ADMINISTRATION CHARGES

HC Deb 13 March 2002 vol 381 cc953-71

Amendment made: No. 49, in page 124, line 23, leave out from "Schedule" to end of line 28 and insert— '"variable administration charge" means an administration charge payable by a tenant which is neither—

1. (a) Specified in his lease, nor
2. (b) calculated in accordance with a formula specified in his lease.'.—[Ms Keeble.]

Ms Keeble

I beg to move amendment No. 50, in page 125, line 12, at end insert—

'Notice in connection with demands for administration charges 3A (1) A demand for the payment of an administration charge must be accompanied by a summary of the rights and obligations of tenants of dwellings in relation to administration charges. (2) The appropriate national authority may make regulations prescribing requirements as to the form and content of such summaries of rights and obligations. (3) A tenant may withhold payment of an administration charge which has been demanded from him if sub-paragraph (1) is not complied with in relation to the demand. (4) Where a tenant withholds an administration charge under this paragraph, any provisions of the lease relating to non-payment or late payment of administration charges do not have effect in relation to the period for which he so withholds it.'.

Madam Deputy Speaker

With this it will be convenient to discuss the following:

Government new clause 9—Failure to pay small amount for short period.

Government new clause l0—Power to prescribe additional or different requirements.

Government new clause 11—Notice to accompany demands for service charges.

New clause 3—Abolition of forfeiture— 'A right of re-entry or forfeiture under any proviso or stipulation in a lease of a dwelling for a breach of covenant or condition in the lease shall not be enforceable by action or otherwise.'.

New clause 6—Balance of proceeds of forfeiture to be paid to leaseholder— '() Where a forfeiture action is successful, after deduction of all debts any balance shall be paid to the leaseholder.'.

New clause 8—Restrictions on and relief against forfeiture of leases and underleases— '. In section 146 of the Law of Property Act 1925 (c. 20) (restriction on forfeiture) there is inserted— (4A) Where the court has made an order for forfeiture pursuant to subsections (1) to (4) above, any balance remaining after the payment of the lessee's debts owed to the lessor shall be paid to the lessee".'.

New clause 19—Leases exceeding 21 years—

'.—(1) This section shall apply to any lease granted for a term of years certain exceeding 21 years, whether or not it is terminable before the end of the term by notice given by or to the tenant or by re-entry, forfeiture or otherwise and whether made before or after the coming into force of this section, where the rent reserved for the time being is less than £1,000 per annum.

(2) In this section a right of forfeiture shall mean a provision in a lease whereby the landlord under a lease has a right to re-enter the premises demised (or part thereof) upon the happening of specified events, whether the right to re-enter is expressed as a condition or as a proviso on breach of covenant or otherwise howsoever.

(3) No landlord may re-enter the premises demised (nor any part thereof) pursuant to a right of forfeiture, insofar as the exercise of the right of forfeiture is based on the non-payment of money.

(4) Where a tenant fails to pay monies payable under the terms of the lease, the person entitled to payment of the said monies shall be entitled to a first legal charge (herein referred to as a "landlord's charge") over the lease for the monies payable and for his reasonable costs and expenses of and in connection with the landlord's charge and the enforcement thereof, such costs and expenses to be payable on the indemnity basis.

(5) Subject to the next subsection, a landlord's charge shall have priority to all charges, underleases and other encumbrances estates easements estoppels and rights of whatever description created by or deriving title from or through the tenant, whether at law or in equity and whether created or existing before or after the coming into force of this Act (hereinafter referred to as "subsidiary interests").

(6) Notwithstanding the previous subsection, no local land charge within the meaning of the Local Land Charges Act 1975 shall be a subsidiary interest.

(7) Subject to the next subsection, a landlord's charge may be enforced in any manner in which a first legal charge may be enforced.

(8) The landlord's charge may only be enforced by sale with leave of the High Court or the County Court.

(9) On such a sale, the purchaser shall purchase free from all subsidiary interests.

(10) Where a landlord's charge has no reasonably realisable commercial value, the landlord may apply to the High Court or the County Court for an order terminating the lease, but such an order shall not release the tenant from any pre-existing obligation under the lease.

(11) Any person holding any subsidiary interest shall be entitled to have subrogated to him the landlord's charge on payment of the sums secured by the landlord's charge and shall be entitled to add his reasonable costs and expenses of and in connection the said exercise of the right of subrogation to the landlord's charge, such costs and expenses to be assessed on the indemnity basis.

(12) Where more than one person holding a subsidiary interest wishes to have subrogated to him the landlord's charge, the priority as between such persons shall be determined in accordance with the rules of equity.

(13) Where on a sale of the lease pursuant to subsection (8) hereof, there is a surplus after payment of all the monies secured by the landlord's charge, the distribution of the said surplus shall be made in accordance with the rules of equity.

(14) Rules of Court shall provide for service on the tenant and on persons holding subsidiary interests of any application made pursuant to subsection (8) hereof for leave to enforce the landlord's charge by sale and for the circumstances in which such service may be dispensed with.

(15) Notwithstanding the provisions in subsections (4) and (11) hereof permitting the adding of costs and expenses to the landlord's charge, the High Court and the County Court shall have the power to make in substitution for the said provisions some different order as to incidence, basis and amount of the costs and expenses of the holder of the landlord's charge and of the lessee and of any other person where such different order would be just.

(16) The figure for the annual rental specified in subsection (1) hereof may be varied from time to time by regulations made by the Secretary of State.

(17) Nothing herein shall affect the validity or effect of a forfeiture of a lease, whether by re-entry on or service of originating process seeking to re-enter the premises demised (or part thereof) or otherwise, effected before the coming into effect of this section.

(18) "Lease" in this section shall include underleases and "landlord" and "tenant" shall be construed accordingly.

(19) The existence or potential existence of a landlord's charge shall not prevent any person who is restricted or prohibited whether by statute or otherwise from lending money save on the security of a first legal charge from lending money on the security of a charge which, but for the existence or potential existence of the landlord's charge, would have been a first legal charge.'.

Amendment No. 26, in clause 163, page 84, line 14, leave out Clause 163.

Amendment No. 27, in clause 164, page 84, line 39, leave out Clause 164.

Amendment No. 28, in clause 165, page 85, line 43, leave out Clause 165.

Amendment No. 67, in page 86, line 1, after "(1)", insert— '(a) for the words "exercise a right of re-entry or forfeiture" substitute "enforce a landlord's charge"; and (b)'.

Amendment No. 64, in page 86, line 9, leave out— 'exercise a right of re-entry or forfeiture' and insert "enforce a landlord's charge.".

Amendment No. 63, in page 86, line 27, leave out subsection (5).

Government amendments Nos. 61 and 58.

Ms Keeble

The Government amendments and new clauses deal with issues that hon. Members will have been anxious to speak about for a long time this evening. They all relate to forfeiture, which I know is a matter of great concern to hon. Members in all parts of the house and is one of the factors that has brought the whole leasehold tenure system into a certain amount of disrepute.

It might be helpful if I set out some of the background before moving on to the details of the proposals, which go a long way towards tightening up existing arrangements. I hope that they will reassure hon. Members that the Government have listened carefully to the concerns that have been expressed, especially in Committee and on Second Reading, and have worked hard to find a way of taking matters forward and providing further safeguards.

The Government accept the widespread concerns about the forfeiture system. On Second Reading, we heard about some distressing examples of leaseholders who had fallen foul of the system. Forfeiture is a draconian penalty and many people feel that it is unfair that a leaseholder can lose their home, possibly for the non-payment of a relatively modest debt, while the landlord obtains a large windfall profit.

8 pm

Some hon. Members who spoke to me about that during the discussions that took place seemed to be unaware that that is the current position and has been so for some time. The Bill includes several provisions that improve the situation, and the Government amendments and new clauses will further improve it. The Bill contains measures restricting freeholders' ability to use forfeiture and the amendments and new clauses will provide further safeguards for leaseholders. In effect, they mean that forfeiture will operate only as a sanction of last resort for leaseholders who wilfully refuse to pay money that they rightfully owe to the freeholder. We have given great thought to those measures since the Bill was debated on Second Reading and especially since it was considered in Committee. I shall give some of the background to the proposals and explain the extent to which they protect leaseholders from any continuing abuse by freeholders.

Although forfeiture has remained a sanction for freeholders, its draconian nature has meant that in practice the courts have been reluctant to grant it unless the leaseholder has failed to take advantage of opportunities to remedy matters. However, difficult cases arise, some of which have led to concerns being expressed by hon. Members on both sides of the House. Moreover, forfeiture has enabled landlords to practise a variety of abuses, including using it as a threat to extract money from vulnerable leaseholders. The Government put their mind to that problem and the amendments and new clauses deal with those issues.

In December 1999, following the Government's consultation paper on residential leasehold reform in 1998, we published a document entitled, "Leasehold Reform: the Way Forward", in which we announced that we intended to replace forfeiture with a fairer regime. Hon. Members—mostly Conservative Members—have accused us of reneging on those commitments, but that is not so. The document proposed that determination of facts would be separated from repossession proceedings; that penalties for late payment of ground rent and other administration charges would have to be reasonable; that leaseholders would have the right to challenge the reasonableness of any such charge before a leasehold valuation tribunal; and that ground rent would not be recoverable unless demanded and there would be a period of grace before any additional charge could be made. The Bill will implement all—I repeat, all—those proposals.

We also proposed that where the landlord obtained possession, the leaseholder should be compensated for the loss of leasehold interest after deducting moneys owed to the landlord. That remains our long-term aim. However, although the concept may seem relatively simple, legally and practically it is a complex matter. When we drafted the Bill we considered the issue carefully, but reluctantly came to the conclusion that we could not resolve all the complexities without delaying the Bill's introduction. The Bill implements all the proposals in "Leasehold Reform: the Way Forward" except, owing to practical difficulties, the proposal on deducting moneys. As the Bill extends many other benefits to leaseholders, it is right to proceed with it.

The complexities surrounding the provision of the new regime cannot be properly resolved by a single new clause such as those tabled by my hon. Friend the Member for Bolton, South-East (Dr. Iddon) or the hon. Member for Stone (Mr. Cash). Instead, we decided to focus our attention on the main abuses associated with forfeiture, including using it as a threat to extract payment and exploiting leaseholders' fear of challenging unreasonable charges or breaches of covenant that are unfounded. Hon. Members on both sides of the House cited examples of such cases that they have had to deal with in their constituencies.

Let me explain how the Bill will set about ending those abuses. The provisions are scattered throughout the Bill and we did not debate the relevant clauses in Committee, so we have not yet considered their impact. Clause 162 provides that forfeiture proceedings cannot be brought against a long leaseholder for non-payment of ground rent unless the landlord has issued a written demand and the rent has remained unpaid for more than 30 days. Regulations will prescribe the form and content of the demand and we intend that they will include a requirement clearly to spell out leaseholders' rights.

Clauses 163 and 164 prevent the commencement of forfeiture proceedings for breaches of covenant—including the issue of notices under section 146 of the Law of Property Act 1925, which are often phrased in threatening terms—unless a leasehold valuation tribunal or court has determined that a leaseholder is actually in breach of their lease and has been given a period to rectify the matter.

Clause 165 similarly prevents the commencement of proceedings for non-payment of service charges or administration charges unless a leasehold valuation tribunal or court has determined that the sums claimed are legally payable and reasonable.

Those are important measures that will dramatically reduce the scope of unscrupulous landlords in exploiting leaseholders' fears. They also deal with issues related to debt and with other breaches of covenant such as persistent antisocial behaviour or littering or dumping in communal areas. Much of the discussion of forfeiture has revolved around payment of debt, but it can also arise as a result of other breaches of covenant, so the regime must deal with those as well.

In effect, the Bill provides for a two-stage legal process—first, to go to the tribunal to establish whether there has been a breach of the terms of the lease and, secondly, to go to the courts for approval for forfeiture.

Permanent elimination of abuses of forfeiture would require its complete abolition, as proposed in new clause 3. In considering such a measure, we must accept that managers of leasehold properties need an effective means of redress against those who fail to comply with the terms of the lease. Unfortunately, some leaseholders refuse to pay their fair share of the cost of maintaining their block or estate, no matter how reasonable those charges may be, or carry out structurally damaging repairs—for example, demolishing internal load-bearing walls or taking similar actions that damage the property interests of other leaseholders and of the freeholder. We discussed earlier the importance of ensuring that there is proper financing to pay for the maintenance of property.

One of the advantages of the leasehold system is that it provides a means of enforcing certain rules on a group of individuals living in a community, whether it be in a block of flats or on a housing estate. Simply abolishing forfeiture in the manner proposed by the hon. Member for Torbay (Mr. Sanders) in new clause 3 would seriously undermine that system. Leasehold management companies, which are unlikely to have a substantial capital reserve, are particularly vulnerable if irresponsible leaseholders fail to pay their fair share. Other leaseholders may suffer the consequences of essential repairs not being carried out through lack of funds. Ordinary civil debt recovery or injunction proceedings are lengthy and not always effective against those who are determined to avoid their responsibilities. We would need to replace forfeiture with an alternative that provided an effective enforcement mechanism, but without the same scope for abuse.

Mr. Sanders

Can the Minister explain why the proposals on commonhold include a provision that prevents the right of forfeiture?

Ms Keeble

The answer is that commonhold and leasehold are two different types of tenure.

As I have said repeatedly during our consideration of the Bill, creating an alternative to forfeiture is not a simple matter. Indeed, the Law Commission has been wrestling with the problem for many years, and its work has now reached an advanced stage. It has been developing proposals to abolish forfeiture across the board. One of the major objections to forfeiture is that, in the rare cases in which a lease is forfeited, the leaseholder is left with nothing. That can be a draconian penalty. To avoid this, the Law Commission is considering the scope for providing that a long lease be assigned to a third party, and for the value of that lease to be shared out. That would remove the unfairness of the current system, in which all the value passes to the landlord. The commission is also considering the scope for imposing penalties when landlords act improperly.

Hon. Members have repeatedly expressed concern about the length of time the Law Commission has taken on this project, and have asked when we might expect to see the results. I understand that the commission plans to put forward revised proposals for consultation during late spring or early summer, with a view to preparing a draft Bill during the 2002–03 Session. I very much hope that this will produce a fairer and workable solution in the longer term.

The hon. Member for Stone has tried to pre-empt the Law Commission's work with his new clause 19. I recognise some of the thinking behind his new clause from our consideration of possible alternatives to forfeiture, and he has no doubt borrowed from the Government's work. He has failed to achieve his goal, however, because his new clause has run into the same problems as our own work did, and into even greater ones. It leaves completely unresolved a number of practical and technical issues, which is why the Government cannot accept it.

I do not want to run through all our concerns on the new clause—that would take far too long, and I recognise that other hon. Members wish to speak—but I shall deal with just one, to demonstrate how unworkable it would be, and what chaos it would introduce into the system. Subsection (13) proposes that any surplus should be distributed in accordance with the rules of equity. Equity, as the hon. Gentleman must know, is not a set of rules but a broad legal principle, and it is far too vague to determine the basis of apportionment. Given the proven track record of many of those who abuse the forfeiture process at present, it is essential that there is no room for argument over such a fundamental issue. The hon. Gentleman completely fails to set out who would make the distribution. Should it be the landlord or the court? To be workable, any provision would have to spell out clear, unambiguous rules and procedures for all foreseeable circumstances, and specify how disputes were to he resolved.

A further weakness that the hon. Gentleman might not have realised is that the new clause applies only to forfeiture for debts—for failure to pay money. It would have no effect on the widespread abuses relating to use of forfeiture for other breaches of leases, such as the failure to obtain consent for buildings—an issue raised in Committee by my hon. Friend the Member for Bolton, North-East (Mr. Crausby). Unlike the Government's new clause 9, which I will describe shortly, it does not prevent the use of forfeiture for small sums, so leaseholders could face the prospect of the forced sale of their homes for non-payment of small amounts if they did not respond to proceedings.

At this late stage in the Bill's progress, there is no scope for us to consider this matter further, or subsequently to introduce a revised new clause. In any case, we could not contemplate introducing such a major change to property law without full consultation with all interested parties. For example, in making any changes to property law, we would need to be satisfied that they would not affect the ability or willingness of lenders to provide mortgages.

We have discussed briefly the proposed new clause with the Council of Mortgage Lenders. Its initial response was that the proposal was far too hurried and would need detailed consideration and guidance. It was also concerned that the measure could lead to an escalation of costs, which would be added to the landlord's charge, thereby eroding mortgagees' security. That could lead to lenders being reluctant to lend a high proportion of the value on leasehold properties, which would clearly not be in the interests of current or prospective leaseholders.

I shall now move on to the Government's amendments. As I said in Committee, we have considered carefully the strength of feeling on this important issue, and the desire for further measures in the Bill to deliver better protection for leaseholders. We have proposed further safeguards for leaseholders, and I would like to explain the additional safeguards that these amendments would provide.

8.15 pm

To assist hon. Members in understanding the extent of the new safeguards that the existing provisions, and these new ones, would extend to leaseholders, officials have helpfully drawn up a flow chart of the steps that freeholders would need to follow before a leasehold property could be forfeit. These have been laid in the Library, and hon. Members may consult them at their leisure. They will see the extensive range of steps that a freeholder would have to follow. The flow chart illustrates this rather complex process, which is far removed from the simple procedure that it is sometimes thought to be. Almost all the safeguards in the flow chart arise from the Bill and the Government's amendments.

New clause 9 is intended to prevent the use of forfeiture for small amounts of money. Forfeiture proceedings would be prohibited unless the amount outstanding exceeded a prescribed sum or unless the amount, or any part of it, had been outstanding for more than a prescribed period. This is designed to deal with the problem of ground rent grazers, and of people losing their homes for the sake of small amounts of money, or being frightened by demands for the money and paying up.

In the Bill, the prescribed sum is set at £500. The level at which it would be introduced would be set by regulation, and we would consult on that, although our current thinking is that it should be set at about £350 in the first instance. That is the kind of sum that hon. Members have suggested in discussions. We would expect to set the prescribed period at about three years. That would make forfeiture unavailable for amounts of less than £350, unless they had been outstanding for more than three years.

Regulations made under the power would be subject to the affirmative procedure by virtue of amendment No. 58, so there would be an opportunity to examine the matter closely, and to debate it at some length. Administration charges and penalties for non-payment of an outstanding amount will not be taken into account in determining whether the prescribed sum has been exceeded. This would prevent landlords trying to evade the provision by adding further charges to push the total above the prescribed sum. I am sure that all hon. Members will see the logic of that.

New clause 10 deals with an abuse repeatedly mentioned by hon. Members in Committee. The proposal is intended to protect vulnerable leaseholders, such as those who suffer from a mental illness, who are unable to respond to the various warning notices required under existing legislation or other provisions of the Bill. We propose to require landlords to take reasonable additional or alternative steps when there is no response to demands or notices. We will consult on what steps would be appropriate, practicable and reasonable. This may include a duty to investigate the leaseholder's circumstances.

That power would not apply in relation to properties subject to a mortgage. That is because mortgagees are normally informed of forfeiture proceedings, and have a right to seek relief. They invariably do so to protect their security. It is the leaseholders who do not have mortgages—for example, the elderly whose mortgages have been paid off—who would be protected by this measure. A number of hon. Members, including my hon. Friends the Members for Cleethorpes (Shona McIsaac) and for Great Grimsby (Mr. Mitchell), identified older people in their constituencies who have been vulnerable to bullying and abuse by freeholders, and who are in particular need of protection. We would hope that that would be of help to some of them.

Regulations made under this power would also be subject to the affirmative procedure—amendment No. 58. There would be an opportunity closely to debate the provisions.

New clause 11 is intended to ensure that leaseholders are aware of their rights and obligations by providing a power to require certain information to be provided with service charge demands. It should help also to prevent forfeiture being used as a threat by unscrupulous landlords. The form and content of these notices would be prescribed. It would set out leaseholders' rights to challenge service charges that they consider to be unreasonable. The notices would have to set out also restrictions on forfeiture. In addition, they would point out the possible serious consequences of non-payment of service charges and the dangers of ignoring demands. They would suggest that leaseholders take advice. Amendment No. 50 provides a similar power in relation to demands for administration charges.

We believe that it will be important to improve awareness among leaseholders and landlords of their rights and obligations in this somewhat complex but important and sensitive area. It is therefore also our intention to produce a guide that will summarise in plain English, as hon. Members have repeatedly requested, all the relevant provisions concerning forfeiture proceedings.

Amendment No. 61 provides that new clauses 9 and 10 would be binding on the Crown. The other changes already apply to the Crown by virtue of clause 166.

I appreciate that I have taken quite a long time to set out the proposed measures. The new clauses and amendments have been carefully crafted by officials to meet some of the concerns that have been raised on both sides of the House on forfeiture. The additional measures, together with the existing provisions, should go a long way towards preventing the distressing cases that have been described, and which have been raised repeatedly by hon. Members. If hon. Members examine the flow chart of the steps that a freeholder would have to take, they will see clearly the safeguards that we have provided. They will see also that in practice forfeiture can be used only where leaseholders have wilfully and persistently defaulted on their obligations and have harmed other leaseholders or created the potential of harm. They should also ensure that landlords are not able to intimidate leaseholders with threats of the loss of their homes to secure payment of unreasonable charges.

The additional safeguards that we are providing show that the Government have listened carefully to the views of hon. Members, and have responded with a range of measures that will be of real benefit to the constituents whose interests and homes hon. Members rightly seek to protect, and for whom they have been vocal in making a case. They represent major improvements in the safeguards for leaseholders, and represent also some major improvements to the Bill. I urge Opposition Members to withdraw their amendments and to support the Government amendment.

Mr. Cash

We have heard an interesting justification for the Government's proposals as set out in their amendments and new clauses. I noticed that the Minister said that, reluctantly, it was not possible to deal with all the issues. However, it seems that the Government have been pushed into a situation of coming up with a half-way house. To some extent, we discussed the issue vaguely in Committee, but the Bill has been round the houses five times. I am surprised that the Minister is not able to come forward with something that deals with the problem more effectively.

The Government could have done better. Despite the Minister's remarks about new clause 19, it is my belief that that clause is better than the measure that the Government are proposing. The Minister mentioned that the Law Commission is at an advanced stage of coming up with comprehensive proposals.

A cause of great concern has been whether, for example, there would be any reasonable substitution for forfeiture where, for example, premises were being used for prostitution or for other illegal activities such as drug dealing. The issue is not whether we like forfeiture but whether it is appropriate in all the circumstances. It is our view that forfeiture is not appropriate in respect of non-payment of money or service charges.

The basic principle is that if a tenant breaches the terms of his or her lease, the landlord can forfeit the lease. The landlord can repossess the property and either sell it or rent it out to someone else. Where the tenant has a long lease at a low rent, the landlord ordinarily receives a considerable windfall. As I stated in The Daily Telegraph yesterday, the law is now more complicated than the simple equation of breach equals forfeiture. It is necessary to distinguish between two quite different regimes that apply. The first regime is where a tenant fails to honour some obligation to pay money. The second is where the tenant breaks some other non-pecuniary obligations under the lease.

With the second case, a landlord who wishes to forfeit must first serve what is colloquially called a 146 notice, under the Law of Property Act 1925. The notice must specify the breaches alleged and give the tenant a reasonable to time remedy the breaches insofar as they are remediable. Even if the tenant has not performed the remedies of the breaches within a reasonable time, he or she can still apply to the court for relief against forfeiture. My amendment is concerned only with non-payment of money and has no impact on the other forms of breaches. I shall explain why.

I turn to the first case, where the breach consists of non-payment of money. In this instance, equity has always treated the provision for forfeiture as being simply security for the payment of sums due. That means that if the tenant pays the moneys due, the court will grant relief from forfeiture so that the tenant does not lose the flat. A tenant can, within reason, even apply for relief from forfeiture after the landlord has repossessed the property.

In practice, it often happens that the tenant's mortgage company steps into the breach and pays off the arrears owing to the landlord. The reason is simple. If the landlord forfeits the lease, the mortgagee loses its security because the lease which is charged to the bank or building society ceases to exist. This is a highly effective way of obtaining payments of rent and service charges from tenants. It is right that there should be an effective way of obtaining payment of those moneys. In particular, in connection with service charges, every sum of money which one tenant escapes paying is money which other tenants will have to pay.

The issue is not whether there should be a strong means of enforcement of tenants' obligations. There should be. That may be a point of distinction between Opposition and Government. The issue is whether forfeiture is the right way to go about it. I mentioned that the amendment is not concerned with forfeiture for breach of non-pecuniary obligations. The reason is that there are circumstances in which it is right that a lease should be forfeited. Suppose the tenant uses his flat for drug dealing. In such a case, the landlord and other tenants must have a right to throw out the offending tenant.

In principle, the right to forfeit should exist in at least some cases; whether in all cases, as at present, might be doubted. It is likely that improvement can be made on the current law of forfeiture. We know that the Law Commission is considering that. The question is whether the Government have come forward with enough, despite the fact that they have been harried by us and by others, including Labour Back Benchers, into coming to a conclusion. They have been making a case—I think that it probably goes too far—for the abolition of forfeiture in all instances. The same applies to the Liberal Democrats. We are trying to strike a reasonable balance to ensure that there is a degree of proper remedy available for the non-payment of money and service charges.

We recognise that this is a complicated area. We will not go into the question of forfeiture other than for non-payment of money or service charges.

8.30 pm

The position is quite different in the case of non-payment. Here all the parties are interested in is money. The main objection to the current law is that it allows landlords to make large 'windfall gains, as it is insufficiently flexible. As the Minister said and as I pointed out in The Daily Telegraph, there may also be threats and the accumulation of expensive correspondence. The situation may be exploited, and people may be put at a disadvantage and at risk.

If a tenant falls into arrears with rent and service charge, the landlord can repossess the property. When the tenant is living in the property that requires a court order, but the court has no discretion in regard to whether to order possession, it can only delay eviction by a short time. Arrears equal eviction. We do not agree with that.

The consequences of forfeiture are eye-opening. We want to preserve a proper balance in the interests of the many millions of people who could well be affected. We know that more than 3 million people hold long leases at what is probably a low rent—a considerable number of people who vote for all parties.

Under forfeiture, the landlord recovers vacant possession of the property. He can then sell a new long lease on the flat at full market value. It makes no odds that the tenant may owe only a few thousand pounds, or even less; the landlord repossesses, and can then sell the flat for possibly hundreds of thousands of pounds. To add insult to injury, the landlord does not even need to give the tenant credit for the service charges for which the landlord was able to forfeit. Not only does the landlord collect the full capital value of the flat; he can carry on enforcing the arrears.

We think that that goes much too far. Yes, there must be an efficient way of enforcing ground rents and service charges, but there is no need to give landlords such massive windfall gains. We do not think that abolishing those gains would pose any human rights problem.

The Government's amendment does not deal with our complaints. It merely tampers with forfeiture in a way that we believe will lead to the worst of all possible worlds. It sounds well and good to say that forfeiture shall not be permitted for sums under £500. It might be said that obviously it should not be permitted for trivial sums. The amendment, however, removes any cost-effective remedy for the recovery of small sums due from tenants to landlords. The only remedy a landlord will have is to go to the small claims court to enforce his claim against the tenant. He will then have the bother of enforcement through the county court bailiffs, which is notoriously ineffective. Charging order proceedings would be wholly disproportionate, and the landlord will have no claim against the mortgagee.

This is what will happen in practice. Tenants will realise that they are effectively bullet-proof up to the sum of £500. Landlords will not bother to collect such sums. Mortgagees will feel under no obligation to pay such small arrears, because it will not affect their security. Once again, honourable tenants who pay their service charges in full will be subsidising dishonourable tenants who bilk their obligations. The Government's proposals may strike some as rational and tenant-friendly, but any more detailed consideration shows them to be gravely defective.

So what is the way forward? Our amendment picks up the equitable rule that landlords are entitled only to security for moneys owed to them. It substitutes a charge over the lease for non-payment of money for the right to forfeit. 'That would have two advantages. First, the landlord recovers only what is owed to him, receiving no windfall at the tenant's expense, and secondly the court has well established powers to allow debtors to pay off secured moneys without losing their homes.

New clause 19(1) limits the proposal to long leases at a low rent. This is where the problem lies. Where leases are short or granted for a market rent, it is only right that a landlord should be able to repossess for non-payment of rent. By contrast, it should make no difference whether the lease is residential, business or agricultural. If the lease has a capital value, forfeiture should give way to a system that recognises that capital value.

Subsection (2) defines what is meant by forfeiture. Subsection (3) abolishes forfeiture for non-payment of money. The new clause gives the landlord a charge over the lease, which extends to anyone owed money under the lease. That is designed to deal with the common situation in which service charges, for instance, are payable to a management company rather than a freeholder.

Subsection (5) is central to the workability of the proposal. At present, as I have explained, the tenant's mortgagee has an incentive to pay the arrears in order to avoid forfeiture. That will continue under these proposals.

Shona McIsaac

I think the hon. Gentleman's proposal is flawed. He keeps referring to mortgagees. Many people who are threatened with forfeiture have paid off their mortgages. They may be threatened with forfeiture because payment of a £5 annual ground rent is late. The hon. Gentleman has not addressed that issue of threat, which I think would be addressed by a de minimis level of £500.

Mr. Cash

In the circumstances, we shall simply have to disagree. I want to get on so that others can speak.

Up to now, underlessees have had either to pay up or to lose their leases. That will continue. Subsection (5) ties in with subsection (11), which provides for mortgagees and underlessees to come in and pay off the arrears. In turn, those subsidiary interest-holders will take over the landlord's charge from the landlord.

I have spoken at some length because this issue is important to the lives of many people throughout the country. Let me finally say that forfeiture for arrears of rent and service charge is a remedy whose time has passed. It is savage and unnecessary. The Government's proposals do not improve the workings of forfeiture; they worsen them. We propose something better.

Dr. Brian Iddon (Bolton, South-East)

New clause 3 would abolish the forfeiture of leases. Amendments Nos. 26, 27 and 28 are identical to amendments I tabled in Committee, but agreed to withdraw in order to give the Government more time to consider them before Report. When I went to the Public Bill Office to re-table them, I found that the hon. Member for Torbay (Mr. Sanders) had pipped me at the post. New clauses 6 and 8, which relate to compensation, would fall if the Government accepted new clause 3 and amendments Nos. 26, 27 and 28.

I am surprised that this was not a big issue in the other place. It was hardly discussed, if indeed it was discussed at all. It has, however, been a big issue here, both in Committee and on Report. I am disappointed that, at 8.38 pm, we still have a huge batch of amendments and new clauses before us. I must criticise the hon. Member for Stone (Mr. Cash) for delaying the proceedings, just as he did on Monday. This should have been the major debate of the day, as it relates to an issue that is extremely important to people out there. I am pleased that the Minister and the Government have been listening. I thank the Minister for tabling the amendments, which will make it far more difficult to proceed along the route of forfeiture. Nevertheless, the threat of forfeiture is still there. I would have liked it abolished completely.

I hear what the hon. Member for Stone and the Minister say about the reasons other than financial reasons for having forfeiture on the statute book, but if someone is running a house of disrepute or a person in a block of flats is selling drugs, what has happened to the police? There are other ways of dealing with those problems—they may be dealt with through the courts and the judicial process. That is not an excuse for maintaining forfeiture.

We have had a lot of lobbying on the issue, which has been around a long time. The Minister mentioned the Law Commission. It has been examining the subject for more than 17 years. It knew that the Bill was coming to this place. Almost as soon as the Government got in, there was talk about the Bill. There was plenty of discussion on the draft Bill. Indeed, in December 2000, the Government published the results of the consultation on the draft Bill. Paragraph 12 of that document states: We accept the need for effective sanctions against defaulters but we do not believe it is right that a landlord can gain a windfall profit by obtaining absolute possession at the expense of the leaseholder. Instead we propose that where the landlord obtains possession the leaseholder should be compensated for the loss of his interest after deducting moneys owed to the landlord. I do not believe that anyone in the House tonight and in the other place could argue that it is natural justice if a person pays off a mortgage for a flat in Camden worth £350,000—I cited the case in Committee—the landlord goes along the route of forfeiture, wins the case and the leaseholder of the flat loses the entire amount of £350,000. Can anyone in this place or in the other place claim that that is natural justice?

I will not push my new clauses in relation to forfeiture because I think that we will come back to that issue. Indeed, the Minister has promised to come back to it. I ask her how long it will be before the Law Commission comes up with the lengthy proceedings that it has debated for more than 17 years. Can she assure us that we will get a Bill very soon on that subject? It is a crucial matter.

I am prepared to let that ride until the relevant Bill is introduced, but I am not prepared to accept that forfeiture should remain on the statute book and that a person can lose such vast sums of money as the sum that I have just mentioned. I am afraid that I am minded to press the case for compensation, because that is natural justice.

I cannot believe that this is as complicated as the Minister said it was. It seems such a simple issue. If a person has gained a large sum of money, highway men should not rob them of it. If the judicial system cannot get its act together within a few weeks or even a few months and sort that one out, people should be compensated.

I am aware of the time. I had a lot more to say but I shall finish on the following point. I am grateful to the Government for introducing the Bill, which has made huge strides. It is a good Bill and on the whole I am very supportive of it; but it could have been a Rolls-Royce Bill if many of the issues that have been around for a long time had been addressed properly. Abolition of forfeiture is one of them but, more important, compensation when that happens is critical.

Mr. Sanders

There is no doubt that the amendment improves the Bill but it still keeps forfeiture on the statute book. It is therefore necessary to press new clause 3.

As the Minister has admitted, the Government have recognised the unfairness of the use of forfeiture for the collection of debt, because in the case of commonhold units there is a provision preventing a right to forfeiture. The issue for leaseholders is that, where forfeiture of a long lease occurs, particularly for the non-payment of ground rent or service charges, the landlord will obtain benefit that is wholly disproportionate to the breach. Its existence enables landlords to practise a wide variety of abuses. It encourages unreasonable charges, because landlords know that they have the final sanction in order to secure them.

Leaseholders have felt reluctant to challenge unreasonable charges for fear of losing their homes, and because it is the lessee who has to pay the costs of obtaining relief against forfeiture.

8.45 pm

Strict time limits are imposed, and these can often be missed. The fact is, good landlords do not need forfeiture, as owed moneys can be reclaimed through normal debt recovery procedures. The fact that forfeiture exists goes against natural justice. It appears archaic in the modern legal context, which is supposed to seek a fairer balance of the rights of individuals at law, and it helps to perpetuate the discredited reputation of leasehold tenure—one of the factors behind the Bill.

A lease can be drafted so that service charges are described as being by way of further rent. That means that freeholders can issue legal proceedings without the necessity of having the service charge dispute resolved.

Forfeiture is a one way street, heading in the landlord's direction. If a tenant refuses to pay ground rent because, for example, a roof is faulty, he can be faced with losing his home. If the home is lost, the "homeless" leaseholder is not compensated for his loss, following the sale of "his" property.

The Government will say that forfeiture is used only rarely, as the Minister noted earlier. It could therefore be argued that it is unnecessary to keep it on the statute book at all. A Conservative Member said, in Standing Committee, that forfeiture was akin to state-sanctioned theft. That summed the matter up.

Forfeiture is not appropriate in modern property management. For long leases, it could be abolished straight away, as the law provides other mechanisms for recouping moneys owed. The threat of losing one's home is out of proportion to the scale of debt, and causes a vast amount of distress. It is a punishment that far outweighs the crime.

Liberal Democrat Members are not able to support the Government amendments, even though they are an improvement, as they do not address the principle. That principle is forfeiture, and it must go.

Mr. David Lepper (Brighton, Pavilion)

I welcome the Government amendments, which go some way towards removing the central abuse involved in forfeiture. That abuse was not necessarily the loss of a home, which happens relatively rarely, as has been acknowledged. The main abuse of forfeiture has been the fear factor, which has threatened tenants and leaseholders for so many years. Indeed, it would be hard to pick an aspect of leasehold that more clearly represents the feudal relationship that exists between freeholder and leaseholder.

I am pleased that the Government have introduced proposals that will go at least some way to removing the freeholder's right to use the blunt instrument of forfeiture. The term "blunt instrument" was used by Peter Haler, the chief executive of LEASE, in a letter to me picking up some comments of mine on Second Reading. He wrote: Whilst it is quite correct that relatively few cases of forfeiture are enforced by the courts, the present archaic law provides opportunities for mischief by some landlords, and this is a major cause of concern for us. He added: what we find reprehensible is the use of the forfeiture procedure as a blunt instrument to harass leaseholders.

The Government have recognised that. However, the Labour Opposition before the 1997 election carried out extensive consultation about leasehold reform and the introduction of commonhold. I am not sure that the Law Commission has been considering the matter for 17 years, as my hon. Friend the Member for Bolton, South-East (Dr. Iddon) said, but an answer from my hon. Friend the Parliamentary Secretary, Lord Chancellor's Department on 11 March suggested that it had brought forward a draft Bill on the matter in 1994.

Reform of the leasehold laws has been discussed for many years. I therefore find it hard to understand why, with only 10 minutes or so to go before the last stage of voting on the Bill, insufficient thought has been given to including in it provisions for the abolition of forfeiture, and for compensation.

I am one of the vice-chairs of the all-party group on commonhold and leasehold reform. In our submission to the Government at the earlier stage of consultation on the draft Bill, we welcomed their desire to curb abuses of forfeiture. We went on to say, as a cross-party group, that forfeiture should be abolished. Such debts should be handled primarily through the small claims courts and ultimately it should be possible to force a sale of property to pay a debt. However, the balance of funds after settlement of the debt should revert to the leaseholder.

I am realistic enough to see that there is no hope of the new clause to abolish forfeiture succeeding this evening, but I hoped that the Government would accept the principle of compensation. I note what my hon. Friend the Minister says about intending to deal with compensation at a later date, which takes me back to my earlier points about the time scale. For those reasons, I will be supporting my hon. Friend the Member for Bolton, South-East this evening.

Ms Keeble

We have had an important discussion this evening on an issue of major concern to hon. Members on both sides of the House. I share the concerns of my hon. Friend the Member for Bolton, South-East (Dr. Iddon); our earlier discussions about some small, technical amendments have meant that the amount of time available for debating this matter has been curtailed. It is a matter of great importance, because it is a principle and because of the serious practical consequences arising from measures in the Bill.

We have listened carefully and sought to strike a fair balance. We all recognise the need to protect vulnerable leaseholders from oppressive behaviour by unscrupulous landlords and from threats and bullying. However, there is also a need to protect responsible landlords and other leaseholders and to make sure, at this late stage, that there are proper orderly arrangements in place for people's homes, and that includes financial arrangements.

The hon. Member for Stone (Mr. Cash) was muddled in his thinking. He has recognised throughout the Bill's proceedings that the ultimate sanction is the termination of the lease, which is a factor in leasehold arrangements. However, he has not carried through the logic of his argument, for purely party political reasons, I suspect, and not because he is thinking carefully about the best arrangements for leaseholders. New clause 19 does not provide an orderly alternative for sanctions for non-payment of the lease. Given that the hon. Gentleman is presumably trying to present it as a credible alternative, I am astonished that he has not even attempted to discuss his proposal with the Council of Mortgage Lenders.

I recognise the consistent concerns expressed on this issue by hon. Members, including in particular my hon. Friend the Member for Bolton, South-East and the hon. Member for Torbay (Mr. Sanders). They have raised these concerns on Second Reading and in Committee, and have pressed the issue in various discussions. The Law Commission is due to come back in the spring or summer of this year and produce a draft Bill in time for the 2002–03 Session. I realise that it has been a long time in coming, but the Law Commission has got a long way down the road and is very near to concluding its work.

I point out to the hon. Member for Torbay and to my hon. Friends the Members for Bolton, South-East and for Brighton, Pavilion (Mr. Lepper) that I clearly stated the Government's intention and the principles set out by my Department on the removal of forfeiture and a fairer regime for leaseholders. However, it was not possible—especially at the stage when the measure came to this place—to set up a system that would replace the current regime. We have listened—

Lynne Jones (Birmingham, Selly Oak)

Will my hon. Friend give way?

Mr. Cash

Will the hon. Lady give way?

Ms Keeble

We have all been extremely tolerant of the hon. Gentleman, but I intend to close my remarks—

Mr. Cash

The Minister is being patronising.

Ms Keeble

Perhaps the hon. Gentleman is being patronised for the first time in his life.

I shall give way to my hon. Friend the Member for Birmingham, Selly Oak (Lynne Jones).

Lynne Jones

I thank my hon. Friend as I have not yet had an opportunity to intervene.

Is my hon. Friend actually saying that the Government—with all the resources that they have at their disposal—intend to put the matter off for a future legislative opportunity that may well not occur? We know about the pressure on the legislative programme, so surely now is the time to deal with these matters.

Ms Keeble

The entire debate has turned on those points. We have listened carefully. We have taken on board the points that were made. My hon. Friend herself referred not to the ending of forfeiture but to some of the safeguards that have been set up because it was not possible to come up with a workable system within the time constraints. We have come forward—

Mr. Cash

Will the hon. Lady give way?

Ms Keeble

No, I do not intend to give way. I have made it clear that I do not intend to give way. We have spent a large amount of time listening to the hon. Gentleman during the two days of debate on Report.

We have drawn up the most stringent safeguards and protections consistent with orderly arrangements for people's homes. We also have to consider carefully the financial arrangements for people's homes. That is why—even at a late stage—I asked officials to discuss the proposals made by the hon. Member for Stone with the Council of Mortgage Lenders. We take seriously the need to protect and safeguard people's homes.

My hon. Friend the Member for Brighton, Pavilion rightly raised concerns not only about the impact of forfeiture but about the threat to vulnerable leaseholders, especially the elderly. Those issues are dealt with by our amendments. A comprehensive range of measures will oblige freeholders to go through a two-stage legal process before they can even begin to consider forfeiture. A variety of safeguards will be provided to ensure that leaseholders are thoroughly informed of their rights and have the opportunity to deal with all the issues. There is a de minimis level so that people do not lose their homes over a small amount of money. We have provided for further safeguards and protection through secondary legislation so that hon. Members can be consulted and can debate the issues.

Together, those measures will provide a real charter to safeguard leaseholders. Although we have not been able to set up the compensation arrangements that we discussed on many occasions, the Government have produced some workable proposals and amendments to safeguard leaseholders and to ensure that there are proper sanctions for non-payment, consistent with good property management. Those measures will also ensure that the cases raised by hon. Members on Second Reading and in Committee are a thing of the past and that we do not hear of such things again. So I urge hon. Members to support the Government amendment, which will do a very real service for the millions of leaseholders throughout the country.

Amendment agreed to.

Mr. Deputy Speaker (Sir Michael Lord)

In the light of the debate, I am prepared to allow the House to divide on new clause 3 and new clause 19 if that is desired.

Dr. Iddon

On a point of order, Mr. Deputy Speaker. I should like the House to divide on new clause 8.

Mr. Deputy Speaker

Is the hon. Member for Torbay (Mr. Sanders) happy with new clause 8? I shall not allow Divisions on lots of new clauses.

Mr. Don Foster

Further to that point of order, Mr. Deputy Speaker. Perhaps you could explain to the House whether it would be possible to combine new clause 3 with new clause 8. I understand that that would not be possible, and we would therefore wish to press new clause 3 to a Division.

Mr. Deputy Speaker

In that case, the House will divide on new clause 3.

John McDonnell (Hayes and Harlington)

Further to that point of order, Mr. Deputy Speaker. May I ask you to reconsider your decision not to select new clause 8? We are dealing with two distinct issues, the first of which is the abolition of the forfeiture altogether and the other relates specifically to compensation. They involve two distinct principles, so I urge you to consider allowing Divisions on new clause 3 and new clause 8.

Mr. Deputy Speaker

It is for the occupant of the Chair to decide such matters, and I will so decide.

It being after Nine o'clock, MR. DEPUTY SPEAKER pursuant to Orders [31 January and 11 March], put forthwith the Questions necessary for the disposal of the business to be concluded at that hour.