Grand Committee Report of 15 March 2001

Official Report of the Grand Committee on the Commonhold and Leasehold Reform Bill [H.L.]
Thursday, 15th March 2001.
The Committee met at four of the clock.
[The Deputy Chairman of Committees (Lord Ampthill) in the Chair.]
Clause 94 [Management functions: supplementary]:
Lord Goodhart Lord Goodhart moved Amendment No. 169:
Page 44, line 15, at end insert—
("( ) Where under subsection (1) the RTM company owes to a person who is landlord under the lease with respect to repairs, the company shall (except in relation to any right of re-entry or forfeiture) be deemed to be a lessee of that person for the purposes of the Leasehold Property (Repairs) Act 1938.").
The noble Lord said: I come to kick off the fourth day of this marathon—if "kick off" is the right term. It is possible that landlords will try to harass right-to-manage companies by taking them to court to maintain standards of repair at a higher level than is in fact needed. That actually happened with residential leases in the 1930s. The result was the Leasehold Property (Repairs) Act 1938.
The Act stated that landlords could not take actions to enforce repairing covenants in a lease with more than three years to run without obtaining the leave of the court. They could obtain the leave of the court only on specified grounds, such as damage to the value of the reversion, or the fact that works carried out at the present time would be a great deal cheaper than if the property were allowed to deteriorate.
We believe that right-to-manage companies should be in the same position as they would be if they were tenants and should have the benefit of the Leasehold Property (Repairs) Act 1938. I beg to move.
Lord Kingsland: The noble Lord, Lord Goodhart, may be surprised to hear that we support his amendment.
Lord McIntosh of Haringey: We certainly support the intention behind the amendment because we do not want there to be oppressive legal challenges against the right-to-manage company by unscrupulous landlords based on spurious grounds. However, we are not convinced that going back to the 1938 Act is the best way forward. Questions as to whether a failure to repair had damaged the landlord's reversionary interest are likely to increase the scope for disputes and litigation rather than reduce them. If we try to qualify the duty owed to particular parties, we are likely to run into the same problem, and that may also lead to unintended omissions.
The main sanction against a right-to-manage company under the Bill would be the appointment of a new manager under Part II of the Landlord and
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Tenant Act 1987. I can assure the Committee that leasehold valuation tribunals view this power as an extreme sanction. Appointments are made only if there is clear evidence of persistent and serious shortcomings. We expect the tribunals to take a similar approach to applications to remove a right-to-manage company.
I should also add, if it is of any comfort, that we are providing tribunals with additional sanctions to deter frivolous and vexation applications, including a limited power to award costs against the party concerned. I hope that that will reassure the noble Lord, Lord Goodhart.
Lord Goodhart: That provides some reassurance. I shall consider what the Minister has said. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 170 and 171 not moved.]
Clause 94 agreed to.
Lord Kingsland Lord Kingsland moved Amendment No. 171A:
After Clause 94, insert the following new clause—
MANAGEMENT FUNCTIONS: INSURANCE
("—(1) Notwithstanding the specific terms of any lease of the whole or part of the building, any person responsible for management functions in relation to the premises shall ensure that the entire building is insured under a single insurance policy.
(2) Any person responsible for arranging an insurance policy under subsection (1) shall be under a duty to obtain best value for the service charge payers in procuring a suitable policy.
(3) If, in the opinion of any party to a lease, the insurance policy arranged in accordance with subsection (1) does not represent best value for the service charge payers, they may refer the matter to the leasehold valuation tribunal for determination.
(4) Any reference of an insurance policy to a leasehold valuation tribunal under this section shall be supported by an alternative quotation for insurance cover from a recognised and reputable supplier to support the case; and the leasehold valuation tribunal shall not consider any such reference unless it is supported by such an alternative quotation.
(5) The duty to arrange insurance under subsection (1) applies notwithstanding the existence of a dispute which has been referred to the leasehold valuation tribunal.
(6) In determining any dispute referred to it under subsection (3), the leasehold valuation tribunal shall take into account—

(a) the extent of cover procured, and

(b) the level of premium payable by individual service charge payers.").

The noble Lord said: This amendment requires the building to be covered by a single insurance policy, regardless of who arranges it. It requires whoever arranges that policy to provide best value for the service charge payers. The policy may be challenged on the grounds that it does not offer this value but there must always be a policy in place, even if it is subject to challenge. Any challenge must be supported by an alternative quote.
As drafted, the Bill transfers the right of the landlord under the lease to arrange insurance for the building but does not prevent anyone insuring the whole or any part of the building at their own expense. The importance of having a single building insurance policy cannot be overstated.
The impact is perhaps best illustrated by the example of Rose Court in Putney, which was destroyed by a gas explosion in 1985. It transpired that the individual leaseholders were responsible for insuring their own flats and that many had failed to make adequate arrangements for the restitution of the building. The consequence was that the insurance cover could not meet the cost of reinstating the building, so leaving leaseholders with the problem of finding new accommodation while still retaining an outstanding mortgage liability.
The purpose of the amendment is to go beyond the parallel right of the landlord to challenge the RTM's choice of insurers by adding an obligation for there to be a single building policy in force at all times, and to require that this policy represents best value rather than only the cheapest option. The courts have confirmed in the past that freeholders are not required to opt for the cheapest insurance quotation but, rather, are obliged to obtain the best deal available.
There is no requirement that the RTM company make insurance arrangements separate from those which existed when the management was undertaken by the landlords. Many landlords use bulk purchasing power to provide the best deal that they can for their tenants. It may not be possible for a single building to obtain such favourable terms. This amendment provides a mechanism for the landlord, or any other party to the lease, to challenge an insurance arrangement on the grounds that it does not represent best value to the service charge payers and to offer an alternative and possibly a better deal.
Indeed, it is possible that, if a sufficient number of buildings were withdrawn from the landlord's collective arrangements, the landlord would not be able to obtain such favourable terms for those buildings which remain within his portfolio, thus prejudicing the interests of others.
Many freeholders, as Members of the Committee are well aware, are concerned that one of the effects of leaseholders claiming the right to manage will be to disrupt insurance arrangements. For many of those landlords whose portfolios are made up primarily of ground rent investments, the right to earn commission from the provision of buildings insurance represents a principal element of value. They are, therefore, understandably worried that the effect of a claim, or even the prospect of a claim, for the right to manage could result in those portfolios being devalued.
I am, of course, only too well aware that there are freeholders who exploit the right to provide insurance by charging commissions which can only be regarded as excessive. I wholeheartedly condemn that practice wherever it occurs.
Finally, one aspect of insurance in mixed use buildings where the right to manage has been exercised, is the risk of double insurance by both the landlord and the RTM company as each seeks to fulfil its obligations. Most business leases include an obligation on the landlord to insure the building and then to charge back the premium as an insurance rent.
The landlord may not be in a position to vary the terms of the arrangement with the tenant and so may remain contractually bound to insure the building.
That can be avoided only if there is a single insurance policy for the whole building, which may, in itself, be achieved only by establishing mutual enforceability of covenants via a separate management agreement. Permitting each to insure their own interest is simply not practicable. If the landlord insured the ground floor commercial elements on which he had long-standing leases, and the RTM company insured the remaining residential elements above and a fire in the commercial units destroyed the building, it is unlikely that the landlord's insurance for those parts would cover the damage to the residential parts. It may even be that the leaseholders were no longer able to enjoy beneficial occupation; but the landlord would have had no interest to insure and so there would be no consequential loss to recover the material damage. I beg to move.
Lord Goodhart: I return the compliment made by the noble Lord, Lord Kingsland. On this occasion we broadly support his amendment. It seems to us that a single insurance policy covering a whole building is an essential element; indeed, our Amendment No. 238YA (formerly Amendment No. 237) includes, among a number of other provisions, a power to vary leases so as to ensure that there is an obligation to insure the whole building under a single policy. This obviously makes good practical sense, and we support it.
The Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions (Lord Whitty): At the risk of creating too broad a consensus, I should tell the noble Lord, Lord Kingsland, that we have some sympathy with what lies behind his amendment, although I do not support it as it stands. Clearly, in almost all circumstances it would be better for a block of flats to be subject to one insurance policy which covered the whole building for all the reasons the noble Lord, Lord Kingsland, spelt out. We would also expect anybody who took out that insurance to follow the principles of best value, as he also said. However, later in the process of the Bill we shall come to our own proposals to address these issues. Members of the Committee may recall that the consultation paper of August 2000 floated the idea that the absence of a requirement to take out a single insurance policy for the block should be made clear grounds for the variation of the relevant leases. We prefer that approach to what is in this amendment, which overrides the terms of the leases.
A number of noble Lords have tabled later amendments relating to the question of variation of leases, which arises first in Amendment No. 195. We can perhaps discuss that in more general terms later. As to that, it is the Government's intention to bring forward some proposals.
Leaseholders already have a right to challenge the "reasonableness" element of the service charge, including insurance, so there is an incentive for best value, in that the landlord who has taken out

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unnecessarily expensive insurance, for example, may find himself unable to recover the full costs of that from the leaseholders if they appeal against it. Our proposed amendment to Section 20 of the 1995 Act will also provide some protection to require the landlord to consult before taking out insurance contracts which last more than 12 months.
I hope that the noble Lord, Lord Kingsland, and others accept that these measures are intended to address the problem which has been rightly identified. I also hope that the noble Lord understands why we cannot accept that more stringent requirements should be placed on the RTM company in taking out insurance of the property than would apply to any other landlord, or any other manager in these circumstances. We believe that at a later stage we shall devise a better way to deal with the fundamental problem.
Lord Richard: Before my noble friend sits down, perhaps I may ask him a question on one matter which I do not quite follow. I can see what my noble friend and the noble Lord, Lord Kingsland, seek to achieve. But if one looks at Amendment No. 195, which my noble friend indicated was the approach he preferred, that gives the RTM company the right to make the application if the insurance of a flat is defective; in other words, it is a permissive right. If it wishes to make the application, it can. The amendment of the noble Lord, Lord Kingsland, seeks to place an obligation on them. I would have thought that, as opposed to the permissive right on the one hand and the actual obligation on the other hand, there is a lot to be said for having an obligation for single insurance rather than merely having the right to apply for a variation of the lease in order to try to achieve it. Will my noble friend expand a little on why he rejects the mandatory nature of the amendment?
Baroness Gardner of Parkes: Before the Minister replies, perhaps I may follow up on that point. I may not be here when we get to Amendment No. 195 as I am chairing a meeting elsewhere.
With regard to Amendment No. 195, which has just been mentioned—and, indeed, to Amendment No. 171A—does a leasehold valuation tribunal have a right to interpret a lease? I have been contacted by tenants about whether or not it will be given such a role. Tenants say that that is not clear in the legislation.
4.15 p.m.
Lord Whitty: I referred to the group of amendments which includes Amendment No. 195 because those amendments deal with the variation of leases in general. I am not necessarily commending the exact terms of Amendment No. 195 in order to deal with this problem. In that general context, we will propose grounds for changing a lease. Part of the grounds for changing a lease would be to write into the varied lease the obligation to insure the building as a whole.
I am not prepared at this stage to go down the road of a mandatory requirement through that mechanism in relation to the RTM. As I said in my previous
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remarks, one would be putting on to the RTM an obligation that one would not put on any other landlord in those circumstances. Generally speaking, we have tried not to place any further thresholds on the proper operation of an RTM than exist for any other manager or landlord of the property. The ability to vary the lease should deal with the problem where it is identified.
As to an LVT's ability to interpret the lease, as I understand it, an LVT's responsibilities are confined to the application of the lease and whether the terms of the lease have been followed. It cannot expand or elaborate on the terms of the lease. It may be more sensible if I write to the noble Baroness on that question.
Baroness Gardner of Parkes: The point that was made to me by various tenants' groups was that many leases are defective and are therefore unclear. If you plan to vary a lease, you have to know what the lease is. Tenants feel that if the leasehold valuation tribunal could determine what the terms of the lease were that may be an answer to the problem. I do not expect an answer on this point today. I am happy to wait for a letter.
At the moment, the leasehold valuation tribunal tends to refer people to a court to have their lease interpreted; the matter then goes back to the leasehold valuation tribunal, and so it becomes an expensive football.
Lord Kingsland: I thank the noble Lord, Lord Goodhart, for returning the compliment. I should like to thank also the noble Lord, Lord Richard, for saying what I hope I would have said had he not said it first.
The tone of the Minister's response was extremely constructive and most sympathetic. I should like to reflect on what he said, see what he says when we get to Amendment No. 195, and then perhaps return to the matter on Report with a different amendment. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 95 [Functions relating to approvals]:
[Amendments Nos. 172 to 175 not moved.]
Clause 95 agreed to.
Clause 96 [Approvals: supplementary]:
[Amendment No. 175A not moved.]
Clause 96 agreed to.
Clause 97 [Enforcement of tenant covenants]:
[Amendment No. 176 not moved.]
Lord Kingsland Lord Kingsland moved Amendment No. 170A:
Page 46, line 31, at end insert—
("( ) The RTM company shall assist and co-operate with the landlord, or any other person by whom tenant covenants arc enforceable, in the enforcement of any covenant which has not been complied with.").
The noble Lord said: Under Clauses 97 and 98, a landlord retains the right to step in and enforce tenant covenants if the RTM company does not for any reason. The amendment requires the RTM company

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to assist and co-operate with the landlord if he decides to exercise that right. In other words, the RTM company should not obstruct the enforcement of covenants.
There are two other amendments in this group—Amendments Nos. 176B and 176C—and I shall trespass on the Committee's time to speak briefly to them. Amendment No. 176B would render the RTM company liable to recompense the landlord for any loss resulting from its failure to monitor and report on any breaches of tenant covenants under Clause 98. The obvious purpose of the amendment is to ensure that the landlord does not find himself out of pocket as a result of the failure of the company to comply with its duties.
Amendment No. 176C is self-explanatory. The RTM company is unable to exercise the powers of forfeiture or re-entry. If a case requires enforcement and reaches the stage where the use of those powers is justified, it must seek the co-operation of the landlord who remains able to exercise the powers granted to him by the lease. The landlord will not derive any direct benefit from taking enforcement action, particularly if the dispute is in relation to unpaid service charges.
Enforcement proceedings involve costs, which at present can be recovered through the service charge if necessary. However, the landlord no longer has access to that. To ensure that landlords will be willing to support RTM companies where proceedings are necessary, the legislation should state explicitly that the RTM companies will reimburse the landlord's costs. The company will be able to recoup those from the tenant through the service charge. I beg to move.
Lord Whitty: This group of amendments proposes a number of changes to the provisions governing enforcement of tenant covenants. It may be helpful if I explain to the Committee where we are in the Bill as it stands in order to achieve enforcement of covenants.
Clause 97 already ensures that the RTM company can enforce any of the tenant covenants itself. That is needed so that we can ensure that they can exercise proper management control over the premises and deal with problems that arise, either with the building or with disputes between tenants, where someone breaches the terms of their lease. Because a breach of lease can in some cases, like those concerning the amendment of the noble Lord, Lord Kingsland, affect the landlord's reversionary interest, we have not taken away their right to take enforcement action. So the landlord and the company will both have rights in parallel to one another here.
Clause 98 sets out the responsibilities of the RTM company in respect of monitoring compliance with covenants. I should make clear that this should not be interpreted as being too heavy-handed, but a good leasehold manager will be expected to keep an eye on compliance with covenants and we therefore expect the same from the RTM company. It is also important, as the noble Lord, Lord Kingsland, said, that the landlord knows if a breach is causing long-term harm
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to his reversionary interest. We are therefore requiring the RTM company to inform the landlord of any breaches which are not put right within three months of their coming to the attention of the company.
Beyond that, we do not see any requirement on the company to have any further explicit requirement to co-operate with the landlord in this manner, because the RTM company itself is under an obligation to enforce the covenants. As such, the company could not be anything but failing in its duties if it were preventing those covenants being enforced. Therefore, that is already covered by the obligations of the RTM company in the Bill.
We certainly are not in favour of the RTM company being made liable for compensation, as one of the amendments would require, at least not in the way that is suggested in the amendment. The landlord would already have a general civil right to take action against someone for failure to comply with a statutory requirement. So unless we provide otherwise—and we have not—the landlord would therefore be able to seek compensation from the RTM company if it fails to meet its obligations under Clause 98. A court would then have to decide what a fair amount of compensation would be.
However, we would consider it wrong to do what these amendments suggest we should do, which is automatically to peg such compensation to the loss caused to the landlord by the breach. Any such sums should be sought from the tenant who was in breach rather than the RTM company, although in some cases there will be a complex inter-relationship.
It is correct to say that the RTM company cannot seek forfeiture but the company has general powers to use against a defaulting leaseholder, such as going to court to enforce a debt. We do not consider that the RTM company will necessarily need to involve the landlord and, therefore, invoke the rather draconian power of forfeiture to settle lesser disputes; for example, disputes over service charges.
The proposed requirement to pay the landlord's costs could also be unfair. As the rights are parallel to the landlord and the RTM company, the landlord will be able to take his own enforcement action at any time, even in the case where the RTM company is itself taking such action to deal with the matter. If the landlord chooses to do so, the costs need to fall on the landlord himself. If there are costs arising from a failure of the RTM company to deal with the matter, these will be recoverable as part of any action for noncompliance with the statute—mainly under Clause 98. The rights of the landlord regarding non-fulfilment of duties are already in the Bill. We do not need the additional powers that are spelled out in the three amendments.
Lord Kingsland: I shall read the noble Lord's speech carefully before deciding whether to retable the amendment for Report stage. Would I be right in concluding from what the noble Lord the Minister said

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that he believes that the power of forfeiture is now effectively otiose? Is that why he has weakened it in other parts of the Bill?
Lord Whitty: I tend to try to avoid the word "otiose". It would be true to say that in much of housing and tenure law the use of forfeiture, or the threat of forfeiture, is not appropriate. The noble Lord may be aware that the Law Commission has been looking at the question of forfeiture for some time. In this context, there is some history of the threat of the use of forfeiture being used inappropriately, and therefore we have put certain modifications at other parts of the Bill.
Lord Kingsland: Would the noble Lord find it helpful if we were to table a wide-ranging amendment on forfeiture at the Report stage?
Lord Whitty: I am not entirely sure that I should be encouraging anybody to table wide-ranging amendments on forfeiture or anything else at later stages of the Bill, should we reach them. No doubt the issue of forfeiture will be discussed both at this stage and at later stages in the Bill.
Lord Kingsland: I am much obliged to the noble Lord for his diplomatic response. I shall reflect on whether to turn my attention to the wider issues between now and Report stage. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 97 agreed to.
4.30 p.m.
Clause 98 [Tenant covenants: monitoring and reporting]:
[Amendments Nos. 176B and 176C not moved.]
Clause 98 agreed to.
Clause 99 agreed to.
Schedule 7 [Right to manage: statutory provisions]:
Lord Whitty Lord Whitty moved Amendment No. 177:
Page 80, line 48, at end insert—
("(5) Section 26 does not apply.").
The noble Lord said: Amendment No. 177 ensures that a right-to-manage company cannot take advantage of an exemption from prosecution which is granted to certain public sector landlords for non-compliance with certain requirements of the Landlord and Tenant Act 1985. This tidies up the situation. I beg to move.
On Question, amendment agreed to.
Schedule 7, as amended, agreed to.
Clause 100 [Landlord contribution to service charges]:
Lord Kingsland Lord Kingsland moved Amendment No. 178:
Page 47, line 19, after ("company") insert ("a sum being that part of").
The noble Lord said: In moving Amendment No. 178, I shall also speak to Amendments Nos. 179 and 181, and leave Amendment No. 180 in the name of my noble friend Lord Caithness. Amendments Nos. 178, 179 and 180 seek to specify on the face of the Bill how the proportion of costs which fall to the landlord to pay as his contribution to the service charge should be calculated. We would prefer to see the definition of the proportions stated more explicitly.
I am attracted to the proposal put forward by my noble friend Lord Caithness. The substance of it is already likely to exist and, therefore, will perhaps generate less argument. Calculating the proportions by reference to floor area is a viable alternative. However, I am aware that disputes between surveyors over floor area are by no means unusual.
I turn to Amendment No. 181. If a unit were excluded from the right to manage, the amendment would make the person required to pay the service charge on it the superior landlord rather than the direct landlord of a tenant in occupation. I beg to move.
The Earl of Caithness: Before speaking to Amendment No. 180, which is grouped with this, perhaps I may apologise to the Committee for not being in my place when the Committee started. It is very difficult to be in two places at once; in the Chamber talking about foot and mouth disease and in the Moses Room talking about commonhold and leasehold reform. I apologise for my absence, but I was going to lose out on one or the other.
Amendment No. 180 is a very simple amendment. Subsection (4) of Clause 100 refers the internal floor area. That might not be the appropriate or the common way in which the service charge is calculated on the building. It could be done by a service charge or perhaps a rateable value if it were a very old block of flats. Amendment No. 180 seeks to introduce some flexibility into the situation. Should there not be agreement on that flexibility, the matter can be referred to the leasehold valuation tribunal.
Lord Richard: I am a little mystified by the amendments, particularly those of the noble Lord, Lord Kingsland. I do not see the great difference between the Bill as it would stand if Amendments Nos. 178 and 179 were incorporated into it and the Bill it now stands. If there is a point that is escaping me I shall listen to it with great care and attention. However, as the amendments do not seem to add a great deal to the Bill they seem perhaps a little otiose.
Lord Whitty: This is an interesting area. As you may know, in this area long leases will normally make the leaseholder responsible for paying the service charges, and in a block of flats that will normally be accompanied by a provision to set out how the overall service charge liability is divided up. In many cases, that is on a fairly straightforward basis of their shares, but in some blocks the leases will set down the precise proportion that each leaseholder must make, which may have been based on all kinds of formulae in the past.

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Logic suggests that where this applies, the proportions however arrived at, should add up to 100 per cent. Regrettably, however, there are instances where they do not, and that may be because the leases themselves are defective—and there are rights to correct that. But it may also be that the leases were deliberately set to come out to less than 100 per cent in recognition of the fact that the landlord holds some of the units or some of the territory and therefore meets a share of the costs.
To take a simple example, if one flat in a block of four is held by the landlord, each of the leaseholders has to contribute only 25 per cent. Where that applies—and unless we provide otherwise—the newly created RTM company will find itself faced with a shortfall. Of course, the company could seek to amend the leases, but it does not seem right that it should necessarily have to do so. If the landlord met a fixed share of the cost when he was the manager, we consider that he should continue to do so when the RTM company is in effect the manager. Clause 100 is designed to do that.
I hope that what I have said indicates that the landlords should in certain very limited circumstances be liable to meet some of the costs that would otherwise fall on the RTM company, and I hope that these amendments will not be pursued.
As regards Amendment No. 181, it is probably best to say that we cannot see why the freeholders should have to bear the full cost in such circumstances.
On Amendment No. 180, the noble Earl, Lord Caithness, suggests that there should be a choice of alternative formulae for apportioning costs among a number of landlords. I can appreciate the arguments in favour of that. However, we believe that it is better for there to be just one. We want to minimise the opportunity for landlords to be obstructive. If there is a choice to be made, there is a danger that that will lead to further argumentation or further disputes. Those disputes can take a long time, leaving the RTM company out of pocket. That is our initial view on that amendment, but we are not irrevocably wedded to the precise formula currently on the face of the Bill. We obviously consider that floor space is a clear and easily measurable basis for apportionment, but would be happy to look at alternatives. We cannot see that having regard to the leases themselves would work in these circumstances.
The requirement imposed under this clause would apply only where the leases specify the individual proportions payable by each leaseholder. Simply having regard to that will not necessarily provide an answer as to how that should be cross-applied to the landlords. This could again create scope for argument and delay, which we are obviously hoping to avoid. We may return to this matter but we are not convinced at the moment that the opportunity for choice offered by Amendment No. 180 resolves any of the problems.
The Earl of Caithness: I am glad that there is some flexibility in the Government's position on this. The
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noble Lord has a very good argument: that if there is one method of calculating a formula it resolves a great many disputes.
However, it should be borne in mind that a number of situations exist throughout the country where the noble Lord's formula would run contrary to the existing formula under which the building is operated. That could lead to all kinds of difficulties as one would then be applying two formulas to running the building.
I hope that the Minister will reconsider this issue. I am glad that the noble Lord said that he was not entirely wedded to his wording. There is a good case for having some sort of flexibility here, where an established pattern has been set and all the tenants are used to it, rather than having to change that and come to a new formula. If the noble Lord, Lord Whitty, is going to take this matter away, I am happy to proceed no further at this stage.
Lord Kingsland: I saw the noble Lord, Lord Whitty, nodding as my noble friend Lord Caithness was sitting down. In those circumstances, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 179 to 181 not moved.]
Clause 100 agreed to.
Clause 101 agreed to.
Clause 102 [Cessation of Management]:
[Amendments Nos. 182 and 183 not moved.]
Clause 102 agreed to.
Clause 103 agreed to.
Clause 104 [Agreements excluding or modifying right]:
[Amendments Nos. 184 to 187 not moved.]
Clause 104 agreed to.
Clause 105 [Application to Crown]:
[Amendments Nos. 188 and 189 not moved.]
Clause 105 agreed to.
[Amendment No. 190 not moved.]
Clause 106 [Powers of trustees in relation to right]:
[Amendments Nos. 191 and 192 not moved.]
Clause 106 agreed to.
Clause 107 agreed to.
Clause 108 [Notices]:
[Amendments Nos. 193 and 194 not moved.]
Clause 108 agreed to.
4.45 p.m.
The Earl of Caithness The Earl of Caithness moved Amendment No. 195:
After Clause 108, insert the following new clause—
VARIATION OF LEASES
("—(1) The RTM company shall enjoy the right to make an application to the leasehold valuation tribunal (LVT) for variation of all existing leases which are defective or inadequate in dealing with—

(a) repair or maintenance of the flat, building in which the flat is contained, or land or building let to the tenant under the lease,

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(b) insurance of the flat,

(c) maintenance of installations or services reasonably necessary to ensure that the occupier of the flat enjoys a reasonable standard of accommodation,

(d) recovery of expenditure and advance payment on receipt of expenditure,

(e) computation of service charge under the lease,

(f) creating and building up adequate reserve funds, and

(g) such other matters which shall be for the future benefit of the building and its occupiers.

(2) The LVT in considering such applications shall have regard to provisions which may prevent the proper upkeep of the property and equity between the parties.
(3) Before serving notice on the tribunal, the RTM company shall give at least two months notice to all parties setting out the terms of variation, their reasons and intentions.
(4) Where the parties are in agreement, this shall be incorporated in the notice in order that the LVT can endorse the agreement.").
The noble Earl said: We now move on to the difficult and vexed question of variation of leases. Members of the Committee who have dealt with leasehold properties will know what a difficult area it is.
I am delighted that, for a change, I am able to do some of the Government's work for them. In their consultation paper, the Government pointed to the problems of the existing provisions with regard to leases, the difficulties that there were and the reasons why they should be changed. When we come to the Bill, there is nothing to take forward the thoughts that were in the consultation paper. I thought that I would do it for them. The Minister may, if he wishes, take my amendment away and have it drafted properly, but I hope that he will not destroy the arguments.
The problem comes where there is a legitimate ground for a variation of lease, because the lease is not specific or is contradictory. It prevents right-to-manage companies getting going and taking over the operation of their buildings. Most of us believe that that is a good thing and should be encouraged. There are far too many bad leases and old leases that do not make reference to the important issues facing landlords and tenants today. Yet one cannot get those leases changed. That is the nub of the problem.
My amendment sets out areas in which the leases, which might be defective or inadequate, can be changed for specific areas. That is taken to the local valuation tribunal. It is fair to both parties, it will continue to encourage the right-to-manage companies to proceed, it will bring the management of flats up to a better standard than is taking place at the moment and, above all, it will give parity to landlords and tenants. That is only to be welcomed. I beg to move.
Lord Richard: Perhaps I may speak to my Amendment No. 240A. I am sorry. Am I interrupting the noble Lord, Lord Goodhart?
Lord Goodhart: My amendment comes first. I am sorry that I was not quick enough of the mark. Our Amendment No. 238YA applies to long leases of flats generally and not just to RTM companies. That is the distinct advantage of it as compared with Amendment No. 195.
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It is based on the proposals in the Government's consultation paper of last August. Section 35 of the Landlord and Tenant Act 1987 allows leases of flats to be varied by the court as they are unsatisfactory in particular respects. The consultation paper (Cm 4843) states in paragraph 5 on page 181 that,
"the grounds for an individual leaseholder of a flat to bring forward an application are narrow, and omit a number of important management-related matters".
The consultation paper goes on to discuss what those matters are. All the proposals in this amendment come directly from the Government's consultation paper.
Subsection (2) of Amendment No. 238YA transfers jurisdiction for variation from the court to the leasehold variation tribunal. That follows a Government proposal to transfer jurisdiction to the LVT to reduce the costs and duration of applications.
Section 35(2) of the 1987 Act sets out the grounds on which an application to vary may be made in a number of sub-paragraphs. Our amendment extends and clarifies these. The new subsection (2A) of Section 35 of the 1987 Act clarifies what is necessary to make repairing and maintenance obligations satisfactory. The new subsection (2B) modifies Section 35(2)(b) by requiring the entire building to be insured under a single policy to avoid problems which arise if each lessee insured separately, those problems already having been discussed in connection with an earlier group. I should say that in subsection (3A)(b) there is a misprint. It reads, "expenditures insured in respect of administration"; it should read, "expenditures incurred". New subsection (3A) clarifies the meaning of expenditure in the context of recovery of expenditure incurred in performing obligations under the lease for the benefit of other parties. New subsection (3B) makes it clear that a proper lease must include provision for payment in advance and interest on late payments. The amendment follows precisely the proposals set out on pages 180 to 184 of the consultation document. I should like to know why the Government have not included these proposals in the Bill. I invite them to do so now.
Amendment No. 240, which is grouped with Amendment No. 238YA, deals with a somewhat different issue. It would be better if I dealt with that in its proper place in the groupings list.
Lord Richard: I am not very often accused of being too fast, but on this occasion I apologise to the noble Lord, Lord Goodhart.
Amendment No. 240A follows very much on the lines of the amendment moved by the noble Earl, Lord Caithness, and those spoken to by the noble Lord, Lord Goodhart. I do not propose to go through it in any detail as the thrust of it is clear. It is that variations should be made to the lease in circumstances in which it improves the management. It is an issue on which I believe the Government had envisaged legislating, but somehow, in the course of the drafting of the Bill and its introduction, it seems to have become lost. I hope the Minister can tell us today that he is minded to look at this point again.

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It seems to be a fairly simple and attractive proposition that, if the lease inhibits proper management, in certain circumstances there should be a variation of the lease so that that management may be made more effective and more efficient. I am not wedded to the wording of the amendment any more than the noble Earl, Lord Caithness, was wedded to his. I hope that the Minister will feel able to smile benevolently on the thrust of the amendment.
Lord McIntosh of Haringey: I can reassure all Members of the Committee who have spoken that we share their concerns. We believe there should be effective means to seek the variation of defective leases. There are already provisions in the Landlord and Tenant Act 1987 which allow for that to be done. We have always agreed that they are not entirely satisfactory. We consulted on proposals to improve them alongside the draft Bill. The noble Lord, Lord Goodhart, and the noble Baroness, Lady Hamwee, have proposed an amendment which is designed to enact these proposals. Indeed, Amendment No. 240A, which stands in the name of my noble friend Lord Richard, is along the same lines. I can say straight away that we will consider the point and see whether it is possible to bring forward an amendment at Report stage to meet those concerns.
The noble Earl, Lord Caithness, made a parallel suggestion that we should grant rights to allow the RTM company to seek lease variations. This is not necessary, because paragraph 10 of Schedule 7 already allows the right-to-manage company to make use of the 1987 Act. Paragraph 10 states:
"Sections 35, 36, 38 and 39 of the 1987 Act (variation of long leases relating to flats) have effect as if references to a party to a long lease (apart from those in section 38(8)) included the RTM company".
It would not be right to grant the company additional rights in this respect which are not open to landlords or tenants. I hope the noble Earl, Lord Caithness, can be persuaded that the correct way to look at this issue is to make sure that the existing rights properly care for the needs of everyone, including the RTM company, and that he will be content to allow us to consider that matter further.
I understand from the noble Lord, Lord Richard, that he is not now raising the issue of service charge accounts, because that is a matter to which, if necessary, we can return later in the Bill. However, I can tell him now that, on this issue too, we shall consider what can be brought forward at Report stage. The same applies to his reference to the appointment of a manager regime. Amendments have been tabled that relate purely to that subject, which we are due to discuss when we reach Chapter 5. Perhaps we can discuss the whole issue then.
The Earl of Caithness: I am grateful to the noble Lord for that response. He has covered many of the concerns. He has met my concerns and those of the noble Lords, Lord Goodhart and Lord Richard. I shall read with care what he has said.
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I have to say that I am finding it much harder today to hear in this room than last time.
Lord McIntosh of Haringey: It is my defective voice rather than the address system, although that has been adjusted.
The Earl of Caithness: We always enjoy listening to the noble Lord, Lord McIntosh, and we listen with care to what he says. I have had difficulty in hearing what other noble Lords have said. I shall read with care what has been said and come back to this issue at Report stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clauses 109 to Ill agreed to.
[Amendment No. 196 not moved.]
Lord Goodhart Lord Goodhart moved Amendment No. 197:
After Clause 111, insert the following new clause—
QUALIFYING TENANTS SATISFYING RESIDENCE CONDITION
("—(1) Section 6 of the 1993 Act (qualifying tenants satisfying residence condition) is amended as follows.
(2) In subsection (2), after "tenant" insert "or an adult member of his family".
(3) In subsection (3), omit the words following paragraph (b).
(4) After subsection (3) insert—
"(3A) A body corporate shall be treated as satisfying the condition specified in subsection (2) if that condition would have been satisfied if any individual who is a member of the body corporate had been the tenant of the flat.
(3B) For the purposes of subsection (2), references to any person being an adult member of another's family shall have the same meaning as in section 10.".").
The noble Lord said: I had intended not to move this amendment. However, it may be better if I move it formally and explain why I do not intend to bring back this matter at a later stage.
The original aim of the amendment was to keep the residence test for collective enfranchisement, but to make it easier to satisfy the test. I was concerned that this might be taken advantage of by speculators who had no real link with the property. I have been persuaded, however, that keeping a residence test is in fact undesirable. I am particularly grateful to the Leasehold Reform Professional Committee and others who have made submissions on this point.
The need for any residence test to be satisfied by more than half the tenants exercising that right is a serious barrier to collective enfranchisement. We support collective enfranchisement and wish to make it more easily available. I understand, particularly from the Leasehold Reform Professional Committee, that collective enfranchisement is not of interest to speculators, because they want a property interest that they can control, and out of which they can get very quickly if they so wish. The abolition of the residence test also eliminates problems with tenants who are corporate bodies and therefore cannot satisfy the residence test. Corporate tenancies have of course been used fairly frequently to frustrate the exercise by tenants of their statutory rights.
Therefore, I formally move the amendment, but I shall of course ask leave to withdraw it. I do not intend to bring back the amendment at Report stage. I beg to move.
Lord Kingsland: This amendment extends the definition of a qualifying residence to cover any adult member of a tenant's family, or an individual living in a flat on a lease held by a company. Broadly speaking, we can support the amendment. That may make the noble Lord, Lord Goodhart, extremely worried.
In central London, there is still a demand for leases granted to named companies, especially offshore companies. It is reasonable that these leases should not be franchised, not least because many such companies operate outside the United Kingdom taxation laws. Where a lease was originally granted to a company and the assignment clause allows it to be assigned only to companies, that requirement should prevail as the original purchase price would have been agreed on that basis. However, if the assignment clause is silent, the lease should be treated as though it were a lease granted to an individual.
There is an argument that this would be inequitable towards the beneficiaries of the trusts, who will not be able to benefit from this. However, we take the view that trusts were established primarily for taxation reasons rather than property ownership. It might be thought desirable that trusts should, in fairness, benefit from this element of property law; but if it were thought so desirable, it should be accepted that they cannot benefit from the tax laws as well.
5 p.m.
Lord Whitty: I note that the noble Lord, Lord Kingsland, is raising a wider point in that respect. I note that the noble Lord, Lord Goodhart, will not pursue the amendment and, indeed, for it to work it would have to be combined with several others. The amendment as proposed would still enable people who were members of a family and so forth to qualify under these provisions, whereas somewhere else they would be keeping the residence qualification.
The reality of the movement of flats is that flats change hands relatively frequently. Others are occupied in effect as second homes and others are sublet by their owners when they are away abroad or wherever for a length of time. These people are not really the kind of speculators and investors in terms of property companies on which the original concern was based. They are private owners and therefore should have some rights under this Bill.
As my noble friend Lord Bach explained at Second Reading, we are preventing any person or a company holding leases on more than two flats in the block from participating in the collective enfranchisement proceedings. We will therefore exclude somebody who was attempting to acquire the whole block or part of the block for investment purposes rather than as a residential leaseholder. That should provide an adequate safeguard against acquisition of whole buildings by investors through the back door. We have probably met that point. There would be
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understandable anxieties among leaseholders if the original intention were pursued, and I am grateful that the noble Lord is withdrawing this amendment.
Lord Goodhart: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 112 [Non-residential premises]:
Lord Goodhart Lord Goodhart moved Amendment No. 198:
Leave out Clause 112 and insert the following new Clause'—
NON-RESIDENTIAL PREMISES
("—(1) Section 4 of the 1993 Act is amended as follows.
(2) In subsection (1)—

(a) omit "neither";

(b) for "residential" substitute "non-residential";

(c) for "nor (ii)" substitute "(ii) not";

(d) for "10 per cent" substitute "25 per cent".

(3) For subsection (2), substitute—
"(2) For the purpose of calculating the internal floor area of the premises, any part of the premises used as a garage or parking area or for storage shall be disregarded."").
The noble Lord said: The amendment may seem obscure on first reading. It is an attempt to deal 'with a point raised some time ago by my noble friend Lord Jacobs. As Section 4 of the 1993 Act states, there is no collective enfranchisement if the parts of the premises which are not occupied for residential purposes and not comprised in the common parts exceed 10 per cent of the floor area. Clause 112 increases that figure from 10 per cent to 25 per cent, and that is a change which we support.
My noble friend pointed out that commercial premises on the ground floor may often have basement storage areas underneath them, and that will make it more difficult to certify the not-more-than-25-per-cent test. The effect of our amendment is to exclude storage areas from the computation and, as a matter of balance, that would have to apply both to the commercial and non-commercial storage areas. We believe that on balance the amendment would make it a little easier to go ahead with the collective enfranchisement of a mixed-use unit. I beg to move.
Lord Jacobs: I am pleased to support this amendment. However, as often happens, when you keep studying these things you begin to see a few difficulties. Before the Government raise the difficulties, it must be remembered that, for example, there are units in London where the basement area is not storage, but is used as retail or restaurant premises and so on. There are two levels.
The principle exists. I believe that the Government's intention where there is a commercial ground floor—and, probably, basement—in relation to the number of residential floors above, is relevant. Therefore I would suggest that we should go further and extend the provision to basements, garages and outside storage areas. That would be satisfactory and if the Government could modify it—I think that that might be necessary—I am sure that it would he more effective.

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We do not want the same situation that we had with the previous Bill, when it was impossible to find a building anywhere in London that could be enfranchised, so at least we are moving in the right direction.
Lord Kingsland: I am afraid that I am unable to support the amendment of the noble Lord, Lord Goodhart. I have reached this conclusion because, at a later stage, I shall oppose Clause 112 altogether.
As the noble Lord, Lord Goodhart, explained, the amendment would mean that garages, storage areas and parking spaces attached to residential dwellings would not be regarded as occupied for residential purposes. In my view the amendment seeks to distort the definition of non-residential parts to make it easier for mixed-use buildings to qualify for enfranchisement. Garages, storage areas or parking spaces are attached to particular dwellings. It cannot be argued that they compromise part of the building that is in non-residential use.
Lord Whitty: I believe that I am clearer about what the intention might be. I am not entirely sure, but there seems to be an internal contradiction here. If the areas are attached to the residential flats, they are part of the residential lease. If the aim is to make it easier for mixed dwellings to qualify—which, I presume it is—it could have the opposite effect. Garages and storage areas will frequently be attached to individual flats, particularly garages, and their exclusion from the calculation would go against the residential element of the building. I do not think that that was the intention, but it would be the result of the clause. It may be that there is more to the logic than I am currently following, in which case I apologise, but we may need to consider it again.
As explained by noble Lord, Lord Goodhart, in certain circumstances the intention would not be achieved by the clause.
Lord Goodhart: We have discussed the point as much as is necessary and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
On Question, Whether Clause 112 shall stand part of the Bill?
Lord Kingsland: As Members of the Committee are aware, the clause seeks to raise the qualifying threshold of non-residential floor space that determines whether a mixed-use building can enfranchise from the current 10 per cent to 25 per cent.
Current legislation compels those who are able to enfranchise to buy the commercial element of the building. While we welcome the desire of residents for greater control over the management of their homes, we question whether they really want to take on the management of the commercial elements of the building. Commercial property management requires specialist skills, without which the value and marketability of the building as a whole may decline.
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It is possible that the commercial element of the mixed-use building will be far more valuable than the residential freehold. Indeed, it might prove difficult for the residential leaseholders to raise sufficient funds to purchase the whole building, particularly with the higher threshold—though it may be that an enfranchising company arranges to finance the purchase by a back-to-back deal with a commercial end purchaser who would be willing to buy a lease on the commercial element.
As I suggested at Second Reading, there are already indications that investors and funders are resisting proposals to develop new mixed use buildings if they include less than 25 per cent non-residential use. They are concerned that the risk of enfranchisement means that the investment will not be certain or secure. This could have serious implications for the Government's ambitions to promote mixed use buildings, especially in regeneration areas.
Lord Lea of Crondall: Some Members of the Committee believe that this clause is an absolutely fundamental reform. There are certain difficulties about the number 25 but not in the way that the noble Lord, Lord Kingsland, indicates. His proposition appears to be tantamount to saying that there should be a total exclusion zone for virtually every mixed block in the country. That may not be the position that is being advanced, but I cannot see a difference between that and this amendment.
Lord Whitty: I had thought that we were going to deal with the two amendments at the same time as we dealt with this, because they all address the same problem: how the enfranchisement process could operate in mixed use dwellings.
The clause provides for a 25 per cent instead of a 10 per cent threshold, which we believe is too low. That would unfairly prevent too many leaseholders from enfranchising. The 25 per cent leasehold will protect the landlord where the commercial unit is the majority interest in the building—we have already been over this ground at some length—in that a 25 per cent commercial content equals approximately half the value of the building to the landlord. However, where the leaseholders hold the majority interest and the commercial basis is less than 25 per cent, it is only right that those leaseholders should in all circumstances be able collectively to buy out the landlord.
The Government are aware of the suggestion that to raise the enfranchisement threshold could discourage some desirable mixed use development, which would be a cause for concern. However, it is not at all clear that that is likely to be the effect. The motivation for deleting this clause is different; it is to provide a means whereby the legitimate desire of several thousand leaseholders would be excluded from the Bill. That is not our intention, except in the limited circumstances where the residential element is of significantly less value to the landlord than half the value of the property.
Therefore, we do not wish to see this clause deleted. It would revert to the 10 per cent, which, as the noble Lord, Lord Lea, suggests, means that almost every

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leaseholder in a mixed use block would be excluded from the rights under the Bill. That would be a severe limitation on what is promised to leaseholders under the Bill. In certain circumstances there is some recognition of the landlord's rights by the 25 per cent figure, and to revert to 10 per cent would not be helpful.
5.15 p.m.
Lord Kingsland: I am sad but not surprised to hear the observations of the Minister. However, if either Amendment, No. 199 or Amendment No. 222 finds favour with the Minister, at Report stage I shall not repeat my objection to Clause 112.
Clause 112 agreed to.
The Earl of Caithness The Earl of Caithness moved Amendment No. 199:
After Clause 112, insert the following new clause—
COUNTER-NOTICE AND LEASE
("—(1) In any property where there is a non-residential element, the landlord may serve a counter-notice.
(2) The landlord in such a case shall be obliged to offer a 999 year lease of all the residential areas to the RTE company.
(3) Notwithstanding such a lease, the RTE company will have full rights to manage the residential area.
(4) The 999 year lease shall include suitable mutually enforceable covenants which may be specified in regulations.").
The noble Earl said: My noble friend Lord Kingsland made some very good points in the debate on whether Clause 112 stand part about the difficulties of commercial and residential management in the same block. My concern is slightly different. I am perhaps a little more lenient towards the Government in accepting 25 per cent, but my real concern here is that it will act as a distinct disincentive to investment in mixed residential/commercial schemes. I go further and say that it would also act as a disincentive for development of those schemes which I know both parties have been keen to encourage. As a Minister, I remember that the government were keen to see mixed use development, and that has been continued by the present Government.
My solution, which I hope is acceptable, is the separation of management as between the residential and commercial sectors with mutual enforcing covenants and insurance between both parties. That does not stop the enfranchisement, except that the leaseholders would apply collectively for a 999-year lease and have the right to manage the residential parts. The owner of the development would retain the freehold of both the residential and commercial elements and the freeholder would be responsible for the management of the commercial element. That gives the effective separation that is necessary in managing blocks of this type, while allowing the tenants their right to enfranchise in the best possible way.
I hope that this commends itself to the noble Lord, Lord Lea, as I entirely take his point. I am trying to find a middle road so that we do not lose the investment and development markets for mixed use properties. I beg to move.
Lord Goodhart: Our Amendment No. 222 is grouped with Amendment No. 199 and is not inconsistent with it. Broadly speaking, one has no objection to Amendment No. 199, although it is arguable that once one has a 999-year lease who holds the freehold and who holds the lease does not make an enormous difference.
Section 36 of the 1993 Act entitles the landlord to call for a 999-year leaseback of the unit comprised in the enfranchised premises which is not let to a qualifying tenant. It can, therefore, apply not only to commercial shop or office premises but also to a rented flat, which is directly rented and not the subject of an intervening long lease. Our new clause is a mirror image of that. It assumes that the RTE company which wants to enfranchise does not want to take on the shops, and that gives the RTE company the right to require the landlord to take a 999-year lease in the same way as the landlord can require a lease under the 1993 Act. Again, it seems to us that this right should operate both ways so that the RTE company can take on a property if it wants to without having to take on the parts of the property which it does not wish to manage or own.
Lord Lea of Crondall: This is an opportune moment to say that those of us who have been worried from the start about the difficulty of disentangling residential from non-residential parts are very appreciative of the efforts made by the noble Earl, Lord Caithness, in putting forward the amendment, which is most ingenious.
The element to which I draw attention is that the RTE company would have full rights to manage the residential area. That has been thought to be very difficult in previous constructions because of a n umber of problems, including common parts. In this part of the Bill, which is to do with enfranchisement but concerns the right to manage, we would solve the problem by transferring the lease while still having the freeholder principle and the right to manage for the residential parts.
Is that how it would work? Am I correct in saying that we would still need to have some consequential discussions about the definition of common parts and where the 25 per cent cut-off applies? I take it that it would still apply. It has a good deal to commend it. I should be interested to know whether my noble friend the Minister sees some merit in the amendment.
Lord Jacobs: I want to speak briefly to the noble Earl's amendment, which has much in its favour. If one wishes to improve the situation of leaseholders, I have always wondered why, instead of offering leases for 90 years or whatever, we do not offer 999 years. It has been my view that landlords rapidly lose interest in the property once the lease is effectively nearly 1000 years.

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I also argued—unsuccessfully—with the previous government that in dealing with this matter one should separate the residential from the commercial. I was going to do it the other way round: give the commercial a 999-year lease and then subleases out. The tenants do not want to be involved with the commercial side if they can help it. The investment point that has been made is a very important one. We want to encourage mixed developments. This is an interesting solution.
Lord Whitty: We all recognise that this is a difficult area, and a certain amount of ingenuity has been applied by both the noble Earl, Lord Caithness, and the noble Lord, Lord Goodhart. The noble Earl's amendment is effectively applying for those who are excluded—presumably as the result of a 25 per cent threshold—an alternative to enfranchisement. When served with a claim notice, the landlord would simply serve a counter notice offering a 999-year lease with the right to manage those parts and covenants to ensure that all the parties to the different part of the building contributed to the effective maintenance of the building as a whole.
I can see that that might work in certain circumstances, but I am not quite clear whether that is a mandatory alternative or an optional alternative to circumstances where the leaseholders would otherwise be excluded. If it is a mandatory alternative, which could spill over into areas where the leaseholders might be entitled, then that could represent a weakening of the leaseholders' rights and could enable the landlords to retain a substantial degree of management where the non-residential element was relatively small. This is not a perfect solution, but I do not have a better one at this stage. As the Committee will know, we have consulted widely and have received a number of proposals on this front. We ourselves are not yet in the position where we have an ideal solution to the problem.
As regards the noble Earl's point about discouragement of development, the essential point here is that we are all trying to find a way of converting existing properties into commonhold. When it comes to new development—even if it is the conversion of an existing building—presumably one is talking about a new structure of tenure entirely. We would hope that developers, seeing the new opportunity, would want to ensure that commonhold was built into the new building, or the newly converted building, in a way that mixed use properties as well as those that are solely residential could be carried out on a commonhold basis. I do not see that the exclusion discourages new development or conversion of existing conversion with re-negotiation of leases for existing premises. However, there remains a problem in relation to existing blocks. Our measures should not therefore discourage new developments.
The amendment tabled by the noble Lord, Lord Goodhart, would insert a new section into the 1993 Act, so as to deal with the concern that leaseholders may be unable to afford the cost of buying out the
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landlord's interest where we are dealing with a very large, or significant, commercial element. He is seeking to do that by requiring the landlord to take a mandatory lease-back of the non-domestic part. In those circumstances, one would be tying the landlord's hands in the property in which he would otherwise cease to have a day-to-day interest. It is not really desirable or reasonable to force the landlord to take a leaseback in all such circumstances, just because the other leaseholders are not able to raise the money to fund the purchase.
The only equivalent that my advisers have been able to find is the mandatory leaseback provisions in the 1993 Act, which applies solely to social landlords. They are designed to ensure that, where there are renting tenants of social landlords, their immediate landlord and tenancy arrangements are not altered detrimentally as a result of enfranchisement. That deals with a rather different situation and a different kind of tenant. In this situation, however, it is difficult to have a mandatory requirement for the landlord to engage in a leaseback provision when faced with an application for enfranchisement.
What I am saying may appear to be negative to these particular solutions. It is not entirely negative, but the amendments do not give a complete solution. We are still looking at this area but it is unlikely that, in the course of the proceedings on the Bill, we will be able to come up with a satisfactory provision. As I said during the discussion on clause stand part, we wish to ensure that at least a significant proportion of those leaseholders within mixed use dwellings would have a right of enfranchisement. How we deal with the rest, none of us has yet satisfactorily addressed.
The Earl of Caithness: I am grateful for what the Minister has said. I am particularly grateful for the support that I received for my amendment. The reason I introduced development into my argument is that it is not requisite on a developer to build for commonhold. When we discussed Part I of the Bill, the option was still there for a developer to let the building as leases. That is why I mentioned the development aspect. It may be that the developer goes for commonhold, or it may be that he keeps it in the traditional form of leases that he has been used to all of his life. He may find that easier.
I was slightly disturbed when the Minister said that, although he was still looking at this problem, he did not believe that a solution was likely to arise during the passage of the Bill. We do not know how long we are going to be able to keep talking about the Bill, but something should be done during the passage of the Bill. We do not get many bites of the cherry of legislation, and this is an important point. The noble Lord, Lord Goodhart, tackled the problem one way; I am trying to tackle it another.
Some severe problems are building up. If one allows tenants to enfranchise where there is a high mixed-use value—25 per cent is a high percentage in my book—one has to think of all the consequences: the investment of the tenants trying to buy the units; the position of the landlord; and the commercial element.

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It is not beyond our wit to devise a scheme which, although not perfect—nothing will be perfect in a situation like this—will encourage enfranchisement, will allow that to go forward in the best possible way and separate out the commercial element.
Obviously I must withdraw the amendment, but between now and the next stage—if there is to be a next stage—I would be happy to discuss the matter with the Minister and his advisers. However, I take issue with him that a solution is not likely; a solution must be found.
Lord Lea of Crondall: Before the noble Earl sits down, perhaps I may say that it would be useful to explore the matter further. I hope that the Minister will silently note the offer of many Members of the Committee to be party to a further discussion as to whether this ingenuous solution is relevant to the problem—even below the 25 per cent of people not wanting to be involved in the management of the commercial parts. That is a much more general solution to the Minister's problem than he has so far admitted.
The Earl of Caithness: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
5.30 p.m.
Clause 113 [Qualifying leases]:
[Amendment No. 200 not moved.]
Clause 113 agreed to.
Clause 114 [Premises with resident landlord]:
[Amendments Nos. 201 to 205 not moved.]
Clause 114 agreed to.
Clause 115 agreed to.
Clause 116 [Abolition of residence condition]:
On Question, Whether Clause 116 shall stand part of the Bill?
Lord Kingsland: The Bill proposes the abolition of the requirement that the qualifying tenant of a flat should have occupied the flat for the 12 months prior to the claim to enfranchise being made, or for three years in the previous 10.
Collective enfranchisement is a right given to the residents of the building. We believe that this link should be maintained. After all, we are talking about a form of compulsory purchase, and it is an important principle that buildings subject to this right are sold to the people who live in them, and will continue to be so.
We are not convinced that the existing law offers adequate protection against predatory purchasers. There needs to be a residence test in some form to prevent blocks being sold to profiteering investors. The long-standing concern has been that predatory purchasers would seek to put themselves in a position to purchase the freehold, using company vehicles to cover their tracks.
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However, under the Bill as proposed, anyone buying a flat as an investment, using a buy-to-let mortgage for example, will qualify for enfranchisement. That means that the Bill gives one investor a right of compulsory purchase over another investor's investment and the means to enforce that right against the latter's will.
Our instinctive preference is for the leaseholder to be living in the flat at the time of the claim. However, we accept the arguments that have been put forward regarding expatriate workers and, to a lesser extent, those who have been unable to sell their flats for whatever reason. It is difficult to establish clear rules if one then introduces too many exceptions. This reinforces our belief in the need for a clear definition. At the very least there should be a requirement that any participating leaseholder should have held the lease for at least two years. This would coincide with the requirement proposed for lease extensions and the requirement that the lessee should have occupied the premises for at least 12 months during the course of his ownership—to ensure that this remains a right granted primarily to those who live in the properties, rather than to third party investors.
Taken to its extreme, the Government's proposal that the residence test should require at least half of the enfranchising group to occupy their flats as their only or principal dwelling on the date that the initial notice was served would produce bizarre results. For example, could an individual enfranchise if he moved in on the Monday, the notice was served on the Tuesday and he moved out on the Wednesday?
Finally, we are conscious that the Government are keen to harmonise the rules and procedures relating to enfranchisement for both houses and flats. It is therefore all the more important to retain the residence test for the enfranchisement of houses, so the principle must be maintained.
Lord Whitty: We dealt in part with the issue of retaining the residence qualification earlier. The deletion of this clause would effectively restore the residence qualification. I have indicated both now and earlier in the Bill that the requirement under Section 13(2) of the 1993 Act, which would be removed by this, has been shown to be a substantial obstacle to the enfranchisement under that Act. Many leasehold flats change hands frequently. Leaseholders may own a home in London which they retain while they are working abroad or elsewhere and sublet to members of their family or to others. They are in fact the owners of those flats, however, and they retain a similar right over those flats to the other leaseholders in all other attributes of law. If we are putting a residence requirement on them, as distinct from investors who are attempting to acquire the totality of the property, which was the original concern behind introducing a residence qualification, we are inevitably going to restrict the situations under which a right to enfranchisement would apply.
I referred earlier to the discussions at Second Reading, when it was clear that our procedures do not allow investors and speculators to take advantage of the enfranchisement proceedings. To try to define, as

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the previous Act did, the situation where somebody is resident and therefore has rights and, as soon as they are no longer resident, (despite the fact that to all other intents and purposes they are carrying out the leasehold) they lose those rights, is a severe break on the process of enfranchisement. Certainly, there is evidence that under existing provisions that is the case. There is no reason for it to be different—in fact, it is more likely to be the case—when we are dealing with lots of flats under these provisions. We would therefore hope to retain that deletion and, therefore, retain Clause 116.
Lord Kingsland: As Members of the Committee will see from the Marshalled List, I had imagined that I would have the robust support of the noble Lord, Lord Goodhart, and the noble Baroness, Lady Hamwee, in my quest to delete the clause. So far they have not found voice. In anticipating the Report stage, it would have made a great deal of difference to me if I had had the support of the Liberal Democrat party.
Indeed, I feel rather as Sir Henry Newbolt declared in one of his most famous poems,
"The Gatling's jammed and the colonel's dead".
Your Lordships can make up your mind as between the noble Lord, Lord Goodhart, and the noble Baroness, Lady Hamwee, as to which is the colonel and which is the Gatling.
I shall pay the closest possible attention to the Minister's speech. I put him on notice that I shall return to the matter on Report with as much vigour as is at my disposal.
Clause 116 agreed to.
Clause 117 agreed to.
Clause 118 [RTE companies]:
Lord Goodhart Lord Goodhart moved Amendment No. 205A:
Page 54, line 16, at beginning insert ("Subject to subsection (1A),").
The noble Lord said: Perhaps I may describe the noble Lord, Lord Kingsland, as the subaltern whose voice rallied the ranks and said,
"Play up, play up! and play the game!"
Amendment No. 205A stands in my name and I wish to speak also to Amendment Nos. 205C, 215A and 215B.
There has been a good deal of concern expressed during the passage of the Bill about the use of a corporate structure for commonhold associations, RTM companies and RTE companies. I think that in fact the corporate structure is necessary and correct, but we need a body which has legal personality, because without legal personality you cannot hold property, enter into contracts and so on. It would therefore be necessary in the absence of a corporation of this kind to have to hold property or enter into contracts through a nominee or trustees, which is not a satisfactory way of going about it.
It would, of course, have been possible to have created a new corporate body for the purposes exclusively of commonholds, RTM and RTE
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companies, but that would have been an unnecessary complication. Companies limited by guarantee are the appropriate form of corporate structure for larger blocks, which need a formal structure, with memorandum and articles of association, directors, annual general meetings and so on, but this structure is too elaborate and bureaucratic for small blocks.
The Limited Liability Partnerships Act 2000 created a new form of corporate body; that is, the limited liability partnership. That is suitable for running a business where all the members of the LLP participate. It is simple in form with no directors, everybody takes part in the running of the business and there is a flexible agreement between the members instead of a memorandum and articles of association. That structure is potentially more suitable for small blocks of flats.
The amendment relates only to RTE companies, not to commonhold associations or RTM companies. The only reason for that is that I decided to table this group of amendments at a stage after we had already passed discussion of the commonhold associations and the structure of RTM companies. I thought that it would be useful, nevertheless, to raise the issue for debate now and, if necessary, to table an amendment at the Report stage not only for RTE companies but for commonhold associations and RTM companies.
Amendment No. 205C gives the option for the qualifying tenants in any block with not more than 10 flats to form an RTE, which is a limited liability partnership, rather than a company limited by guarantee. I have chosen 10 because that is the maximum number where it is reasonable to expect that all lessees could participate in the decision-making powers of the company. Perhaps even 10 is too many but, if you are looking at smaller blocks with perhaps four or five flats, it seems that an LLP would be much more appropriate than a company limited by guarantee.
Amendment No. 215B authorises the Secretary of State to make regulations as to the form and content of a members' agreement before the LLP would take the place of a memorandum and articles.
I believe that LLPs are much more suitable for small groups wanting to exercise the rights of collective enfranchisement. These groups should be given the option to set up an LLP. I recognise that this may need some time to consider but, in the event of the Bill not getting through Parliament before dissolution, I would very much hope that the Government, if re-elected, would reconsider this before coming back with a revised Bill in due course. I beg to move.
5.45 p.m.
Lord Lea of Crondall: The amendment puts forward an interesting suggestion. Is the logic of 10 that, in the Limited Liability Partnerships Act, there is a concept of 10 partners? Can KPMG not be a limited liability partnership? What, exactly, is the logic of 10?
Lord Goodhart: Of course KPMG and many other organisations—solicitors firms and so on—have

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hundreds of members and, in the case of some of the big accountancy firms, probably thousands, rather than 10.
The KPMG model is not the model for collective enfranchisement companies. The reason why they are partnerships which continue nominally as partnerships rather than companies as companies is a different matter, for both historical and tax reasons. It simply seemed to me that once you get beyond 10 you need the sort of management structures which are equivalent to those of having a board of directors of a company.
If one is looking at LLPs, as one normally should, as being a group of people who are all collectively involved in the running of the business, then 10 is perhaps a maximum number before you would need some kind of management or executive committee to handle the conduct of the business.
Lord Hodgson of Astley Abbotts: As Amendment No. 205B is in this group, perhaps I may speak briefly to that now. I view the issue of flexibility in much the same 'way as the noble Lord, Lord Goodhart, but my wish is that we should have flexibility on the other side as well. I should like to explore the Government's thinking on why we have restriction to the company limited by guarantee.
I understand that this is the simplest of the corporate structures and, therefore, the easiest to understand. It is the right structure to have if you are seeking to encourage enfranchisement. That seems perfectly worthwhile. However, I am not sure why it has to be prescribed in that sense. There are, or could be, cases—how many I do not know—where the company limited by guarantee structure would not be appropriate. As I understand it, from the companies limited by guarantee with which I have had experience, they are of course restricted as to dividend and capital distribution. If you had an RTE company, a company limited by guarantee, which had a capital profit—perhaps by having done some extensions or some developments within the enfranchised block—the profit on that would not be able to be distributed to the participants. It could be defrayed and paid out over a period of years by reduction of charges, but it could not be paid out as a dividend or capital distribution. That seems to me to be an unnecessary inhibition on the operation of RTE companies. I am not saying that we should eliminate a company limited by guarantee; indeed, it is likely that most RTE companies will be of that form. However, there may be some which would like to have a more sophisticated, complex and demanding form of corporate structure—a company limited by shares—and I am not quite clear why they should not be able to do so.
Lord McIntosh of Haringey: Last year the noble Lord, Lord Goodhart, and I spent many happy hours debating the Limited Liability Partnerships Bill (as it then was). If he attends tomorrow morning we can debate the regulations which result from the Limited Liability Partnerships Act 2000. However, although I
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am sympathetic to the idea of flexibility and reducing any difficulties arising from over-complex company legislation, I do not believe that this is the solution.
Section 2(1)(a) of the 2000 Act refers to,
"persons associated for carrying on a lawful business with a view to profit",
which is not the intention of RTEs. Under paragraph 3.18 of the memorandum and articles they are allowed to carry on a trade which can, in the opinion of the board of directors, be advantageously carried on with. or ancillary to, any of the businesses of the company. but they do not really fall within the scope of limited liability partnerships, as the noble Lord and I understood the position to be when the legislation was passing through Parliament.
The limited liability partnership moves from an unlimited liability partnership rather than a limited company. It is designed to give a partnership limited liability while retaining responsibility for tax in the hands of the individual members rather than collectively in the company. The noble Lord, Lord Goodhart, now comes to it from the point of view of a company limited by guarantee. For that company the issue of tax does not arise. For RTEs it is expected that the issue of corporation tax will not arise, because, even if it made a surplus, as the noble Lord, Lord Hodgson, said, it could be disposed of by reducing the charges either immediately or over a period of time rather than paying tax on the surplus or profits. I am willing to look at this again simply on the basis that my noble friend Lord Bach gave a similar undertaking when the issue was raised under commonhold. However, on the face of it, I do not believe that a limited liability partnership is an appropriate vehicle.
I turn to Amendment No. 205B tabled by the noble Lord, Lord Hodgson. This would allow the use of any limited company as an RTE company, so it would permit a wide range of options to be used. While some may see advantage in flexibility, it would make it more difficult to prescribe the constitution of the enfranchising body. It is important that we prescribe the constitution of the enfranchising body. not just to secure comparability but because smaller companies would be burdened if they had to make up their own constitution. The prescribed constitution makes life easier for leaseholders and ensures that the body is suitable for the purpose. Under the existing legislation there have been cases where leaseholders have run into difficulties, which were described by Members of the Committee at an earlier stage; for example, the corporate body used as a nominee purchaser may not be suitable. That is why we have adopted the more prescriptive approach.
I want to come back to the motivation behind the amendment of the noble Lord, Lord Goodhart. It is worth saying that for most smaller blocks, compliance with the requirements of company law would not be particularly onerous. We would expect company formation agents to provide standard RTE companies off the shelf. A current review of company law is likely to lead to further simplification of the rules and reporting requirements for small companies. There are plans for measures to reduce the probability of

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companies being struck off the register and, if that occurs, making it easier and cheaper for them to be restored.
I am not as worried as the noble Lord, Lord Goodhart, apparently is about the burden of forming a company and, subject to any further consideration we may have together, I do not believe his solution is the right one.
Lord Goodhart: I am sorry the Minister gave certainly not as much as half a show of favour towards this amendment. He showed perhaps about one-tenth; a certain degree of sympathy only.
As regards the problem of limited liability partnerships being required to be businesses carried on with a view to profit, that difficulty would seem to be the main one and could be overcome by putting a clause in the Bill stating that an LLP company could be set up for these purposes, notwithstanding that it was not carried on with a view to profit. There is a prospect of real simplification here.
Lord McIntosh of Haringey: Surely, the problem is that if one is going to have alternative corporate structure, we will lose the consistency between one RTE company and another. The basis of the Bill and of us saying that it is not too onerous a task to run a company limited by guarantee is that there is consistency between one and another. Everyone recognises what an RTE company is. If there are two kinds of corporate structure, we shall lose that.
Lord Goodhart: The problem with that is that there is an enormous difference between running a converted house which contains three flats and running a massive block which contains 300 flats. It is entirely suitable to have different structures, in the same way that an LLP has been created to give an alternative form of corporate structure for small businesses.
There seems to be a close parallel. There is an LLP for a small business, forgetting the KPMG because basically it will be used for small businesses. Most large commercial businesses will continue to use the ordinary corporate structure. There should be a similar simplified form of corporate structure available for three, four or five-flat buildings, which may be inappropriate for a much larger building where something more bureaucratic is required.
As regards what was said by the noble Lord, Lord Hodgson, I would not support the idea of a company limited by shares. That is probably rather difficult to reconcile with the philosophy behind having an RTE company, and in any event, the noble Lord, Lord Hodgson, was wrong in suggesting that a company limited by guarantee cannot distribute its profits or capital payments. The situation is that most companies limited by guarantee are, in fact, charities or other non-profit companies which are limited by their own memorandum and articles in distributing profit. There is nothing inherent in the guaranteed company rules that makes it impossible to do so.
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Having said that, this is something we may well want to look at again on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
6 p.m.
[Amendments Nos. 205B and 205C not moved.]
Lord Whitty Lord Whitty moved Amendment No. 206:
Page 54, line 24, leave out ("is already") and insert ("which is").
The noble Lord said: In moving Amendment No. 206, I shall speak also to Amendments Nos. 208 and 214. The first two amendments will allow more than one RTE company to exist for the same premises, provided that none has served a notice under Section 13 of the 1993 Act to initiate the enfranchisement process. Where a Section 13 notice has been served, only the company which served that notice can thereafter be considered an RTE company for the premises for as long as that notice remains in force.
The reasons for allowing the RTE company for the early stages in the enfranchisement process may vary. The most obvious is that the leaseholders might wish to do so because their existing RTE company is also an RTM company and they have now decided that they do not want to lose the right to manage by enfranchising through that company, and therefore wish to establish a new RTE company. It will not, however, be possible to have competing enfranchisement bids going on for the same property at the same time.
Amendment No. 214 changes the provisions which allow personal representatives of someone who was a participating member to themselves become participating members. We need to allow them to become participating members after the cut-off point which would otherwise apply, because they could otherwise inherit a liability to pay towards the enfranchisement price without being able to be part of the collective ownership of the freehold.
The Bill as it stands provides that personal representatives would become participating members unless they opted not to do so. That could lead to their being bound by certain obligations without having agreed to them. We now consider it better that they should be able to opt in and thereby formally agree to be bound by the obligations. I beg to move.
The Deputy Chairman of Committees (Lord Lyell): I draw the attention of the Committee to the fact that Amendments Nos. 207 and 208 are wrongly marshalled. The next amendment I shall call will be Amendment No. 208. That should not affect the procedures of the Committee.
I gave the Committee warning that the Minister had spoken to Amendment No. 208. It is only now that I have become aware of the instructions that these two subsequent amendments, Amendments Nos. 207 and 208, have been wrongly marshalled. They should be in separate order. We are still dealing with Amendment

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No. 206 until the Committee decides otherwise. Does the noble Lord, Lord Goodhart, wish to speak to Amendment No. 206?
Lord Goodhart: No.
On Question, amendment agreed to.
Lord Whitly Lord Whitly moved Amendment No. 208:
Page 54, line 28, at end insert—
("has given a notice under section 13 with respect to the premises, or any premises containing or contained in the premises, and the notice continues in force in accordance with subsection (11) of that section.").
On Question, amendment agreed to.
Lord Goodhart Lord Goodhart moved Amendment No. 207:
Page 54, line 28, at end insert—
("(3) A company which is a RTM company may not become a RTE company except by a resolution passed with the affirmative vote or written consent of all its members.
(4) In this Part, "RTM company" has the same meaning as in Chapter I of Part III of the Commonhold and Leasehold Reform Act 2001.").
The noble Lord said: I think I have at last sorted out what has been happening. We have dealt earlier, and again in the last couple of amendments, with amendments which the Government have accepted which will enable RTM and RTE companies to coexist in the same property. So a person who is a member of art RTM company does not have to choose between giving up his role in management and taking part in a collective enfranchisement process which will cost money that he does not want to spend or cannot find.
Amendment No. 207 introduces what we believe is a necessary corollary, that an RTM company cannot convert to an RTE company unless there is unanimous agreement among its members. If you start with an RTE company which includes a member who does not wish to take part in collective enfranchisement, and if that company is able to convert itself without his or her consent into an RTE company, that member would still have to opt out of that company. That member would thereby lose the right to participate in management if he or she did not wish to go ahead and take part in the enfranchisement, with all the financial implications that involves.
These are companies with different objectives. The principle, which has been accepted by the Government, that you can separate an RTM and RTE company requires this additional amendment if it is to be fully effective.
Amendments Nos. 209 and 210, which have been included in this group, refer to ground that has already been covered; that is, the exclusion of the landlord from the membership of an RTM company. I shall not repeat the arguments that were made earlier.
I intend to support strongly Amendment No. 212, tabled by the noble Lord, Lord Kingsland. Indeed, I am inclined to feel that it does not go far enough. I hope to ex plain why at a later stage rather than speaking to it now. I beg to move.
The Earl of Caithness: My Amendment No. 211 is grouped with this amendment. I, too, am concerned
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about the situation where somebody who is a member of the right-to-manage company and has been doing an excellent job does not, for whatever reason—it may be financial—become part of the RTE company. For those of us with experience of managing and controlling blocks of flats, to lose someone who is doing a good job and understands the block, because he cannot participate in the management if he is not a member of the RTE company seems a perverse way of tackling the situation. There must be some method by which those people who are not members of the RTE company can, if they so wish and the RTE company so wish, be used in the management of that company.
I have put forward the idea of having two classes of shares, for instance: one for those who are members of the RTE company, and a separate class of shares for those who are not members of the RTE company but are within the block and could take part in the management of that company. Good people who understand property management are few and far between. To exclude them, as the Bill does in subsection (4) of Clause 118, is rather a perverse way of tackling this problem.
My Amendment No. 211, which seeks to exclude the whole of subsection (4), does not, admittedly, give the complete solution, but I hope that the Minister will give this matter some thought.
Lord Kingsland: I am grateful to the noble Lord, Lord Goodhart, for supporting my Amendment No. 212, which seeks to increase the period of time for someone who acquires a lease from a participating member of the RTE company to indicate their own desire as to whether they wish to participate from 14 to 28 days.
It is with some trepidation that I have to in form the noble Lord, Lord Goodhart, that I am unable to support his Amendments Nos. 209 and 210. That is disappointing, but I shall attempt to change his mind by explaining why.
It seems to me that the amendments of the noble Lord, Lord Goodhart, would exclude landlords on any leases within a building from being members of an RTM company if the company was also the RTE company for the building. We believe that the landlord must always be entitled to membership of an RTM company which manages a building in which he retains an interest.
We recognise the problems which may arise if the leaseholders within a RTM company wish to enfranchise. Understandably, they would not wish the landlord to be a party to their discussions. In these circumstances, they should accept that, however awkward, it would be better to establish a separate RTE company. If they wish to use the same company to be both RTM and RTE they must accept the continuing presence of the landlord.
If the enfranchisement takes place in amicable circumstances it may well be that the landlord voluntarily agrees to absent himself from the RTE company's discussions. If the situation is not amicable, there is a greater likelihood that a separate company would be more suitable anyway.

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As far as concerns Amendment No. 214 tabled by the Minister, our Amendment No. 213 is to similar effect. We are content with the Minister's efforts.
Lord Goodhart: I support Amendment No. 212 but take the view that it does not go far enough for the following reason. I did not appreciate the problem until I started looking at the memorandum and articles of the RTE company, by which time it was too late to table an amendment of my own.
The problem is that in the case of an RTE company membership is not transferable, but anyone who ceases to satisfy the requirements of membership—namely, that he is a qualifying tenant—automatically ceases to be a member of the company. Therefore, when somebody sells the leasehold of a flat he or she will not automatically be entitled to transfer membership of the company. The next stage is that the person who is the purchaser is entitled to become a member of the company under new Section 4B(6) of the 1993 Act, the provisions of which appear at lines 15 to 19 on page 55. That fits together, but the essential stage for the new leaseholder to become a member of the RTE company is the giving of notice under new subsection (6).
It is likely that the assets of the RTE company will be of considerable value—they will include the freehold—and no doubt that value will be reflected in the price which the assignee has paid for the lease. It is essential, therefore, that in order to protect his interest the assignee should apply for a participating notice to the company within 14 days. That is a very short time. If he does not do so, he loses a valuable asset and gives a windfall to the other members of the RTE company. The consequences of that are quite unintended and wholly unfortunate, but there is no way in which the time can be extended if the assignee fails to give that participation notice to the company within the 14 days after the assignment. That can be overlooked.
Under new Section 4B(7), personal representatives become participating members unless they give a notice within 56 days stating that they do not wish to be a participating member. It would be much better if the same rule applied to an assignee, so that an assignee who is negligent—or whose adviser was negligent—and fails to give the participation notice within 14 days does not lose the right to share in a valuable asset for which he has almost certainly paid as part of the price he paid for the flat.
This is a point of some significance—admittedly, in a sense, a detail. However, it is plainly right that it should be reversed so that the assignee becomes a member automatically, unless and until he gives—as he occasionally might wish to do—a notice saying that he does not wish to be a member of the RTE company.
6.15 p.m.
Lord McIntosh of Haringey: I shall deal with the amendments in as much order as I can put them in, starting with Amendment No. 207. I shall then turn to Amendment No. 211 standing in the name of the noble
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Earl, Lord Caithness. I appreciate the concern about members of an RTM company who do not participate in a subsequent enfranchisement. The Bill provides that any such leaseholders will cease to be members of the company on completion of the enfranchisement. That is because, after enfranchisement, there might be conflicts of interest between those leaseholders who did or did not participate in enfranchisement. There might be differences of view between them about how the proceeds of the sales of leases should be used or distributed. If the non-participants were still members of the company, the company directors would find themselves in a very difficult position as a result of their accountability to the entire membership.
We have tackled this matter in a different way already. Amendment No. 99, which was agreed earlier, would remove the bar on there being separate RTM and RTE companies for the same premises. That means that, where the RTM has been exercised, and a proportion of members wishes to proceed to enfranchisement, they would now be able to set up a separate RTE company for that purpose, and non-participants would be able to continue to participate in the management of the building. Amendments Nos. 209 and 210 have already been debated. There is nothing more I should say about them.
I shall respond, first, to the noble Lord, Lord Kingsland, on Amendment No. 212 as the noble Lord, Lord Goodhart, has made quite different points on it. The noble Lord, Lord Kingsland, said that we should extend the period from 14 to 28 days for assignees to make up their minds about whether to participate in an enfranchisement bid. However, there are two difficulties with that. First, it could be inconvenient for the other members in learning whether or not the assignee was going to participate. Secondly, surely a prospective assignee would have been made aware of the pending enfranchisement bid. Indeed, that might have influenced his decision to buy. I should have thought that in many cases the decision to take part would not even be a 14-day decision but would be taken before the 14 days started. In other words, it would be an instantaneous decision.
I find the arguments of the noble Lord, Lord Goodhart, too complicated to respond to at this time. All I can do is undertake to write to him on the basis of what he has said. Amendment No. 213, which stands in the name of the noble Lord, Lord Kingsland, is not necessary. We have just agreed in advance to Amendment No. 214, which solves the problem.
On Amendment No. 214A, I share the concern of the noble Lord, Lord Kingsland, that leaseholders who agree to become participating members should not be able to walk away later and avoid their liabilities. Article 11 of the draft articles of association, which we have made, would prevent participating members from resigning. The Bill already provides that, on becoming a participating member, a qualifying tenant becomes jointly and severally liable for the landlord's costs relating to the enfranchisement, and that liability cannot be avoided

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by withdrawal from membership. I hope I have reassured the noble Lord, Lord Kingsland, on that point.
Lord Good.hart: I am sorry that the Minister has not accepted our position on Amendment No. 207. It is a matter to which we may well have to return at Report stage. On Amendment No. 212, I cannot express a view at the moment, because I shall await with interest to see what the noble Lord, Lord McIntosh, writes in his letter to me. If that is not appropriate, we shall bring forward a new amendment to cover that point. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 209 to 213 not moved.]
Lord Whitty Lord Whitty moved Amendment No. 214:
Page 55, leave out lines 22 to 25 and insert ("if, at any time, they give a participation notice to the company.").
On Question, amendment agreed to.
[Amendment No. 214A not moved.]
Lord Whitty Lord Whitty moved Amendment No. 215:
Page 55, leave out lines 29 to 35.
The noble Lord said: These are tidying-up amendments. In rising to move Amendment No. 215, I shall speak also to Amendments Nos. 218 and 221. These amendments delete powers that would otherwise be granted under the Bill to specify in regulations the form and content of three notices that are part of the enfranchisement process—the notice of invitation to participate, the participation notice and the initial notice to commence the enfranchisement process. There is already a general power under the 1993 Act to make regulations on the form and content of any enfranchisement notice, and the specific powers, which are on the face of the Bill, are unnecessary duplications. I beg to move.
On Question, amendment agreed to.
[Amendments Nos. 215A and 215B not moved.]
Clause 118, as amended, agreed to.
Clause 119 [Invitation to participate]:
Lord Goodhart Lord Goodhart moved Amendment No. 216:
Page 56, line 26, after ("company") insert (", or qualifying tenants intending to form and become participating members of a RTE company,").
The noble Lord said: In moving Amendment No. 216, I shall speak also to Amendments Nos. 217 and 219. These cover two short points. Amendments Nos. 216 and 219 seek to allow people who want to form an RTE company but who are not sure if they will get enough support to make it viable to serve an invitation to participate before forming the company. They will therefore avoid the costs of formation if they do not get enough support.
Amendment No. 217 covers another short point. The estimate of the costs involved in collective enfranchisement is completely unpredictable. It therefore seems pointless and probably misleading to include it. I beg to move.
Lord Richard: My Amendment No. 217A is part of this group. Perhaps I can speak to the amendment at
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this stage. The amendment would permit the RTE company not to include details of the proposed price and estimated costs in notices of invitation to participate that are served on those flats where the qualifying tenant would be the freeholder. I do not think that one could reasonably expect any party to a negotiation to be required to reveal its position to the other party except in its own time and in the manner of its own choosing. The amendment would make that positional point.
For the benefit of all members of the Committee who have the British Property Federation brief. which has been quoted in extenso during the course of the afternoon, I am happy to say that it supports the amendment.
Lord Kingsland: I support the amendment of the noble Lord, Lord Richard, and Amendment No. 216 standing in the name of the noble Lord. Lord Goodhart. However, I am not inclined to support Amendment No. 217, which stands in the names of the noble Lord, Lord Goodhart, and the noble Baroness, Lady Hamwee.
Under the present legislation, the enfranchising leaseholders are responsible for meeting the landlord's reasonable costs in dealing with an enfranchisement. If the costs are thought to be unreasonable they may be challenged in the leasehold valuation tribunal. It is unfair to expect someone who is subject to a compulsory purchase procedure to bear his own costs incurred as a result of someone else exercising the right. If a leaseholder is invited to participate in an enfranchisement, it is only fair that he is aware of the full cost that may be involved.
Lord Whitty: The amendment moved by the noble Lord, Lord Goodhart, would in effect remove the obligation on those who are proposing to establish an RTE company to serve notices without having first established that company. The Bill requires that all the formal steps in the enfranchisement process are carried out by an RTE company. We consider that to be the simplest approach.
Clearly, in the pre-consideration of whether one goes to an RTE company, we would expect leaseholders who are contemplating moving to enfranchisement to try to sound out their neighbours on a more informal basis to see whether there 'was sufficient support before they started incurring the expenses of formal proceedings, including the cost of setting up the RTE company itself. So there is an informal stage of consultation with the potential participants that would not be covered by this restriction. There is certainly nothing in the Bill to prevent such an informal process taking place.
I appreciate that even al the point where the RTE company is formed it may be difficult to assess the likely costs of the transactions in advance. There is a risk that an over-pessimistic estimate may discourage participants, and presumably vice versa. However, potential participants are at that stage being formally asked to accept a binding obligation to pay those costs. It is only fair and reasonable that they should have an

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idea of what they are letting themselves in for at that point. I therefore wish to resist, subject to the qualification on the informal procedures, the implications of the three amendments tabled by the noble Lord, Lord Goodhart.
Amendment No. 217A, which stands in the name of my noble friend Lord Richard, reflects a concern that leaseholders should not have to disclose their proposed bid to the landlord—to the reversioner—in notice of the invitation to participate. It would mean that they would not need to give it to the landlord—the reversioner—if he was also a qualifying tenant. However, that situation would not arise by definition. If the owner of the freehold of a building acquired a leasehold interest in that building, or indeed vice versa, the two interests merge by operation of the law, so that the freehold owner is not a qualifying tenant.
Although the landowner may be occupying a flat equivalent to those of the other leaseholders, he will not be a qualifying tenant in those circumstances and therefore will not be required to receive a notice of intention and an invitation to participate, with an indication of the costs. Therefore disclosure of one's negotiating hand could not take place by stealth in those circumstances.
It would obviously be necessary for us to give guidance to clarify this position, but, as I understand it, the situation that the noble Lord, Lord Richard, is understandably concerned about could not arise.
6.30 p.m.
Lord Goodhart: I am sorry that the Minister has not been more helpful. But these are minor points; we shall look at them again and consider what action to take. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 217 not moved.]
Lord Richard Lord Richard had given notice of his intention to move Amendment No. 217A:
Page 56, line 43, at end insert ("save where the qualifying tenant of the flat is the reversioner").
The noble Lord said: I do not intend to move the amendment. I heard what my noble friend the Minister said but I do not profess that I understood what he said. Will he be kind enough to write to me, setting out the law on which he bases his opinion?
Lord Whitty: I shall write to my noble friend.
Lord Richard: In that case, I shall not move my amendment.
[Amendment No. 217A not moved.]
Lord Whitty Lord Whitty moved Amendment No. 218:
Page 56, line 45, leave out from ("company") to end of line 7 on page 57.
On Question, amendment agreed to.
[Amendment No. 219 not moved.]
Clause 119, as amended, agreed to.
Clause 120 agreed to.
[Amendment No. 220 not moved.]
Schedule 8 [Enfranchisements by company: amendments
]:
Lord Whitty Lord Whitty moved Amendment No. 221:
Page 84, line 7, leave out from ("company:"") to end of line 10.
On Question, amendment agreed to.
Schedule 8, as amended, agreed to.
Clause 121 agreed to.
[Amendment No. 222 not moved.]
Clause 122 [Valuation date]:
Lord Kingsland Lord Kingsland moved Amendment No. 222A:
Page 57, line 21, leave out from ("payable),") to end of line 22 and insert ("in paragraph 1(1), for the definition of "the valuation date" insert—
""the valuation date" means the date of service of the reversioner's counter-notice."").
The noble Lord said: The amendment would fix the valuation date as the date of the landlord's counter-notice, rather than the date of the service of the claim notice. We support the proposal to fix the valuation date; however, we feel that it would be more appropriate for it to be fixed at the date of the landlord's counter-notice as this is the point at which the second party engages in the process.
Under standard compulsory purchase procedures, the valuation date is the day the deal is actually concluded. The amendment is part of a package intended to give the landlord a greater sense of security during the period over which his investment is being compulsorily purchased.
Also in this group is Amendment No. 223A, which would incorporate into the purchase price interest at the current bank base rate on the valuation figure. The Government's proposals have been framed on the assumption that landlords are more likely to delay the process than leaseholders. There is consequentially minimal protection for the freeholder against an enfranchising group that seeks to exploit the system.
If the valuation date is fixed at the date of the claim notice, it will be in the interests of leaseholders to delay the conclusion of the deal as the price they pay will not change, however rapidly the market rises. Meanwhile the landlord would stand to receive a lesser price than the market value on the date of the actual transaction.
We believe that the only way to discourage delay and ensure that leaseholders are encouraged to conclude the deal as quickly as possible is to provide for interest to be included.
Lord Hodgson of Astley Abbotts: There is much to commend my noble friend's amendment. Clearly, a speedy completion of transactions is important and nothing is more likely to concentrate the mind than interest clocking up. I would ask for one point of

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clarification: does this mean that income arising on the property during the period between valuation and completion will accrue to the purchasers? Equity would mean that it should be operated in that way, in which case it seems an extremely good amendment and I support it.
Lord Whitty: The reason we have fixed the valuation date for the collective enfranchisement of flats at the date of the initial notice is to provide a degree of certainty and consistency. There has been a longstanding approach to leasehold houses under the 1967 Act, which fixes the date from the valuation date. We would, therefore, need substantial arguments to shift from that long established position.
If we adopted the date of the counter-notice, as suggested by the noble Lord, we would normally expect the landlord to serve that pretty soon after the service of an initial notice. We would wish to encourage him to do so, otherwise a degree of delay is induced from that side. If the landlord issues a counter-notice rapidly, the difference in the price from one date to another is likely to be minimal. If the landlord delays serving a counter-notice, thereby gaining an advantage at a time of rapidly increasing property values in that area, it will in itself be a disincentive and a penalty on the leaseholder seeking enfranchisement.
We would not wish to encourage such behaviour. In a rapidly rising property market, landlords could be disadvantaged as a result of the price being determined at the basis of prevailing values on the date of the initial notice and with money received at a much later date. However, it cannot be fair to provide a right to payment in terms of interest on the purchase price between the date used to determine the price and the date of completion.
That is apparently not appropriate in other areas of property law and any disadvantage to the landlord would depend on a hypothetical movement in the property prices. If property prices are going down, there will be no disadvantage at all and having a prescribed mandatory interest payment would be quite illogical in those circumstances.
The solution to all of this would be to speed up the process of enfranchisement as quickly as possible. The measures in the Bill are intended to reduce procedural delay, to reduce disputes over the price payable and, where disagreement exists, to speed up the disputes resolution process. To some extent, the first of these amendments provides a temptation to drag the process out. It also departs from the provisions in the 1967 Act as regards the due date. I therefore hope that this amendment is not pursued.
Lord Kingsland: I thank the Minister for his response. I am not surprised to hear it; but equally he will riot be surprised to hear that I shall press this matter at the Report stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 122 agreed to.
6.45 p.m.
Lord Goodhart Lord Goodhart moved Amendment No. 223:
After Clause 122, insert the following newclause—
ABOLITION OF MARRIAGE VALUES
("In Schedule 6 to the 1993 Act, omit—

(a) paragraph 2(1)(b);

(b) paragraph 4;

(c) paragraph 5A(2)(b):

(d) paragraph 5C;

(e) paragraphs 9 and 9A;

(f) paragraph 10(1)(b);

(g) paragraph 12:

(h) paragraphs 15 and 16; and

(i) paragraphs 19 and 20.").

The noble Lord said: In addition to Amendment No. 223, I wish to speak to Clause 123 stand part. Clause 124 stand part, Amendment No. 228, Clauses 131 and 132 stand part—1 32 is not in fact in the list, although it should be—and Amendment No. 231. The other amendments in this group are not moved by us. I do not know whether the noble Lord. Lord Kingsland, believes that as they deal with an entirely different aspect of marriage value they should be taken out and dealt with immediately following in a separate group.
Marriage value arises because the value of a lease and the value of a reversion, if sold separately, is usually less than the value of the same property if sold with vacant possession. Therefore, the merger of the lease and of the reversion produces a boost in value which is known as the marriage value. In the case of the purchase of a freehold by a sitting tenant, another element of marriage value is the fact that the occupying tenant may be willing to pay more than the market value for the reversion in order to avoid the loss of his or her home and the stress of a forced move.
In the case of the enfranchisement of a house, unless it falls into the higher rateable value, the freehold is valued on the assumption that the tenant is not in the market as a purchaser. That means that the valuation of the freehold is made only on the basis that it is being sold as an investment. The marriage value is therefore excluded from the price the tenant has to pay for enfranchisement. That is covered by the Leasehold Reform Act 1967, Section 9(1), as amended by the Housing Act 1969. In all other circumstances, however, the marriage value has to be taken into account.
The amendments in this group propose that the marriage value should be disregarded. The calculation of the higher rateable value houses, those with rateable value on 31st March 1990, when rating came to an end, in excess of £1,000 in London and £500 elsewhere, is set out in Section 9(1)(a) of the Leasehold Reform Act 1967, which was added by the Housing Act 1974. That valuation does not exclude the tenant as purchaser. We intend that the tenant should be so excluded by Amendment No. 231. This requires the assumed exclusion of the tenant as a potential buyer. The words

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used are identical to those which exclude the tenant in the valuation under Section 9(1) of the 1967 Act in the case of lower rateable value houses.
In the case of collective enfranchisement, married value is a more difficult computation. The marriage value arises not from a straightforward merger, because there is none, but from the assumption that those who enfranchise can grant themselves leases over the very long term to take effect on termination of their present leases at a nominal ground rent.
The rules for calculation are set out in Schedule 6 to the Leasehold Reform Act 1993. The basic valuation is based on the value of the freehold, subject to all existing leases, but paragraph 4 specifically requires the managed value to be taken into account. I shall not try to explain the basis of computation which, according to the principal textbook on the subject, is both complex and uncertain. Amendment No. 223 removes all reference to marriage value from the valuation process under Schedule 6. It is coupled with our objection to Clauses 123 and 124 of the Bill, that being purely consequential on the abolition of marriage value. If marriage value is to be retained, we would support both those clauses as reducing the amount of the marriage value, and simplifying its computation.
Finally, we come to marriage value in relation to the grant of extended leases. The payment by a tenant is calculated under Schedule 13 of the Leasehold Reform, Housing and Urban Development Act 1993. The basic price to be paid is the diminution of the value of the landlord's interest because of the grant of a new lease. That is fair enough as a method of calculation.
But then Schedule 13 adds the concept of marriage value. This is a wholly artificial concept in that context. There is no marriage at all. Indeed, the effect of the grant of the new lease, or the extended lease, is to delay the marriage for a considerable time.
Marriage value in this context is based on the assumption, to simplify matters, that the value of a tenant's interest may be increased by an amount greater than the reduction in the landlord's interest. That bonus—if one can call it that—has to be split between the landlord and the tenant.
Our Amendment No. 228 removes the marriage value from the computation under Schedule 13, and again Clauses 131 and 132 stand part are consequential.
The Deputy Chairman of Committees: The Committee stands adjourned for 10 minutes.
[The Sitting was suspended for a Division in the House from 6.47 to 6.56 p.m.]
The Deputy Chairman of Committees: The Committee is debating Amendment No. 223 after Clause 122.
Lord Goodhart: I shall not detain the Committee much longer. I had just explained how marriage value was calculated in various different contexts and the effect of the amendment which is to remove it. We
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believe that marriage value should go: it is complicated and unfair. We believe that the landlord is adequately compensated by being paid the market value of the property that he loses as a result of the enfranchisement, or the extended lease, without increasing what he receives by taking into account the position of the tenant as a prospective special purchaser. This is particularly so in relation to extended leases where the concept of marriage value is an artificial absurdity. Even with the modest simplification proposed by the Government, the computation of marriage value will add to the expense and time of working out the terms of enfranchisement, or the price of an extended lease.
I originally had some concern about the question whether the price of the extended lease should exclude marriage value only where the lessee was in occupation, because in that case the lessee is not a special tenant, or not to the same extent. However, we believe that the concept of marriage value in the context of an extended lease is completely unreal and that the Government's proposed two-year ownership requirement before an extended lease can be granted is adequate to deter speculators. I beg to move.
7 p.m.
Lord Hodgson of Astley Abbotts: My Amendment No. 234C in this group does not address the point just spoken to by the noble Lord, Lord Goodhart, but seeks to deal with leases on houses and flats, which, as I understand it, have differential treatment under the proposed legislation. As I understand it, in Clause 123 we have agreed the 50 per cent share of marriage value. However, if I read it correctly, the clause applies only to flats and gives leaseholders a guaranteed 50 per cent of the marriage value. However, that does not apply to houses. My amendment is designed to bring houses into the same position as under the 1967 Act, as amended by the 1993 Act, which is that the share of marriage value to the tenant shall not exceed one-half. In other words, it could be a maximum of one-half. My amendment is intended to make it one-half, and therefore brings house leaseholders into the same position of 50-50 share as flat leaseholders.
The Earl of Caithness: I should like to support my noble friend's Amendment No. 234C. That is a logical and practical way forward.
I now turn to the amendment of the noble Lord, Lord Goodhart. I was sad to see it on the Marshalled List. For much of the discussion in Committee, the noble Lord, Lord Goodhart, and I have not been that far adrift, but we go down very different paths when it comes to marriage value.
Marriage value is an accepted part of the property scene. All those involved know exactly what it means. It is an integral part of the whole of this exercise. If marriage values were to be abolished, the attitude towards the Bill would change. The comments that I have made are based on the assumption that there is a marriage value. If there is not a marriage value, it is a totally different Bill. The amendment of the noble

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Lord, Lord Goodhart, drives a coach and horses through the principles on which we have discussed this legislation.
I hope that the Minister will have absolutely no truck with this amendment for the reasons I have given. It would be a retrograde step and any good will that has been engendered, and the effort people have made to come to compromises to try and seek a way forward, would be dissipated in one fell swoop.
Lord Monson: I was waiting to support the amendments of the noble Lord, Lord Kingsland, but he has not moved them yet. I support the noble Earl, Lord Caithness, and I support the amendments of the noble Lord, Lord Kingsland, some of which are alternatives. He said earlier that it was a human rights issue. I do not know whether he was referring to this matter in particular, but I am sure he is right.
As I said on the first day of Committee, neither I nor my family has any axe to grind at all on behalf of the freeholders. Indeed, a number of members of my extended family have done very well out of leasehold reform over the past 33 years. Surely there must be some limit to the continuing enforced transfer of value from the freeholder to the leaseholder. Not all freeholders are rich individuals. Some are charities upon whose good work tens of thousands of individuals depend every year. And not all leaseholders are of modest means. If they live in Belgravia, Chelsea, Kensington, Mayfair, Hampstead, and other parts of London, they are probably extremely rich. We are no longer talking about people of modest means in South Wales with whom the 1967 Act was designed to deal. It is a question of fairness, and certainly the Liberal Democrat amendment, and indeed the Bill as it stands, goes too far in a Robin Hood direction, as it were, of taking money from the freeholder and giving to the leaseholder.
Lord Kingsland: On the general issue of marriage value, I share entirely the views expressed by my noble friend Lord Caithness and the noble Lord, Lord Monson.
On the specific issues which my amendments seek to address, I would have been perfectly content had the Government remained with the solution contained in their consultation document: above the 90-year barrier, no marriage value applied or the marriage value was "nil". The Government have now changed their position and we find in the Bill a term of 80 years.
Outside London, above 80 years marriage value is, indeed, treated by most leasehold valuation tribunals as nil. The situation in London, however, as the Minister well knows from the close attention he will have paid to the statistics, is quite different. It is clear beyond per adventure that marriage value does indeed exist above 80 years. I would urge the noble Lord the Minister, therefore, to return to the solution that the Government. were inclined to adopt at the time of the consultation document.
Lord Jacobs: I support the amendments of my noble friend Lord Goodhart. It was interesting that the noble
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Earl, Lord Caithness, said that if the amendment were to be accepted, the attitudes towards the Bill would change. I agree that they would change greatly. There are 2 million leaseholders out there who are disappointed with the Bill because although it is good in a number of very important respects it completely misses the point in terms of the marriage value. The proposal to exclude 80 years and upwards shows some recognition that marriage value is an issue but it should not automatically be accepted that because it was in the previous government's 1993 Bill it should be continued.
I shall deal first with the question of why marriage value should be excluded. The key question is to whom it rightfully belongs. In the first place, the evidence is overwhelming: that it does not in any circumstances belong to the freeholder. The 1967 Act correctly provided that no share of marriage value should be given to the freeholder. The Duke of Westminster took his case to the European Court of Human Rights in 1986. He lost his case. The European Court said that if he were paid the correctly calculated value of his freehold, that was all he was entitled to.
Lord Monson: Could the noble Lord say whether the decision by the European Court was unanimous? Was it not a majority decision and not a large majority at that?
Lord Jacobs: On the basis that those who ask questions usually know the answer in advance, I shall assume that it was quite likely—and I do not know—that it was only a majority decision. Being found not guilty on a majority decision, however, would always seem to be good enough.
The question is then to whom the marriage value belongs. If a tenant had been a leaseholder from the original grant of a lease, he would be entitled to full marriage value. However, those circumstances very seldom arise and there are in reality generally numerous predecessors in title who would rightly be entitled to a share of the marriage value. It would obviously be difficult, if not impossible, to share out the marriage value between all the previous tenants as well as the enfranchising tenant.
Moreover, the marriage value would not be cashable until the property was sold. I would mention that one of the great arguments—and here I have some sympathy with the 1967 Act—is about all the tenants who were able to buy their freeholds effectively and who remained in their properties. The fact that they did not pay marriage value was fine because they probably did not have the cash to do so. However, some immediately thereafter—often within days of enfranchising—sold their property and thereby caused a great deal of concern.
It is understandable for the landlord to object that the property has all gone to them. On the other hand, if marriage value had been in, as it is in the present Act, all the tenants who have remained in their property for many years would have to find the cash not only to buy the freeholder's interest—the reversionary interest—but also 50 per cent of the marriage value. It is clearly a

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contentious point, but there is a strong argument that marriage value should no longer be included. One would agree that the basis of compensation payable to the landlord should accord with the provisions of the 1967 Act. I could have argued strongly with the previous government about the failure to abolish marriage value, but I find the Labour Government's position almost incomprehensible.
In the other place the Labour Member for Cleethorpes, Shona McIsaac, tabled a Private Member's Bill. That progressed but did not come to fruition. She had consultations with Ministers. In August of last year she wrote to me to say that, following consultations, she was confident that many of her suggestions would be adopted and government Ministers were very considerate towards her ideas. In her letter she wrote:
"I want leasehold as a means of housing tenure scrapped totally".
However, she said that if that did not happen—she thought that that was a possibility—at least she would ensure that the "special valuation basis" and "marriage value" as a way of calculating freehold purchase price were abolished. She went on:
"It is this which leads to vastly inflated sums of money being demanded by landowners and landlords".
One can say many more things about this subject. I know that we are trying to progress the Bill fairly rapidly and I shall confine myself to one further remark. The Minister in the other place, Nick Raynsford, replied to a constituent who had written to him in 1995 on the question of marriage value. In his letter he said:
"As you will have seen from the newspapers, we are suggesting that the concept of marriage value should be removed from the legislation. This would clearly help those seeking enfranchisement but also should have a benefit for leaseholders merely seeking to extend their lease".
I end on that point. I have maintained for more than three years that the Government's intention was to make it as easy as possible for tenants to acquire their freeholds or commonhold, or at least to be enfranchised. I remain of the opinion that somewhere along the line there was a change in their decision-making. We should not overlook the fact that, although this matter is contested, they recognise that marriage value is a serious issue. At least they have opened the door by saying that for anything above 80 years marriage value should be excluded from the calculation. That will be a good thing, and I know that tenants will welcome it. But at 79 years one is back to 50 per cent. It may be that in another amendment at another time some adjustment should be made, if the abolition of marriage value is not to be accepted.
7.15 p.m.
Lord Whitty: We always anticipated that this would be one of the most complicated and contentious parts of the Bill. I hope the Committee will forgive me if I go back over some of the history. Before I do so, perhaps I may comment on the amendment tabled by the noble Lord, Lord Hodgson, which seeks to extend the
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provisions of the Acts to houses and achieve a greater degree of consistency in the treatment of houses and flats. So far we have been unable to come up with a provision to do that, but we shall look at that amendment to see whether we can do anything along those lines in the course of the Bill.
The remainder of the amendments to a greater extent tend to exclude marriage value from the purchase price altogether. The noble Lord, Lord Jacobs, is right: the Government do not think that that is a sensible move. There has been some shift in position over the course of the years, which largely relates to the nature of the property with which we have been dealing.
The story of leasehold reform began with houses in 1967, as the noble Lord, Lord Monson, said. The Leasehold Reform Act particularly concerned South Wales, where there were a lot of Victorian houses which were coming to the end of their leases in difficult economic times. The 1967 Act gave leaseholders in houses of relatively modest rateable value the right to buy the freehold on what were extremely favourable terms, and with no concept of marriage value.
Later legislation extended the right to leaseholders of higher value houses but specifically on less advantageous terms. We do not wish to go back over that but it has affected the argument. We cannot use the 1967 Act to justify the exclusion of marriage value, as has been suggested. That Act related to an entirely different property environment, regime and balance of power between leaseholders and landlords and was not intended to address the kind of situation we are discussing.
Nevertheless, it has to be recognised that the right to enfranchise is a compulsory right. To exercise that right, the leaseholders do not have to demonstrate that the freeholder is at fault. It is therefore only fair that the freeholder should receive the same price that he would have obtained from selling the freehold to them voluntarily. The problem is that the effect of enfranchisement of itself changes that value.
When leaseholders collectively buy the freehold of a block of flats, they obtain a benefit which no other purchaser would. They can grant themselves, for example, new 999-year leases without having to pay a penny for them; and they can buy the freehold of a house which is no longer subject to any lease restrictions at all. The value of that benefit is usually described as the marriage value.
If their existing leases have, say, 80 or more years left to run, new longer leases will be worth little more than the existing ones, and so the marriage value in those circumstances will often be insignificant. However, if the unexpired term is relatively short, the difference would be substantial. The same is true, to a large extent, for leasehold houses.

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It follows that in a sale between willing parties, where the unexpired term of the leases was not very long the leaseholders would be prepared to pay additional money for this extra benefit. However, they certainly would not offer the whole amount of the marriage value. They would be well aware that they represented the freeholder's only chance of getting a higher price than he would get from an ordinary, straightforward purchase within that form of tenure.
In practice, a sale would only be agreed if the parties agreed to split the difference. If the parties were willing and eager, we calculate that in most circumstances the difference would be the same as we are providing for here; namely, 50:50. The freeholder would end up with a rather higher price than he would have received in other circumstances, but the leaseholders would still end up with an asset which is worth more than they paid for it. In a sense, therefore, there are no victims and only gainers in this process.
The valuation arrangements for leasehold renewals on flats also include a share of marriage value. People often ask how marriage value can be said to apply in a situation where, unlike with enfranchisement, there is no joining or marriage of the two interests. It is the case that marriage value does not quite have the same meaning in the lease renewal contract. Indeed, marriage value is perhaps not the right term but it is the term that has been carried over from the other circumstance. As defined in the Act, it is the difference between the aggregate values of the landlord's and the tenant's interests as they are before the new lease is granted and as they will be after it is granted. The notion that, in one way or another, extra value is created by the transaction is common in both cases and for lease extension, as for enfranchisement, any amount of married value will tend to be extremely small if the unexpired term of the lease is still very long. Similarly, as under the right to enfranchise, the split of marriage value has been argued about in individual cases but, in most cases, we considered it sensible to go for 50:50.
One can go through even more difficult arithmetic assessments to grasp about how the lease renewal valuation provisions and the enfranchisement counterparts work, but the broad intention is the same. The leaseholder should be required to pay no more, but also no less, for the compulsory acquisition of a new lease than he would in a similar transaction between the same, but this time willing, parties.
That is the principle behind what we are still calling marriage value. In our view it is a sound one. There are defects of detail in these provisions and we are taking corrective action to address them in the Bill. Before doing so, however, it might be as well to compare the 1993 regime with the arrangements for compulsory acquisition under the Landlord and Tenant Act 1987.
Compulsory acquisition under Part III of the Landlord and Tenant 1987 Act means that, sometimes, the leaseholders will want to enfranchise mainly because of a negligent attitude to management by the freeholder. There is a separate procedure under that Act for leaseholders of flats to seek to buy their
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freehold where the landlord is in serious breach of the lease and likely to remain so—although it has to be said that this has not been much used. In those circumstances, the court can make an acquisition order which entitles leaseholders to buy their freehold. They can do that at a price which excludes marriage value. But that is because, in those circumstances, the landlord is clearly at fault and therefore a penal regime is appropriate. If marriage value were removed from the valuation arrangements under the 1993 Act, there would no longer be a distinction between the provisions governing no fault transactions and default transactions. In the Government's view, that is difficult to defend.
I now turn to Clauses 123, 124, 131 and 132, which are mainly addressed by the amendments of the noble Lord, Lord Kingsland. The provisions of the 1993 Act were based on the principles that I have just described, but they were defective in two ways. First, they provided that the freeholder's share could never be less than 50 per cent but could be higher. We considered that to be unfair and we have therefore fixed the division at 50 per cent. The previous situation clearly led to arguments between the parties. A fixed sharing of the married value is more sensible and is likely to lead to a speedier process. Secondly, the 1993 Act encouraged the parties into further arguments about the amount of marriage value, even though there would obviously be practically none in those circumstances. The Government want to retain the principle of those provisions but to eliminate the scope for wasteful argument, both about the amount of the marriage value and about the split.
In practice, all but a very few divisions at the LVT tribunal—and those only in highly unusual situations—have split the value equally between the parties. That has not stopped landlords arguing for a greater share. Therefore, we consider that the marriage value should be split 50:50 in all cases.
Clause 124 provides that where the unexpired term of each of the leases held by participating members of an RTE company exceeds 80 years, no marriage value is payable. Amendments Nos. 224 and 228B would instead provide for a 90-year cut-off for enfranchisements and leasehold renewals. Amendments Nos. 224A and 228C would provide for a 100-year cut-off.
We have already heard views on the principle of the cut-off. Our objective is to prevent costly arguments that are completely disproportionate to the sums involved. The principle of cut-off is consistent with this objective, and that seems sensible to us. However, whatever cut-off is chosen, it seems likely that there will be those who will argue for a different cut-off. We accept that, on occasions, tribunals have sometimes awarded an element of marriage value where the leases have 90 or more years unexpired. But that would normally be a relatively small amount of money—perhaps less than the costs of any legal action.

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It was a key principle of the 1993 Act that valuations for collective enfranchisement should be on the assumption that the Act and its consequences did not in effect exist. In practice, the operation of the Act has distorted the market or altered it so that transactions have taken place, including an element of marriage value where the unexpired terms of existing leases exceeded 80 years. This has been particularly so in some parts of the country as distinct from others. The effect has been that some very experienced and well-resourced landlords, particularly on the great London estates, have brought to bear on those transactions the best professional advice, often leaving the leaseholders somewhat "under-gunned". The Government's proposal is intended to reduce that potential advantage and restore the original objectives in 1993.
The noble Lord, Lord Williams, is not with us today. His amendments attempt to address some of these difficulties by introducing a degree of tapering of the position where the cut-off point would operate—a Cheshire cat, where the unexpired term of the lease grows shorter and the provisions gradually disappear. We have not thought it sensible to go down that road. It would greatly complicate the position. The main reason for not doing so is that in the vast majority of cases the 80 year cut-off does not suddenly occur from a huge marriage value to a nil situation. The marriage value that may be found where the term was 75 years would still be quite modest. Therefore, by the time it reached 80 plus years, the difference would not be all that dramatic.
Nonetheless, we continue to recognise that there is concern over this matter. Our provisions—a 50:50 split and the principle of splitting the marriage value—seem to us to meet the interests of both landlord and leaseholders in a prospective transaction under this part of the Bill. We recognise that there will be rough edges. The more sophisticated attempts to overcome those by changing or tapering the cut-off point will not improve the situation and are more likely to lead to substantial arguments about what will, in most cases, be very limited sums of money.
I apologise to the Committee again for speaking at some length. It is important to place on record the Government's arguments against the principle of excluding marriage value. The formula we have come up with is relatively easy to understand and provides something in terms of value to the landlord and something in terms of increasing what would otherwise be the value of the flat or property to the leaseholder. I ask the Committee to resist the amendments.
7.30 p.m.
Lord Goodhart: I am obviously very unhappy that the Minister has been unable to make any movement in our direction, despite the fact that this is a change in what was until recently a government policy that was the same as that which we are now putting forward.
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Perhaps I may deal first with the 1967 valuation. The element in the valuation under the 1967 Act that was most open to serious objection was not in fact the absence of marriage value, which was not in the original 1967 Act and was introduced a couple of years later, but the introduction into the computation of a wholly artificial 60 year extension of the lease. Thus the valuation of a house which was subject to a lease that was due to expire in two years' time was calculated on the basis that the lease would to expire in 62 years' time. That seemed to me at the time—and frankly seems to me still—to be very unfair. I felt that because of that provision the Duke of Westminster was unlucky to lose his application in the European Court. The 1967 valuation on the basis of this purely nominal lease has not been repeated in the case of any later confirmed rights to enfranchisement or to an extended lease and is not proposed by us now. We are looking at what is, certainly in terms of valuation, the considerably less important issue of marriage value, but it is one that nevertheless causes great concern and distress to many leaseholders faced with an obligation to pay it.
We believe that one of the roles of Government is to protect people who are in a weak bargaining position. That is why we have a great deal of consumer protection legislation for instance. Perhaps I may give an example with which I am familiar from my professional work. The Consumer Credit Act is intended to correct market inequality between parties.
There is undoubtedly inequality in these cases between the landlord and the tenant. To some extent that inequality is due to the fact that tenants are likely to be poorer than landlords, although in individual cases there are, of course, rich tenants and poor landlords. By and large, it is likely that the landlords will have access to better advice and representation, so that the valuations that are produced by the courts will be somewhat skewed in their direction.
Perhaps more important than that is the fact that many of the tenants are people who are living in the property. That is why marriage value exists, because if there was no detriment to moving out of one flat and finding another, the tenant would simply not be willing to pay more in order to buy the freehold than any other prospective purchaser. We believe that marriage value is therefore due to market inequality and to the weaker bargaining position of the tenant in occupation. For that reason, we believe that the appropriate course of action for a Government to take is to correct that inequality by eliminating its representations in terms of cash; namely, the marriage value.
We do not see that this is likely to give rise to any problems with the Human Rights Act. The European Court of Human Rights, having swallowed the camel of the 1967 basis of valuation, is, we believe, unlikely to balk at swallowing the gnat of marriage value. This is an important issue and I would regret it if, as the

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noble Earl, Lord Caithness, said, it caused ill will between landlords and tenants. Nevertheless, this is something that we must take further and bring back on Report. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 223A not moved.]
Clause 123 agreed to.
Clause 124 [Disregard of marriage value in case of very long leases]:
[Amendments Nos. 224A and 224 not moved.]
Clause 124 agreed to.
Lord McIntosh of Haringey: I believe this may be a convenient moment for the Committee to adjourn until next Thursday, 22nd March, at 4 p.m.
The Deputy Chairman of Committees (Lord Geddes): The Committee stands adjourned until Thursday, 22nd March, at 4 p.m.
The Committee adjourned at twenty-four minutes before eight o'clock.