HL Deb 15 March 1993 vol 543 cc1271-80

.—(1) A qualifying tenant of a flat may give notice ("a leaseback notice") to the person who owns the freehold, requiring him to specify which of the units within the relevant premises he would wish to be subject to the leaseback provisions of section 32 below and Schedule 8 below in the event of an initial notice under section 11 below being served within six months of the service of the leaseback notice.

(2) If a leaseback notice is served on him, the freeholder shall reply to it within 28 days.

(3) In this section "the relevant premises" has the same meaning as in section 10 above.").

The noble Lord said: At Second Reading I drew attention to a property called Morshead Mansions, which consisted of 79 long leasehold flats and 25 flats let to controlled tenants on statutory tenancies. The position I described was that the owner of the block was interested in the rack-rents, as they are called—the Rent Act tenancies—because he saw the possibility of granting long leases at premiums when those tenancies fell in. Almost the entire value of the block was in the 25 Rent Act tenancies.

As the Bill stands at present the participating tenants have to make their arrangements for financing the purchase of those Rent Act tenancies. As I explained, they have a low flow of income. It will not be easy to raise finance. They will have to go to considerable expenditure. If they can arrange finance no doubt they will have to pay a substantial commitment fee. However, when the enfranchisement proceeds, the result in such a case will be that at some point—I believe at any time before completion—the reversioner will say, "I want a leaseback on those properties". We can be almost certain that it is a leaseback that he wanted all along but in order to confuse the flat owning tenants he has held his cards back until the last minute. He has given them a rough ride until, at the last moment, he eventually says, "I want those flats back".

It would be much simpler if we could devise a procedure such as that set out in the amendment whereby the enfranchising flat owners could require the reversioner to state at an early stage whether or not he will wish to take a leaseback on certain properties. The result of such a procedure would be that, if and when the enfranchisement went ahead, the reversioner would be obliged to take leasebacks from those on which he has stipulated that he wanted leasebacks but he would be precluded from taking leasebacks on the other properties.

In a case such as I have described that is an eminently sensible provision. My noble friend's agile mind may have devised similar situations in which the procedure would not work. However, such a provision would make the Bill work more easily. It would be in the general interests of flat owners and not against the interests of reversioners who are seriously trying to comply with all the provisions of the legislation in a constructive way in order to get the enfranchisement through on reasonable terms and in a reasonable time. I beg to move.

6.30 p.m.

Lord Boardman

My noble friend asked for suggestions for overcoming the problem as he saw it. As I understood the point he made, he referred to flats in which the majority of occupants are paying rack-rents and are not long leaseholders.

Lord Coleraine

Perhaps I may assist my noble friend. In the example I chose, in 79 of the flats they were long lessees and in 25 they were not.

Lord Boardman

I am grateful to my noble friend. He talked in particular of the problem of the rack-rent payers. In those circumstances, perhaps he would be more supportive of the line that I took on earlier amendments with regard to, first, the right of the non-residents not to be able to enfranchise and, secondly, non-resident leaseholders, the rack-rent tenants, who seem to suffer under the proposals in the Bill.

Lord Strathclyde

I consider that the amendments would place an unnecessary and onerous burden on a landlord. The new clause would allow any qualifying tenant to serve an additional discovery notice asking the landlord which units he would wish to lease back were an initial notice to be served within the following six months. The amendments would then commit the landlord to leasing back those units and no others.

The present discovery notice is satisfactory and reasonable in that it provides a means for tenants to obtain the minimum information they require to enable them to make a decision on whether to proceed with a claim to the right to enfranchise. It allows them to discover who their landlords are, and whether the block is eligible for enfranchisement.

It has been devised quite deliberately to be fair to landlords also by not requiring the release of unnecessarily detailed information. It is possible that a landlord could have many discovery notices given to him, none of which lead to the commencement of the enfranchisement process with the tenants' initial notice. He cannot claim costs for the supply of information and it is therefore right that the information required should not be extensive.

Such a requirement would involve a landlord in a lot more work, and therefore expense, in making his response to the notice. He would have to consider which flats he wanted to lease back which might require him reconsidering his overall investment and its future potential. A landlord may be put in the unenviable position of having to give a realistic answer to a theoretical question about possible enfranchisement at a future date.

The amendments to Schedule 8 impose an even more unreasonable burden. These make the leaseback of the units specified in the leaseback notice mandatory upon both parties. They also prevent the landlord from leasing back units not specified in the notice. Those provisions could be very onerous. Each time a leaseback notice was served the landlord would be in the position of being tied to any decision he made on leaseback for a further six months. That commitment would be without the benefit of knowledge, which the landlord would later obtain from the initial notice, of the extent of enfranchisement, exactly when it might occur, and on what terms.

The current provisions are that, once an initial notice is given to the landlord, he will be required to indicate which units he wishes to lease back. After an initial notice has been given the landlord will be able to recover his reasonable costs, which will include any associated with providing information on leaseback. That is fair to the landlord. If his decisions on leaseback affect the tenants' decision to enfranchise, then they may still withdraw and the landlord will receive his abortive costs.

I am sorry to say this to my noble friend, but I believe that the amendments are unnecessarily onerous to landlords. The information sought will be provided by the landlord when the tenants have a real commitment to enfranchisement. That must be fair on both parties. That is the intention of the legislation and I therefore ask my noble friend to withdraw the amendment.

Lord Coleraine

Did I understand my noble friend correctly? Was I wrong in thinking that leaseback provisions could be brought into effect by the reversioner at or shortly before the time of completion? Does he say that those provisions can be flushed out of the reversioner with the counter notice? I note that my noble friend nods his head; he is saying that.

Obviously, I wish to consider the amendment again in the light of what he said. However, at present his objections to my amendment have been long on drafting points and fairly short on principles. If it is a question of extra expense to the reversioner it will not compare well with the expense that could be saved by the flat owners when they seek to sort out their arrangements for financing a large purchase.

Perhaps I may say this to my noble friend Lord Boardman. The provision does not touch upon the plight of the tenants of the 25 flats which are not included in the enfranchisement. They are not parties to the argument. Possibly I have misunderstood what my noble friend said, but I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 11 [Notice by qualifying tenants of claim to exercise right]:

Lord Clark of Kempston moved Amendment No. 52: Page 13, line 21, leave out ("is made") and insert ("may be made at any time after 30th September 1996").

The noble Lord said: The more I study the Bill the more I am convinced that if a Labour administration had introduced the legislation we, sitting on the other side of the Chamber, would be fighting it tooth and nail.

Having said that, I remind my noble friend that the voting list on the amendment moved last week by my noble friend Lord Peyton shows that a majority of Back Bench Conservative Members voted against the Government. I suggest to my noble friend that that is a matter which should be taken seriously. Having listened to the Committee stage of the Bill since its inception, I have seen few signs of the Government showing any flexibility. Few concessions have been made.

The Bill forces freeholders to sell, whatever the qualification may be. Many of us believe that that is wrong. I refer to sharing the marriage value. Why should a freeholder give part of his asset to anyone, whether or not it be the tenant?

The reason for my amendment is this. I believe that the unfairness of the Bill is exacerbated by the fact that the sale is being forced on a freeholder when the property market is practically at its bottom. When we compute the valuation of the leasehold and the freehold, no matter how it is made, the valuation will be made on the state of the property market. Consequently I should like to suggest to my noble friend that he should give an undertaking to examine the matter.

I know that in Clause 171 the Secretary of State has the right or the duty to say when the date is going to be, and he does that by statutory instrument. Very well, we accept the fact that it somehow got into the Conservative manifesto at the last election, but if my amendment is accepted by the Government it gives the property market time to recover. It also fulfils whatever commitment we put into the manifesto. I urge my noble friend to accept this simple amendment. Perhaps the wording is not as good as a parliamentary draftsman would like, but if my noble friend accepts the spirit of the amendment, that is all I ask. I beg to move.

Lord Strathclyde

My noble friend's amendment is drafted in a very clear manner and he has explained it very precisely. The effect, as of the two similar amendments which my noble friend has tabled for later, would be to delay the new rights contained in Part I of the Bill for roughly three years, until October 1996. I feel that it would not be right to delay new rights in that way. There are a large number of tenants of flats who are keen to have at the first opportunity the same rights that people living in houses have enjoyed for 25 years. People who currently face the problem of having an unreasonable landlord or those who cannot sell their flats because the leases are too short will not understand if the Committee delays implementing this commitment by three years.

My noble friend referred to property prices. They have fallen over the last three years, but I understand that they are now beginning to turn. I, for one, would not be willing to predict where they might be next year, the year after or indeed in 1996; but I cannot believe it is right for the Committee to try to gerrymander by seeking to delay the introduction of the legislation to fit in with particular cycles of the property market. Landlords may do better then, but they may also do considerably worse. Who is to say whether now or 1996 will be the right time to buy commercial property or shares or bonds or any other kind of asset that my noble friend cares to mention?

I believe that the only course we can take is to legislate for what is right and to leave the markets to fix the value of their interests. I certainly do not have a sufficiently clear crystal ball to tell anybody whether enfranchisement now rather than in three years' time will work to the relative advantage of the landlord or the tenant. I take my noble friend's concerns to heart. I understand how he feels about the legislation, but I hope that he will see that the amendment really is not practicable.

Baroness Gardner of Parkes

I oppose the amendment most strongly. It is the second time that this matter of being able to delay everything until it all becomes more expensive has arisen. Although property prices may be described as low now, anyone who has been in property for a considerable length of time, as I have myself, though in a very small way, will see that prices are nothing like what they were in, say, 1977 or even the early 1980s. They have gone back from the absolutely ridiculous peaks, which were quite unrealistic, reached in 1988 and 1989, but they have not gone right back again. The further back we look we find that Smith's Charity all started with £2,000 and then we see what it has multiplied to now. There is no way that we can really be worrying about that whereas the thought of delaying the legislation for three years is very difficult. It will in any case take people quite a long time to go through all the procedures and overcome all the obstacles to enfranchisement. The sooner the Bill is passed the happier I shall be.

Lord Clark of Kempston

I am most grateful to my noble friend for his reply, but I am sure he will understand when I tell him that I do not accept it. Although 1996 may be too long I would be quite prepared to reduce it to 1995 or even to 1994. However, I believe there is a tremendous unfairness, without delaying the Bill unnecessarily, in forcing people who are unwilling sellers to sell an asset when the market is at the bottom. Let it have time to recover. However, in view of what my noble friend says and also in view of the fact that time is getting on, I will come back to the matter at Report stage. In the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.45 p.m.

The Earl of Lytton moved Amendment No. 53: Page 13, line 27, at end insert: ("(2A) All qualifying tenants must be given an opportunity to participate in the giving of notice of the claim to exercise the right to collective enfranchisement.").

The noble Earl said: I will speak to Amendment No. 53 and also to Amendment No. 67, which is grouped with it. These are probing amendments. As the Bill is drafted, enfranchisement can proceed if two-thirds of the qualifying tenants sign the initial notice, but there is no requirement for every tenant to be consulted before participation. It seems to me that the nominee purchaser could on occasion simply forget to include one or more of the tenants. The problem starts with the smallest unit of four flats and can get larger in quantum thereafter, with more numerous qualifying tenants.

Clearly, it is desirable to ensure that as many as possible qualifying tenants take part in the enfranchisement process. The effect of Amendment No. 53 is to enshrine a right for every such tenant to participate, but not so as to force that participation. That is very important. The onus would be on the nominee purchaser to ensure that reasonable attempts had been made to involve as many qualifying tenants as possible. I stress that in my opinion a collective purchase requires the collective involvement of as many tenants as possible.

Amendment No. 67 is slightly different. It starts from the fact that the Bill contains no provision to ensure that a nominee purchaser does in fact convey the freehold to the participating tenants. At Second Reading I drew attention to a case in which I had some professional involvement. A nominee tenant, ostensibly purchasing on behalf of himself and a number of other tenants within a building comprising shops and flats—there were shops below and maisonettes above —when he had concluded the purchase of the freehold, put the title in his own name. The other tenants had to sue to obtain rectification of the situation, in accordance with the original understanding. It would be most undesirable obviously if this sort of activity were allowed to take place under the provisions of the Bill once it becomes law. Amendment No. 67 seeks to remedy that.

There is another reason why the amendment may commend itself to the Committee; namely, that it strengthens the essential relationship between a freehold ownership and the occupation of the property concerned. I should really like to see a provision whereby a share in the freehold was in some way inalienable from the occupation of the building; otherwise it could be alienated and that would be very unsatisfactory. It would lead to a further series of difficulties for tenants in the future. It should be the objective of our discussions in this Committee that we eliminate as far as possible that sort of risk. I beg to move.

Lord Renton

I hope that my noble friend will give very careful attention to the amendment moved by the noble Earl. It provides an opportunity, if I may take advantage of it, to draw attention to what I regard as the principal defect in the Bill. I can explain it quite simply. Under Clause 3, before there can be leasehold enfranchisement, two-thirds of the tenants in the block of flats have to be qualifying tenants. But that does not end the matter. Under Clause 11, two-thirds of that two-thirds must give notice. That brings us to the proposition that only four out of nine tenants in a block of flats may find themselves forcing leasehold enfranchisement on all the tenants.

If my noble friend says, "Oh yes, but of the two-thirds qualifying tenants, at least half, and possibly many more, will agree and will give the initial notice", I would beg leave to doubt it. I doubt it for various reasons, some of which can be gleaned from Clauses 11 to 34, which, I may say in passing, are an extraordinarily inconclusive jumble of detailed instructions for tenants and landlords to have to observe. These clauses to which I have referred comprise 28 pages. They also have to be read in the light of Schedule 8, which contains another four pages. Most of what happens between Clauses 12 and 34 could quite well have gone into a schedule. It would have made for better legislation of the kind which we hope, perhaps sometimes vainly, we are leading towards. It is an unsatisfactory situation. I am sure that noble Lords on both sides who support the Bill, and who believe in democracy, which is government by the majority, find it very unusual that we should allow what is potentially a minority of the tenants to force the issue.

I am grateful to the noble Earl. His amendment, which seems to me a very simple one and which goes towards making the outcome more certain, has provided an opportunity to draw attention to what I suggest is a major defect in the Bill.

Baroness Hollis of Heigham

We on this side of the Chamber also support Amendment No. 53. As has been mentioned by the noble Lord, Lord Renton, there is a broader issue throughout the Bill of latecomers to the process of enfranchisement. We hope to address some of those issues in Amendments Nos. 63, 64 and 65 on the one hand, and Amendment No. 71 on the other, which deals with latecomers coming in at the stage of participation; participatory notice; and, in Amendment No. 71, latecomers coming in after enfranchisement has taken place—perhaps council tenants who subsequently exercise their right to buy. Amendment No. 53, as I understand it, deals with a preceding stage; namely, it ensures that all qualifying tenants know about, and therefore have the right to participate in, the moving of a Section 11 notice. It seems simple equity that all qualifying tenants should have that right to be conjoined in association. We do not in practice expect it to be a major problem, simply because of financial pressures to broaden the base for qualifying tenants to enter into the purchase of enfranchisement. Nonetheless, the amendment seems to me at worst harmless; and in those rare circumstances where there may be some efforts to exclude one or two qualifying tenants from participating, it would protect their democratic rights to be involved. Therefore we support it.

Lord Strathclyde

Perhaps I may preface my remarks to the amendment by replying to my noble friend Lord Renton. I am not at all convinced that the amendment would improve my noble friend's view of this particular part of the Bill.

There is no question of people being forced to enfranchise. What happens to those tenants who do not enfranchise is that they simply go from having one landlord to having a landlord who is controlled by other tenants in the block. I understand my noble friend's point about the difficulties of putting into practice the legislation for people to achieve enfranchisement if they want it. But I understand that most property law is extremely complicated. This leasehold enfranchisement legislation will certainly be no exception. But there are some fundamental basic principles that have to be followed which I believe will make the process considerably easier than my noble friend thinks.

I turn to the amendment of the noble Earl, Lord Lytton. I have a degree of sympathy with the points put forward, in the same way as the noble Baroness, Lady Hollis, did. The objective here is to ensure that all the qualifying tenants have an opportunity to take part in enfranchisement and that none is squeezed out because, for example, one group living in a block of flats wishes to exclude some of the other residents for an unfair or totally irrational reason.

I have considered the amendment with some care. I do not, however, believe that it would be practicable to put in statutory requirements giving everybody an automatic right to take part in the enfranchisement. The Bill provides that the freehold of the block shall be transferred to a nominee of the participating tenants. So a right to sign the initial notice in itself is of little value. To have any meaning, what would be required is a right for all qualifying tenants to be part of the nominee—either as a shareholder if it is a company, or as one of the joint owners if the freehold is to be owned individually. But in order to define such a right, it would be necessary to constrain the way the nominee is established. Each tenant would have to be entitled to have the same number of shares as any other tenant if the right was to make any sense. But that would have the effect of restricting the opportunities for some tenants to contribute more than others in the light of their own financial circumstances and their own commitment to the ongoing management of the block. As the noble Baroness, Lady Hollis, quite rightly said, we shall be considering some of these issues in more detail when we debate the amendments in her name later.

I believe that in practice—and this is what is important —in most blocks the tenants are likely to wish to have the greatest possible number of tenants participating. They will want to share the costs of buying the freehold, and of meeting the freeholders' legal and surveying costs, spread across as many shoulders as possible. The responsibilities which they would be taking on as owners and managers of their blocks are not insignificant, and the more people prepared to share in the task the better. They are more likely to be concerned with getting everyone involved rather than seeking arbitrarily to exclude some tenants.

I do not believe that giving a minority group a statutory right to join the party is likely therefore to be a sensible answer. If someone is only going to be involved through the exercise of a statutory right and against the will of two-thirds of his neighbours, it is hardly likely that the task of running the block after enfranchisement will be an easy one. Most likely, he will simply be outvoted. If any tenants are excluded from enfranchisement, they will of course continue with their existing leases. Their legal position will be no worse than it was previously. They will merely have a new landlord, something that happens very regularly now under current legislation.

I have some difficulty with Amendment No. 67. It envisages a second conveyance, at some unspecified time after the nominee purchaser has acquired the interests to which he is entitled by collective enfranchisement, of those interests to those tenants. But in English law, as I am sure the noble Earl knows well, not more than four people can own a freehold. So if the block is of more than four flats it must be held by a nominee.

I have a great deal of sympathy with the noble Earl's intentions. I believe I have proved that in practice they would not work, and could actually work against the interests of tenants.

Lord Renton

Before the noble Earl replies perhaps my noble friend will deal with my point. We could end up with a situation in which only four tenants out of nine in a block of flats were in favour of leasehold enfranchisement and, by that minority, the majority would have it enforced upon them.

7 p.m.

Lord Strathclyde

My noble friend is right, but perhaps I can explain what happens under current legislation. If a freeholder wishes to sell to another freeholder, he does not need the permission of any of the tenants. We are therefore providing a considerable improvement on that situation by allowing the tenants in a block of flats the opportunity to buy their own freehold. Far from that being undemocratic, it is most democratic and extends the franchise.

Lord Boardman

The only reason I enter the debate is because my noble friend twice referred to the fact that all that would happen is that non-qualifying tenants would have a new landlord. On one occasion he referred to the new landlord as being someone appointed by the other lessees.

I am concerned, and I believe that it is a view expressed elsewhere, that a lessee of fellow tenants is quite different from a new freeholder who has nothing to do with the block. My noble friend referred to four tenants out of nine in a block. If those four lived on the ground floor and the others lived on the second and third floors, there would not be much enthusiasm from the freeholders to install a new lift or repair the roof. Freeholders who have the same interest in the whole block are quite different from those who have an interest in being residents of only four-ninths of the block.

Lord Strathclyde

We are straying considerably from the amendment tabled by the noble Earl, Lord Lytton. It is obviously a point we discussed in previous clauses and no doubt shall discuss again in the near future.

Lord Coleraine

The amendment is a wide one and I ask the indulgence of the Committee while I sneak in a further point which follows from the comments made by my noble friend Lord Renton. He mentioned the case of four tenants out of nine who are able to enfranchise. What happens should there be two blocks of four each wanting to enfranchise? Who has the right to enfranchise and who does not?

The Earl of Lytton

First, I thank the Minister for his considered reply, which I found extremely helpful. We are on the same wavelength. I thank other noble Lords who have spoken. This relatively modest amendment seems to have elicited a considerable amount of interest, which was certainly unexpected by me.

However, I leave the Minister with the thought that there is a requirement for a unity of purpose among those who occupy and manage the building as a result of the changes brought about by the Bill. I have no intention of pressing the amendment. With the leave of the Committee, I beg leave to withdraw Amendment No. 53.

Amendment, by leave, withdrawn.

Viscount Goschen

I beg to move that the House be now resumed. In moving this Motion I suggest that the Committee stage on the Bill be resumed again at 8 p.m.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.