", and
2. (b) in subsection (2), for paragraph (b) there shall he substituted—
1. "(b) "the appropriate date" means the date of commencement of the lease or, if the flat in question did not have a rateable value, or had a rateable value of nil, on that date, the date on which the flat first had a rateable value other than nil;"."

Mr. Clappison

I beg to move, That this House doth agree with the Lords in the said amendment.

Mr. Deputy Speaker

With this, it will be convenient to take Lords amendments Nos. 124, 125 and 128, Lords amendment No. 288 and amendment (a) thereto, Lords amendment No. 289 and amendment (a) thereto, Lords amendment No. 290 and amendment (a) thereto, Lords amendments Nos. 291 and 292, Lords amendment No. 293 and amendment (a) thereto, Lords amendment No. 294 and amendment (a) thereto, and Lords amendment No. 295 and amendment (a) thereto.

Mr. Clappison

We now come to the subject of leasehold enfranchisement, including the subject of the low-rent test, which will be familiar to hon. Members in the Chamber who were members of the Standing Committee. I can deal briefly with amendments Nos. 123 to 125, 128, 291 and 292, because they deal with some minor issues relating to leasehold enfranchisements. In particular, it will now be possible for owners of leases with nil rateable values to enfranchise.

I now move on to amendments Nos. 288 to 290 and 293 to 295. The House will recall that, on Report, we abolished the low-rent test for leases over 50 years. We made it clear that we were prepared to be flexible on this figure. We have been persuaded that 35 years would be a more appropriate figure, and we were pleased to accept Opposition amendments tabled in another place by a former distinguished Member of this House to that effect. As a result, we have reactivated the ability of landlords to promote estate management schemes where their properties are newly enfranchiseable.

The other measures in this group are an anti-avoidance device for the rural exemption to the low-rent test, and a transfer of the jurisdiction to rule on the reasonableness of costs for enfranchisement cases under the Leasehold Reform Act 1967 from the court to the leasehold valuation tribunal.

Turning to the background to the low-rent test, throughout our debates the Government have maintained a consistent and principled approach. Let me briefly remind hon. Members why we are seeking to maintain a test of this kind. The policy has been to give enfranchisement rights to those leaseholders who might be regarded as owner-occupiers. This is the broad policy behind the Bill, the 1967 legislation introduced by a Labour Government, and the more recent Leasehold Reform, Housing and Urban Development Act 1993.

In order to establish whether the leaseholder is an owner-occupier, two tests have been used. First, there must be a long lease—generally more than 21 years. Secondly, the tenant must pay only a nominal ground rent, rather than a market rent. If those two conditions are satisfied, then, except during the final years of the lease, the tenant is likely to have a greater financial stake in the property than the landlord. The hon. Member for Greenwich, with his knowledge of these matters, will be familiar with what I am saying, but the 1967 Act also used as the test a long lease at a low rent.

So, for a long time, there has been a low-rent test. The form differs slightly according to the circumstances, but generally it requires that the rent should be less than two thirds of the rateable value of the property. The purpose of the test is, as I have said, to distinguish between owner-occupier tenants and renting tenants.

There has been pressure to amend or remove the low-rent test. I think that this was not so much because it was thought that renting tenants should be given enfranchisement rights, but because in practice the low-rent test has given rise to difficulties. There are leases where the rent is technically above the low rent limit, but is nevertheless closer to being a nominal ground rent than a full rack rent. In some cases, this has arisen by chance, perhaps because properties were not revalued for rating purposes between 1973 and the end of the rating system in 1990, while ground rents crept up slightly in line with inflation. In other cases, some landlords may have intentionally set rents a small amount above the limit to which I have referred.

The Government have accepted that there is a case for reform. As I have already said, we introduced an amendment on Report in this House which would abolish the low-rent test for leases in excess of 50 years, and, following the debate in another place, we have reduced that period to 35 years.

I have to concede that there are no overwhelmingly strong grounds for 35 years, although it is perhaps important—before the hon. Member for Greenwich gets carried away—that eminent members of the valuation profession have said that this is a significant point at which the freehold value rises to about one third of the total interest in the property. I remind the hon. Gentleman that an Opposition Member of the other place tabled an amendment to introduce a period of 35 years. Therefore, that was the time limit lighted upon by a member of the hon. Gentleman's party. That is the background to the 35 years.

We believe that there should be a range of lease lengths—it is now becoming quite a short range, comprising leases of between 21 and 35 years—for which the low-rent test should be retained. I am concerned that there are some leases within this range which are at rack rents, and hence the tenant's stake in them has never been anywhere near so significant as the landlord's. Some landlords wish to let properties on renting tenancies, but equally wish to give the tenant a substantial period of security—for example, in return for the tenant taking on the maintenance and repairing obligations.

We need to recognise that we have responsibilities to both sides, and we need to have regard to equity in the matter. The Government therefore believe that the 35-year rule should be maintained. The vast majority of leases are for more than 35 years. The position for the handful of leases under 35 years is that the low-rent test, which already exists, continues to apply to long leases. That test requires that the lease must be set at a nominal ground rent for enfranchisement to proceed. Only leases of less than 35 years and which are let at rack rents will be excluded.

I hope that the House agrees that we have taken a reasoned and flexible approach, but one which has sought to create equity in a general sense between the two interests. We feel that we have made a compromise at an appropriate point, and we hope that the House will be able to support the Lords amendment and to disagree with the amendments tabled by the Opposition.

Mr. Raynsford

The subject of the low-rent test and the history of what has happened in the past six months as the Bill has progressed through the House is extraordinarily revealing of the Government's attitude to leasehold reform. One could not have a clearer indication of their response. It has not involved, as the Minister claimed, a consistent and principled approach. The Government's approach has been inconsistent and unprincipled. I shall now reveal exactly why.

When we considered the matter in Committee, the Opposition successfully moved an amendment, with the support of the hon. Member for North-West Leicestershire (Mr. Ashby), to abolish the low-rent test. The Government opposed the amendment. They were opposed to any change in the existing low-rent test. They were defeated. When the Bill came to the House on Report, the Government did not accept that defeat. They sought to reinstate a low-rent test, but with a 50-year limitation. They argued that that was an appropriate cut-off point—that 50 years was the right period below which the low-rent test should apply but above which it might not apply.

The Government just managed to get away with reinstating the low-rent test, with a narrow majority—two votes. The amendment would not have been defeated if Conservative Members who pledged their support to leaseholders had joined us in the Division Lobby. Only the hon. Member for Bolton, North-East (Mr. Thumham). an independent-minded Member of Parliament in every respect, joined us.

Other Conservative Members, including the hon. Member for North-West Leicestershire, who supported us in Committee, did not support us on Report, so the abolition of the low-rent test sadly was not carried on that occasion, and the Government got away with introducing a 50-year limitation. However, it was pointed out that the 50-year limitation was arbitrary. There was no logic behind it or any particular reason for it, and it created anomalies. We highlighted some of those anomalies and drew attention to people who would suffer as a result of that 50-year cut-off.

So what has happened? The Government, faced with that argument, have made a further modest retreat. They were not prepared to do the decent thing and accept that the low-rent test should be abolished altogether. They have reduced the period during which the low-rent test will apply from 50 to 35 years. Hon. Members heard the Minister say this evening that there was no particularly good reason for 35 years rather than any other figure. We have once again an arbitrary figure.

The Minister prayed in aid some specious evidence about some valuers who said that perhaps a period was appropriate in which the leasehold interest began to reduce significantly as against the freehold interest. To persuade us of that, the Minister must produce convincing evidence that the cut-off point is precisely 35 years rather than 33, 34 or 36 years. Some pretty clever statistics will be needed to convince us that the balance between the leaseholder's and the freeholder's interest magically transforms at 35 years.

The 35 years is yet another arbitrary figure plucked out of the air by a Government who do not have the courage of their convictions to support leaseholders, because they are in hock to the big landowners. That is why we still have a low-rent test. As soon as the Committee had abolished the low-rent test, all the landed interests came flooding into the Department of the Environment, throwing their hands up in horror and saying, "This will be disastrous. This will ruin us. It will destroy the great landed estates"—and probably saying, although I cannot prove it, "And you won't get your donations to the Conservative party any more if you don't do what we want and reinstate some type of low-rent test."

7 pm

As a result of that pressure from the big landowners, the Government embarked on the absurd process of trying to put back a low-rent test for a shorter period, without consistency, principle or logic. Effectively, it has been a retreat under pressure, carried out with little grace, and with a final product that is far from satisfactory.

The House should consider why a low-rent test was necessary in the first place. The Minister said, and I am the first to acknowledge, that a low-rent test was introduced by the Labour Government in 1967 when they introduced leasehold enfranchisement for houses. and I would argue that, at that time, a low-rent test was entirely appropriate and proper.

The private rented market then was different from that today. There was detailed and rigorous rent control. Landlords were unable to let on a tenancy giving a rack rent, because they were subject to stringent rent controls, with rents set by rent officers under the provision introduced by the Labour Government in the early 1960s. A landlord who wanted to obtain a larger return often resorted to the device of a lease—notionally a lease—of 12 or 15 years, perhaps longer, to ensure a return that could not have been secured by letting the properly on a regulated tenancy.

In that framework, the lease was used as a device to get around rent control. To distinguish between a property that was let as a tenanted property and one that was truly a leased property for which the leaseholder had paid a substantial premium to acquire as their home, the low-rent test was understandable and justifiable.

The Minister knows that the world has changed. The private rented market has been deregulated. No new regulated tenancies are being created. The framework of assured shorthold tenancies and assured tenancies allows landlords to let, at a rack rent if they want to do so, without risk. There is no longer a need to distinguish between a straightforward tenancy of that nature and a leasehold property where the lease has been granted on a premium. That is why a low-rent test was necessary in 1967 but is unnecessary today.

The overwhelming consensus in the property industry is that 21 years is the proper period to use to distinguish a lease, in the sense in which we all understand it, from a tenancy. People recognise that cut-off point as the borderline between the two.

That is why, in our amendment, we are substituting 21 for 35. There is a logic behind 21 years. It is widely understood that that is the distinction between leasing and tenancy, whereas there is no such justification for the 35-year figure. Our amendment is consistent and logical. It ensures the proper abolition of the low-rent test, without creating the anomalies that have existed to date and which, sadly, will continue if the Government amendments are adopted.

The low-rent test is no longer needed, and should be abolished. Any Government who had the courage of their convictions and were able to stand up to the big landowners and their vested interests, any Government approaching this in a principled and consistent way, as the Minister claimed to do, would agree with the Opposition that the low-rent test should be abolished, and would therefore agree that 21 years is the appropriate figure to use to distinguish a tenancy from a leasehold.

Mr. Clappison

With the leave of the House, Mr. Deputy Speaker, I shall make three brief points.

First, I was not impressed by the explanation offered by the hon. Member for Greenwich (Mr. Raynsford) for the failure of the 1964 and 1970 Labour Governments in this area. In fact, their enfranchisement proposals were restricted to houses, and did not apply to flats. The hon. Gentleman talks about rent regulation. He is aware that that applies to shorter tenancies, not to the leases to which we are referring, and that leaseholders had no opportunity to enfranchise in those periods of Labour Government.

Secondly, the hon. Gentleman chastises us for choosing a fixed time limit, and then recommends a fixed time limit—one of 21 years rather than 35 years. That time limit was proposed in an Opposition amendment in another place. The Opposition in another place may have been seduced by the sort of complaints that the hon. Gentleman envisages coming from the great propertied classes.

Thirdly, that is hardly consistent, which is one of the hon. Gentleman's familiar complaints, with the fact that we were at first prepared to introduce a test of 50 years, and then said that we were prepared to be flexible and reduced it to 35. No doubt we have done so over the massed ranks of bodies of the landed estates, the aristocracy and the great landed interests, but only the hon. Gentleman appears to have noticed that.

Lords amendment agreed to.

Lords amendments Nos. 124 and 125 agreed to.