Housing and Urban Development Bill

HL Deb 22 March 1993 vol 544 cc9-28

3 p.m.

The Parliamentary Under-Secretary of State, Department of the Environment (Lord Strathclyde)

My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.

Moved, That the House do now again resolve itself into Committee.—(Lord Strathclyde.)

On Question, Motion agreed to.

House in Committee accordingly.

[The CHAIRMAN OF COMMITTEES in the Chair.]

Schedule 5 [Purchase price payable by nominee purchaser]:

Lord Gisborough moved Amendment No. 105C: Page 180, line 13, leave out ("the freeholder's share of").

The noble Lord said: The purpose of the amendment is to ensure that the freeholder receives the full amount of the marriage value. I know that it has been said in another place that under paragraph 4 of Schedule 5 the freeholder may be able to receive up to 100 per cent. of the marriage value. However, there is a good argument that the freeholder should be entitled to that 100 per cent. in all cases.

An individual who is required to sell property to a public authority under a compulsory purchase order receives the full value of the property. The public body which exercises that power pays the full value of that property. It is most unusual to give a private individual or group of private individuals the right to compulsory purchase of another private individual's property. When such unusual powers are given to a group of people, it is important that they should be required to pay the full value of the property which they are acquiring. It would be quite wrong to enable them to purchase for a lower price since the discount would provide an incentive to them to exercise their powers in order to make a profit.

The considerations in this case are quite different from those in which local authorities have been given a right to buy. It is open to government to offer rights to private citizens when acquiring property from a public authority. The individual's gain is at the expense of public funds, albeit local rather than central government funds. If the Government wish to provide an incentive to leasehold tenants to enfranchise their flats, that should be at the expense of public funds rather than at the expense of the landlord. Otherwise, we are talking about redistribution of wealth. That may be expected of a socialist administration but it is hardly to be expected of a Tory Government.

A landlord wishing to sell his property may well expect to receive less than the full value from the residential leaseholders as a result of open market negotiations. However, in such a negotiation a landlord who is not a willing seller would not accept a price based on less than the full marriage value. A landlord who is forced to sell as a result of compulsory leasehold enfranchisement should receive the same price. Also, once the landlord has had to sell, it is highly probable that he will have to pay capital gains tax. Having paid that, the value of the compensation received that is available for re-investment will be seriously and unfairly reduced. Therefore, without a 100 per cent. marriage value, he would suffer loss twice.

Finally, since the Budget last Tuesday, the position of charities has worsened dramatically. An argument in favour of enfranchisement under the terms of the Housing and Urban Development Bill was that charities would realise liquid assets from the sale of property and could then re-invest in equities and be none the worse off. After the Budget, they will be considerably worse off if they follow that course of action. Changes in the system of tax credit on share dividends were made and the tax rebate now given with dividends has been cut by one-fifth. The exact losses to be borne have yet to be calculated but any charity relying on income from a share portfolio will lose many thousands of pounds per annum.

Those changes are being phased in over a four-year transitional period for charities but it is difficult to see how, ultimately, they can be avoided. I beg to move.

Lord Boardman

Grouped with this amendment are my Amendments Nos. 108B and 111D. I do not propose to speak to them now. I wish to speak to them when they are reached in their numerical order.

Lord Campbell of Alloway

I support the amendment for the reasons which have been given. I shall support also Amendment No. 108B. The two amendments are not mutually exclusive or inconsistent but for the reasons that have been clearly given, I support the amendment.

Lord Carnock

I oppose the amendment and any amendment which would increase the freeholder's share of the marriage value. My objection turns on the increase in the percentage profit that such an amendment would give to the freeholder at the expense of the enfranchising leaseholder.

I shall illustrate my objection by reference to the figures in the Norfolk and Lloyd-Jones cases which were decided by the Lands Tribunal. Neither case was the subject of a judicial review. So far as I have been able to ascertain, no valuation case under the 1967 Act has come before the courts for review.

In the Norfolk case, the investment value of the freeholder's interest, which was the reversion to a lease at a ground rent with 59 years to run before expiry, was £1,000. The marriage value was £5,500 of which one-half was awarded to the freeholder. Therefore, the enfranchisement price was £3,750 representing a profit to the freeholder of 275 per cent. The value of the property unencumbered was £37,000. The value of the leaseholder's interest was £30,000 but he had to pay £3,750 for enfranchisement. Therefore, his contribution was £33,750. For that he received property worth £37,000. His profit was 9.8 per cent.

According to my calculations, the substitution of 75 per cent. for 50 per cent. as the freeholder's share of the marriage value would increase the enfranchisement price to £4,125. That would increase the freeholder's profit to 412 per cent. and reduce the leaseholder's profit to 8.4 per cent. If 100 per cent. of the marriage value was to be awarded to the freeholder, the freeholder's profit would be further increased and that of the leaseholder further diminished.

I repeat that exercise as regards Lloyd-Jones. The lease had 12 years to run before expiry. The value of the freeholder's interest was £84,257. The marriage value was £58,243, of which one-half was awarded to the freeholder. The enfranchisement price was rounded to £113,000. The freeholder's profit was 34 per cent. The leaseholder's interest was valued at £45,000, but he had to pay £113,000 for enfranchisement, making his total contribution £158,000 for a property worth £187,500. Therefore, his profit was 18.7 per cent. According to my calculation, if the freeholder were to have 75 per cent. instead of 50 per cent. it would increase the enfranchisement price to £127,939, increase the freeholders profit to 51.8 per cent. and reduce the leaseholders profit to 8.4 per cent. The freeholder's profit would be yet further increased if he were to receive 100 per cent. of the marriage value and the leaseholder's profit correspondingly reduced.

Norfolk and Lloyd-Jones were treated by the Lands Tribunal on very similar principles, but there were differences in the basic facts. In Norfolk, the lease had 59 years to run but in Lloyd-Jones it had only 12 years. In Norfolk the value of the leaseholder's interest greatly exceeded that of the freeholder, while in Lloyd-Jones the value of respective interests was reversed. In both cases the profit of the freeholder expressed in percentages greatly exceeded that of the leaseholder. Under the Bill, the profit of the leaseholder is modest, while that of the freeholder is very handsome indeed.

Under Amendment Nos. 105C and 110, the profit of the freeholder will be enhanced and that of the leaseholder reduced. In neither Norfolk nor Lloyd-Jones did the leaseholder make any windfall profit. If there were any windfall profits they were those of the freeholder in both cases. I do not know what profits have been made where enfranchisement proceedings have been settled by negotiation as the results are not published. In view of the published figures, I cannot support either Amendment No. 105C or Amendment No. 110.

I should like to refer to paragraph 2(1)(b) of the fifth schedule to the Bill, which includes a provision for the sharing of the marriage value between the freeholder and any leaseholders with superior leases in proportion to the value of their respective interests in the property. I do not understand why that very simple provision does not include the enfranchising leaseholder. While in practice as a solicitor, I frequently used this method of dividing a trust fund between life tenants and reversioners. In many cases it proved to be entirely satisfactory to the beneficiaries.

Finally I should like to remind Members of the Committee that the learned authors of Woodfall on Landlord and Tenant have cast a doubt on the correctness of the decision of the Lands Tribunal to award 50 per cent. of the marriage value to the freeholder. I cannot improve upon the wording of Woodfall, so I shall quote from the fourth volume, paragraph 26.123: So far as marriage value is concerned, this is generally divided equally between landlord and tenant. An alternative view is that although in a freely negotiated bargain the ability of the vendor to bide his time may result in the 'marriage value' being divided fifty-fifty, the Act postulates a willing seller at the time the tenant serves his notice, and on such a sale it would seem that the sitting tenant could get the marriage value for himself by just one bid higher than the most optimistic of investment bidders would make".

3.15 p.m.

Lord Williams of Elvel

I agree with the noble Lord, Lord Carnock, in his opposition to the amendment. During the last stages of his intervention, he mentioned the decisions of the Lands Tribunal in the cases of Lloyd-Jones v. the Church Commissioners and the Norfolk case. In both those cases the tribunal accepted an even split of the marriage value. We think that that is right. That is something which the market would accept.

However, having said that, perhaps I may make a general point about the grouping of the amendments. We seem to be starting to waver quite a lot. I address my remarks to the Minister. If we are to get through the rest of Part I of the Bill today, it seems to the Opposition to be important that we stick to the groupings agreed. I fully accept that any Member of the Committee is able to speak to any amendment that he wishes in the order that appears on the Marshalled List but if that happens frequently I am afraid that we shall be unable to get to the end of Part I because there are just too many amendments to cover.

Lord Strathclyde

I should like to respond to that point. It is my understanding that in the grouping under discussion we are speaking to all the amendments listed in the groupings list apart from those which will be moved later by my noble friend Lord Boardman. As the noble Lord, Lord Williams, said, that is the normal form that the Committee should take. However, it is up to any Member of the Committee to unbungle the groupings if he so chooses; otherwise, I hope that the grouping of amendments on the list is acceptable.

Lord Clark of Kempston

I could not disagree more with my noble friend Lord Carnock. If indeed a person holds an asset which he agreed in the past to let to someone else, then whoever takes on that lease knows the conditions and consequently the value of the freehold must remain with the freeholder. I believe that my noble friend has got the wrong end of the stick. I say that because my honourable friend Sir George Young said in Committee in another place on 19th November last that the valuation would be based on "normal market practice". What the Bill proposes is not normal market practice. First, the tenant can determine the timing of the sale and, secondly, it is not an open market price because there is only one person to whom the freehold can be transferred. Consequently, in talking about normal market practice my honourable friend Sir George Young has really shot himself in the foot. I say that because the rest of the Bill does not provide normal market practice.

I turn now to the question of a forced sale or, for that matter, any sale. My noble friend Lord Gisborough mentioned in his speech the situation where one has a compulsory purchase order which involves a forced sale. In such a case, so far as concerns the state, whoever owns the property gets the full value; it is not sharing at all. That is not analogous to the sale of council houses where a discount was given for the length of time. The council tenant did not have a lease. By and large, the council tenant was a statutory tenant. That is different from a normal landlord. In order to evict a statutory tenant a normal landlord has to go through a tremendous court procedure. But a local authority need not necessarily do so. Consequently, we are not comparing like with like so far as concerns discounts. Some council tenants are weekly tenants while others are monthly tenants.

For the life of me, I cannot see the fairness in saying, "This property today is worth 100 units, but tomorrow if the freehold is sold it is worth 120 units". I cannot see why the 20 units do not go to the person who owns it. The person who owns it is the freeholder and, in the hypothesis I have referred to, he should receive the 20 units. I cannot for the life of me see why it is necessary that the freeholder should share any proceeds with the tenant. That tenant signed an agreement with his eyes open. As my noble friend Lord Boardman has said on previous occasions—no doubt he will repeat it this afternoon—some of the tenants do not even live in the properties in question. They live abroad or the properties may be holiday homes. Many foreigners come to this country and they stay in flats so they do not have to stay in an hotel. There are also company flats. These tenants are not analogous to council tenants. These tenants will receive a windfall profit at the expense, not of the state but of the freeholder.

The other unfairness in this situation is that the bottom line valuation will be assessed, or computed, when the property market is at its bottom. It is quite obvious that at the bottom of the property market valuations are much lower. The tenant can determine the timing of the sale. That is absolutely wrong and certainly goes against what I have always considered to be Conservative policy, which is that fairness is given to the person who owns an asset. If the state wishes to give a discount, for whatever reason, on council houses that is one thing, but under no circumstances should the state force a private individual to give away an asset and not receive its full value.

I know that my noble friend on the Front Bench has a difficult job. Up until now there have been few concessions on this Bill. My next point has been made by my noble friend Lord Gisborough. If this Bill, or a similar Bill, had been introduced by a Labour administration, the Conservative Party would have fought it tooth and nail. I hope my noble friend will feel obliged to accept this amendment. I wholeheartedly support it and I hope the Minister will give it consideration.

Baroness Gardner of Parkes

I wish to oppose the amendment. I have listened carefully to the speech that has just been made in favour of it. I cannot agree for a moment with the noble Lord, Lord Clark. He claims that the freeholder has the right to everything, but he then contradicts himself by saying that there is only one buyer and that is the person in the flat. It is because that person is in the flat that he has a right to a proportion of the marriage value.

As the noble Lord knows, vacant possession is an entirely different matter. If, as a freeholder, he offered his property on the open market with a sitting tenant, the sum he would receive would be vastly different to the sum he would receive if he offered the property with vacant possession. Therefore possession in itself is worth a great deal.

While a proposed marriage value of 50 per cent. does not favour the tenant, I believe it is far fairer to the freeholder than it is to the tenant. There are other clauses in the Bill that will make things difficult for the tenant. I do not intend to repeat the arguments that have been made in previous debates. The noble Lord, Lord Clark, has repeated some arguments that have been made on previous occasions. I do not wish to delay this matter. I oppose the amendment.

Lord Wolfson

I, too, oppose the amendment because it vitiates the purpose of the Bill, which itself is a logical extension of the 1967 Act and another milestone on the road to a property owning democracy. A number of points were made by my noble friend Lord Gisborough. First of all, he said that the Budget had affected the return on shares. That is perfectly true, but is there any reason why reinvestment should not take place in gilts or convertible bonds if one is concerned about inflation? Incidentally, the level of inflation has not prevented property prices from falling quite sharply.

The point has been made that the market is at its bottom. I am not sure how one can assert that.

Reference has been made to the marriage value. It is normal commercial practice to have approximately a 50/50 split between the freeholder and the leaseholder. In many respects the residential leaseholder has not been able to negotiate freely in these matters. He has made a big input into the property and should participate in its marriage value. Investment income is more valuable in net terms than property income because it requires less money to be spent on the asset itself.

Reference has also been made to capital gains tax. If compensation were doubled, the same would occur with capital gains tax, although I agree that the net amount would be greater. Finally, I am not clear how the foreign and absentee tenants that have been mentioned acquired the properties in the first place. Were they let to them by the landlord, or sublet by other tenants? It would be interesting to know a little more about that.

Lord Peyton of Yeovil

I wish to comment briefly on the six amendments that stand in the name of my noble friend Lord Kindersley, who unfortunately cannot be present today. The purpose of those amendments is to sound one more note of complaint to the Government over the way in which they have handled the issue of charities. As I see it, the Government in their zeal to do something for tenants —that is to say, for all tenants regardless of merit, needs or deserts—have simply brushed charities on one side. The Government have shown little evidence of having thought at all deeply about their value to the community and the importance of the role they perform.

These amendments in part would place a heavy burden upon all tenants. I would not wish to press them for that very reason. That is my complaint about this Bill. The Government propose to do something for all tenants regardless of their deserts. I should like the Government to answer a question. Are they really satisfied that it is fair and right to give indiscriminately a considerable benefit to tenants who do not live in, perhaps never have lived in and have no intention of living in the property concerned? Are they satisfied that it is fair to do that at the expense of a charity whose earnings would be used to succor people in need? I wonder whether the Government have given serious thought to whether it is right so to injure a charity. I have asked my next question before without eliciting an answer from my noble friend. I do not know whether the Government ever consulted the Charity Commission as to whether this was a right and proper way to proceed.

We have already gone into the question of cathedral closes versus the Regent's Park Nash terraces. I cannot understand how it is right to take action to save one and jeopardise the other. The point has already been made about the effect of the Budget and about the disadvantages for charities and others holding shares following the Budget. That rather knocks a hole in some of the remarks my noble friend has been accustomed to make from the Front Bench as regards charities being fully compensated. I do not personally go along with that point.

I ask my noble friend, on behalf of the Government, to take note of the disturbance and concern which charities feel at the way—I shall not use the word "mean" in this sentence —they have been treated, which indicates a lack of care and concern. I hope my noble friend will take this matter seriously as I wish to return to it on Report but not in terms of these amendments. As I have said, they would be objectionable to my mind in that they take an indiscriminate step against all tenants. I object to the Government doing that vis-à-vis all landlords, whoever they are. I hope that my noble friend will take that point to heart.

3.30 p.m.

Lord Hamilton of Dalzell

I thank my noble friend Lord Peyton for supporting the charities. In the absence of my noble friend Lord Kindersley I represent Smith's Charity. In his speech a fortnight ago my noble friend complained at the lack of consultation by the Government before the Bill was brought forward. I do not believe that they understand the concept of the marriage value. I am certain that the Conservative Party research department does not. I have with me a paper of a rather unusual colour for this side of the Chamber. It is produced by the Conservative Party research department, is entitled Housing and is dated March 1993. On page 7 it reads: The marriage value is the difference between the leasehold value and the freehold value of the property". That is wrong. The marriage value is the freehold value less the value of the lease and the value of the reversion combined. That statement is wrong and misleading. I contend that a transaction between two parties belongs in equity to the freeholder in its entirety.

The marriage value is well named because it represents accurately what occurs in the free market. A freeholder wishes to cash in a freehold interest because he needs the money. The leaseholder wishes to sell his lease, providing the opportunity to do so. A proposal of marriage is made by the freeholder that the leasehold and freehold interest should be joined so that the freehold may be sold. To that end the freeholder is prepared to offer part of his equity as a marriage settlement. Once one party is given the right to enforce a union on the other it can no longer be defined as a marriage; it is more like a rape. I could have an interesting discussion with my noble friend Lord Strathclyde as to what he would have recommended the Sabine women to have given as a marriage settlement to their Roman abductors. There can be no marriage benefit where there is no marriage. Smith's Charity feels very strongly that value should not be taken away from its beneficiaries through the Bill.

The second point on which I believe it is important that the Minister should give an opinion, in order to avoid the possibility of litigation in the future, is the value to be placed on the option to buy which will be granted to a leaseholder by the Bill. The leaseholder is to be given an option to buy an asset at less than its free market price at any time during the term of the lease. That may be a considerable number of years. In the commercial market such an option would be worth money. As time progresses the value of the leases sold in the market will begin to reflect that, eating into the marriage value. The first question a freeholder is likely to ask a valuer—and I believe that Smith's Charity will be asking this question—before considering the price of enfranchisement is: what is the value of the option which should be added to the price?

Lord Williams of Elvel

In my earlier intervention I did not comment on the amendments which have been tabled concerning charities. Perhaps I should make a brief comment. We have had this debate before, as the noble Lord, Lord Hamilton, pointed out.

Our view remains exactly what it was two weeks ago. There is no reason why charities should be excepted from the general rule unless part of their charitable work is to let out properties at low rents for charitable purposes. We stand by that.

To talk about Smith's Charity is hardly relevant to the general point at issue. As the noble Baroness, Lady Gardner of Parkes, said, Eton College and Harrow have large properties. As the noble and learned Lord, Lord Hailsham, will know, the battle of Waterloo was won not on Agar's Plough or Upper Club but at Elsworthy Road, NW3, which used to be the playing fields of Eton College.

We cannot go on like this. We have had this debate before and I hope very much that we shall bring it to a conclusion.

Lord Stewartby

Before my noble friend the Minister replies to the debate, as one who so far has found it just possible to support the Government against amendments of this kind, perhaps I may ask him to think very carefully about the point made by a number of my noble friends. I shall not repeat what my noble friend Lord Peyton said because he said it better than I could have done. There are a number of us who are prepared to accept one important principle in the Bill with which we are not very happy, namely the principle of leasehold enfranchisement. However, we are not at all happy about another principle which has crept into the Bill, which is that tenants should have a windfall gain at the expense of freeholders. I suspect that many of the amendments which have been tabled are different manifestations of that same anxiety.

A week ago the Committee considered amendments which were designed to deny enfranchisement if the tenant was not resident in this country. In that debate the point was frequently made that it was not right that such absentee tenants should be entitled to a windfall. That point, which has not been disputed, goes to the heart of the problem. It indicates that there is a windfall to tenants. Whereas I am reluctantly able to go along with the main purpose of the Bill because it was a manifesto commitment that there should be leasehold enfranchisement of this kind, most of the amendments which have been put forward to assist charities, pension funds and other freeholders reflect a fundamental unease among many of us that the terms of the proposals are simply not fair.

If we are to accept the overriding principle of the Bill concerning enfranchisement we should not also have to swallow a very unattractive element which is embodied in the valuation arrangements. It is difficult to accept that at the same time there should be a transfer of value from freeholders such as charities and many others to tenants, some of whom, as was pointed out in last week's debate, are not necessarily at all deserving in that cause.

When he responds to the debate can my noble friend assure the Committee that the Government will think further about the basis of valuation? I hope that he will not merely dismiss many of the points which have been raised on behalf of charities and others. There are sincerely held anxieties that the purpose of the Bill has been distorted by the way in which the valuation arrangements have been framed.

Viscount Montgomery of Alamein

The temptation to follow my noble friend Lord Hamilton into the fields of Roman mythology is great but must be resisted in the interests of progress.

The question of the marriage value involves a matter of principle. I take issue with some of my noble friends because their amendments seek to benefit the freeholder at the expense of the leaseholder. As my noble friend Lady Gardner pointed out, the leaseholder has a large stake in the matter, which may well be much greater than that of the freeholder. In the case of new blocks of flats, the entire cost of construction has probably been paid by the leaseholders in the initial sale price. Therefore it is absurd to suggest that the leaseholder does not have a considerable stake in the issue. Therefore, the concept of the marriage value, which involves sharing the benefit, recognises the fact that the freeholder has art interest, namely in the freehold of the property. In other words, he has an interest in the land on which the property is constructed.

We have agreed the principle of enfranchisement, although one could be forgiven for believing that that was not the case in view of some of the speeches which have been made. We did so at Second Reading and it has been agreed in another place. The question is how that value should be divided. It seems to me that common sense should apply in that sometimes the marriage value may well be more than 50 per cent. and frequently considerably less than 50 per cent., depending on the circumstances which will vary from property to property and from estate to estate. I hope that my noble friend will vigorously resist the amendment.

Lord Coleraine

I wish to speak to the amendment: spoken to by my noble friend Lord Peyton and return to the amendment moved by my noble friend Lord Gisborough. We have heard from my noble friend Lord Hamilton of Dalzell that he is one of the trustees of Henry Smith's Charity; my noble friend Lord Kindersley is another. Smith's Charity does not act among the poor of London. It raises money and hands over millions of pounds every year to other charities to spend for their charitable purposes. The remainder of the money is accumulated year by year and invested in Stock Exchange investments and in the purchase of other freehold properties. It forms a treasure chest. There seems always to have been a large part of its income which is not used for charitable purposes but which one day may be so used.

Were there not other grounds for resisting the amendment, one could quite effectively point to that treasure chest and suggest that while it exists the charity has no claim to treat any particular freehold reversion as providing the funds for charitable donations. Were my noble friend Lord Peyton to press his amendment—he will not do so—the intention would clearly have been effectively to have rendered enfranchisement nugatory for most flat owners with charitable landowners. Under the amendments, a price would be fixed which bears no relation to reality and would make it quite inconceivable that any flat owner would wish to enfranchise. It would make no economic sense.

I have to venture the opinion which has been voiced before: that it is an attempt to re-run the argument that charities should be exempted from the provisions of the Bill altogether. My noble friend has not pointed to any precedent for charities being exempted or for their special treatment on compulsory purchases. I assume that he would have done so had he or his advisers been able to lay their hands on suitable precedents.

Lord Peyton of Yeovil

I refrained from doing so in the interests of brevity. My noble friend should practise what he preaches.

3.45 p.m.

Lord Coleraine

I am not aware what precept I have preached. I shall continue.

Any precedent of which I am aware is against the exemption of charities from compulsory purchase legislation. The Companies Act provisions, whereby a shareholder who has not accepted takeover terms is then bought up with the rest of the minority and receives what the accepting shareholders receive, do not apply to charities. I see no provision for such special treatment of charities, let alone a special price for charities, under the Leasehold Reform Act 1967.

I venture to suggest to my noble friend Lord Peyton that his is an unattractive proposal that he brings before us again today. We live in times when society at large has much to say about the ethical investment of charitable funds. Something could be said about that but I do not wish to embark upon the argument today. I hope that my noble friend will continue to resist such amendments in relation to the investments of charities.

My noble friend Lord Clark of Kempston raised points on the amendment moved by my noble friend Lord Gisborough. I have to say that he does not understand why in a compulsory purchase situation it is necessary to ride over the fact that the freeholder may be entitled to take all the marriage value in certain circumstances and why it is necessary that there should be an assumption of the willing purchaser.

Lord Clark of Kempston

I cannot quite understand what my noble friend says. He agrees with me that with a compulsory purchase order the value of the freehold should go entirely to the freeholder, but he considers that there is a difference in the provisions of the Bill. It involves compulsion on the freeholder at the behest of tenant to sell the freehold. It is analogous to compulsory purchase.

Lord Coleraine

It is because of such remarks that I seek to explain why the argument that my noble friend advances is incorrect. I shall come to it in due course.

The market in leasehold flats is an imperfect one. The term does not just waste away in a straight line until its value reaches zero. As must by now be well known, it reflects the almost universal need to raise a mortgage for flat purchase. A flat which with 80 years' lease may have almost the value of a freehold may be almost unsaleable 30 years later with 50 years of the term remaining. I do not refer to flats in Belgravia and Kensington, where the wealthy congregate and which are a law unto themselves in that respect, but to flats and blocks of flats in less affluent areas.

I am advised that there are not so many flats which have yet fallen into that danger area because it was mainly in the decades after the Second World War that it became usual to sell flats on long leases. The leases of most of those flats still have a while to run before they drop into that danger area, but in many cases the danger area is not far off. In some cases it already exists.

Let us take as an example a flat on a long lease of 99 years in 1950. It would now have about 46 years to run and already it has fallen into the danger area. But what happens when the lease of a flat reaches that point and the owner wishes to sell? He finds that he has to agree a premium for lease extension with his freeholder. The premium will almost invariably include almost the whole of the marriage value. Nevertheless, it is still just worth the flat owner's while to agree to pay it as ransom money to make his lease saleable once again. That process can be repeated more than once in the life of any flat lease and can be as frequent as every 30 or 40 years, depending on the length of the lease and of the lease extensions granted. If a flat owner were content to stay in his flat until the term expired, then the marriage value would have melted away. That rarely happens because flat owners move house fairly frequently.

It is in those ways that dealing in reversions can be so profitable. It is because of that that the law is now stepping in—if the Bill is enacted in a form that is workable—to intervene to help the disadvantaged party in what amounts overall to a monopolistic situation. I hear what noble Lords such as my noble friend Lord Dilhorne say. He is now present. At Second Reading, he said: It is an indisputable fact that the marriage value belongs entirely to the freeholder".—[Official Report, 23/2/93; col. 131.] However, they overlook the fairness of the situation and the fact that the marriage value has been carved out of the flat owner's share of value.

Let us put fairness to one side. That is not the end of the situation. Referring to marriage value, my noble friend Lord Dilhorne continued by stating: In a free market no one but the freeholder can give it or withhold it". That is a patent fallacy. The flat owner is also needed for the giving or withholding of marriage value. There is a good case for saying that the marriage value belongs entirely to the flat owner, but I do not put it that way except on the limited ground of what is fair. It is an argument with which I do not wish to burden the Committee today.

The freeholder can manipulate the system in the "unfree" market for flats which exists in central London because in a hypothetical free market situation which compulsory purchase legislation necessarily requires marriage value has to be shared. That is why the claim of 100 per cent. of marriage value cannot be justified by the claim, and as my noble friend Lord Gisborough pleads, that in the real world of Belgravia and Kensington the reversionists are strong enough to demand and obtain 85 per cent. or more of marriage value. They claim to be able to do so again and again over the long-term scale on which they operate. It is like harvesting a forest. That fact, and the special situation of central London out of which it arises, has to be overlooked in any compulsory purchase legislation. The legislation has to include the assumption of the willing seller. It is simply no good suggesting that the seller is not willing. Such legislation is and always has been framed and interpreted on the basis of balance between the buyer, who may say, "But I am the only possible purchaser, and I will only pay a penny", and the vendor, who may say, "I do not wish to sell and you will have to pay me the moon".

It is in that context that legislation must assume the willingness of the seller. That is what the amendment denies and why I hope that my noble friend will advise that it be rejected. I am sure that my noble friend Lord Peyton will agree that I have spoken long enough and that I need not mention the other argument that it would be altogether disastrous—tending like no other amendment to the wrecking of the Bill—to include provisions tailored to maximise the profit of central London estates, investment landlords, when to do so will defeat the entirely reasonable social objectives of the Bill in relation to the many more flat owners outside central London whose landlords are not holding their reversions as long-term investments but who are holding them as stock-in-trade in dealing operations.

Lord Boardman

Before my noble friend sits down, I wonder whether he has taken account of Amendment No. 138 in the name of my noble friend on the Front Bench. If I may say so, it completely defeats the argument which my noble friend Lord Coleraine put forward on the renewal of leases.

Lord Monson

This seems a convenient moment to speak to my Amendment No. 110 which is grouped with the others and which is a little less radical than the amendment to which we are speaking, Amendment No. 105C. It merely provides that the minimum share of the marriage value to be received by the freeholder should be 75 per cent. rather than 50 per cent. I have with me some pages taken from a magazine which appeared shortly before Christmas, at a time when the Bill was still in Committee in another place and when, therefore, the final terms of the Bill were not known and prices in London did not reflect the expectation of enfranchisement on the specific terms contained in the Bill before us.

The pages contain advertisements for several flats at prices ranging from £295,000 to £475,000. Unlike the noble Lord, Lord Coleraine, I specifically cite flats in South Kensington, Chelsea and Belgravia because it is there that the greatest totally undeserved and unearned profits will be made if we do not agree to some amendment.

The specific flat which I have chosen to illustrate my case is located in Cadogan Square where £400,000 was sought for the remaining 31 years of the lease. That equates to a freehold vacant possession value of £760,000. On the assumption that the ground rent is a nominal £100 per annum and on the secondary assumption that there is no compensation to be paid for injurious affection, someone who bought the leasehold interest in the property before Christmas for £400,000 will have to pay £248,400 to enfranchise, assuming that the landlord receives 50 per cent. of the marriage value. That makes a total of £648,400 for a property whose vacant possession value is £760,000. In other words, it gives a profit of £111,600, or 17.2 per cent.

Surely that is too much by anyone's standards and particularly when we bear in mind that the Chancellor of the Exchequer announced in his Budget speech that foreigners who bought flats in London for secondary or tertiary residences would not pay income or capital gains tax if they used them while in this country, giving scope for an enormous amount of profit speculation without any tax whatever being paid to the Exchequer.

If the freeholder were to receive a minimum of 75 per cent. of the marriage value, the profit would be reduced to £55,800 on a total purchase price of £704,200, giving a profit of 7.92 per cent. That is not bad. It is perfectly acceptable and would leave something in hand. I do not object to that. I should have thought that the Committee would agree that it could be borne as it is not too excessive or gross. However, a profit of over 17 per cent. is far too much and should be resisted.

Lord Wolfson

Before the noble Lord sits down, has he taken into account in his calculations the amount spent on the property by the leaseholder in assessing the capital profit that he has enunciated?

Lord Monson

The example that I gave assumed that someone who had bought the property just before Christmas had spent nothing on it. I am talking about short-term speculation, not people who may have been in a flat for 15 or 20 years. That is another matter altogether.

Lord Hamilton of Dalzell

I wish to put on record how much I object to the remarks of my noble friend Lord Coleraine, who appears to impugn the integrity of Smith's Charity in accusing it of not distributing its income to the full, as it is required to do by the Charity Commissioners.

Baroness Hamwee

The right reverend Prelate the Bishop of St. Albans commented last week that the debate on charities appeared to be turning into a debate about Smith's versus the rest. I do not believe that any Member of the Committee would wish to impugn Smith's Charity but we have to bear in mind the requirements and positions of other charities and of leaseholders with which the Bill is intended to deal.

For the reasons given by the noble Baroness, Lady Gardner, and the noble Viscount, Lord Montgomery of Alamein, with regard to the amendment which would remove any interest in the marriage value from the leaseholder, I agree with the point which I may be paraphrasing but which strikes at the heart of the principle of enfranchisement.

With regard to charities, and without wishing to repeat the arguments that were made last week, it has occurred to me that no Members of the Committee—among whom I include myself—commented on the fact that many charities do not have that type of portfolio. Their investments, if they have any—and many charities struggle along without them —are in different assets.

I wonder whether it would be correct to suggest that a particular type of investment should attract a particular type of advantage. I should have thought that there might be an argument which would appeal to Members of the Committee opposite that the market should be allowed something of a free rein and that the existing provisions for tax benefits which apply to charities are the right way to assist all charities, rather than assisting charities which have a particular investment portfolio.

Lord Selsdon

I think this is perhaps the most important part of the Bill because it is about money or windfalls or profit. Up to now I have the feeling that it has been more about prejudice. I wonder whether, with a wicked sense of humour, if we had excluded from the Bill the great estates of London we would have had the same prejudice on the Benches this side of the Committee.

I recall that, as the noble Lord, Lord Williams, pointed out, basically we are not talking about London. I address my remarks more to outside London and the 60 per cent. first-time buyers and the problems that people had when they wished to buy a home and there were only leasehold flats available. Ultimately, at this stage we come down to what is a fair price. Members of the Committee have argued that in this case it is not the market price that the freeholder will receive. Other Members of the Committee will say that in many cases freeholders would find it impossible to sell their investment with a sitting tenant.

Somewhere between those two poles of what is on offer—100 per cent., 50 per cent.—must be the right amount. I should not dream of determining what that amount would be. If it were left to me, my preference would be that the freeholder should voluntarily seek to sit down with his tenants—as has happened on many occasions in the past—and negotiate a fair price. However, I assume that that is not possible within the terms and conditions of the Bill.

It is a question of what is a fair price to whom. Let us begin with the freeholder. In general, the freeholder will not necessarily be one of the great estates. In many cases, he will not even be British; he will be a foreign national sheltering behind an investment company set up for him by his advisers. In general, I believe that the freeholder will not pay tax, either through roll-over relief or some other perfectly legal and acceptable mechanism.

The leaseholder, on the other hand—if it is his permanent place of residence and he buys a longer lease and sells it —will not pay tax. If it is his secondary residence—and the law is already established for that—he will pay tax: 40 per cent. capital gains tax after the smaller amount.

In considering valuations, we should look at the net position. The freeholder will himself have legal fees. In general, if he is a big landowner, those legal costs will not be too high, whereas the individual leaseholder may have substantial legal costs with which he has to cope. Thus, when we come down to what the net figure is, in listening to noble Lords today I have certain worries. I tend to feel that the Government may, by accident or design, have it almost right. Some noble Lords say that the consideration is too much; others say that it is too little. Some others rightly point out that at the moment property prices are low and it is an unfair time to bring about such an initiative. Property prices may be low, but there is a desperate shortage of liquidity. However, the situation is open-ended; there will be an option to purchase for quite a long period of time.

The windfall profit may well go to a foreigner, to the freeholder or the leaseholder. In many cases, it is greater outside London. But even within London, there are many foreign investors who have come in, particularly in the past few years, and some have seen substantial losses because of the decline in their currency. I do not say that the Government have the balance right. I am not qualified to judge as I am not a professional in that area. But the professionals to whom I have spoken say that it is probably not far out.

4 p.m.

Lord Strathclyde

My noble friend Lord Gisborough introduced his amendment most succinctly, and I am grateful that he did so. In his opening remarks he said that the tenants should pay the full value. I hope that in the course of the next few minutes I shall demonstrate that that is exactly what they will do.

My noble friend Lord Selsdon was also right in saying that nobody agrees with the Government, and therefore we are probably right. Some Members of the Committee have said that tenants should pay more; others have said that they should pay less. The Government have chosen to seek a middle way which is fair to all parties. But I understand that the Committee still has great anxiety about the proposals.

I shall try to respond to all the issues raised by the amendments tabled on valuation to show why we have arrived at the provisions in the Bill, and why we consider them to be fair.

It is clear that the issue of fair valuation is crucial to the whole debate on enfranchisement. It is important that the rights which we confer on leaseholders should be possible only at a fair price. Therefore, I hope that the Committee will permit me to explain how the valuation provisions in the Bill evolved, and why I consider them to be fair.

When the 1967 Act was passed by a Labour Government, the price which long leaseholders had to pay was very low. All they had to pay was the open market value of the freeholder's interest in the land, which would have been less than the price for which it could have been sold to a third party.

That was understandably very popular with the tenants. However, the Conservatives did not accept that the provisions were fair to both parties and we opposed it at the Second Reading of the Bill as unfair to the landlords. During the passing of the Labour 1974 Housing Act we successfully moved a change to the 1967 Act to cover medium value houses, newly brought in. That ensured that the price had to take into account the fact that the tenant had a special interest in buying, and so his bid for the freehold was likely to be higher than that of a third party. That proved more acceptable and has worked well for nearly 20 years. The basis for medium value houses reflects what actually happens in the open market and allows no statutory favouritism.

When we came to consider extending enfranchisement to the relatively few leaseholders of high value houses, and the three-quarters of a million or so long leaseholders of flats, it was clear that they should have to pay the market value of their landlords' interests. That follows the Conservative tradition of fairness to all parties.

We have provided that the price paid to the landlord should comprise the sum of three elements. The first is what a third party should pay for the landlord's interest as an investment. It reflects the value of the property to the landlord, subject as it is to the tenant's lease. The second element is marriage value, where we have provided that the landlord will receive at least half. The third element is compensation for any severance losses.

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

Many of the amendments put down today concern the second element, which is marriage value. Marriage value is the increase in value when the freehold and leasehold come under the same control. So for example, if the landlord's interest could be sold for, say, £20,000, and the value of a leasehold flat is £80,000, making £100,000 altogether, but either could sell the flat with a new lease for £150,000, then the marriage value would be £50,000. The marriage value does not exist unless one party—either the landlord or the tenant—can obtain vacant possession of the flat and grant a new lease. So it does not belong wholly to the landlord, or to the tenant. I suspect that that is the basis for what I felt was a misunderstanding by my noble friend Lord Clark.

In the open market marriage value is shared to ensure that a mutually acceptable bargain is struck. This reflects the mutual benefit of the landlord selling to the tenants and of the tenants buying. Landlords could not obtain all of the marriage value in the open market except in very exceptional circumstances. The Lands Tribunal, following that principle, has adopted the approach of sharing marriage value. The Royal Institution of Chartered Surveyors agrees that the Bill's proposals follow market practice. Their press notice of 9th February made clear that they did not consider that tenants will be able to make windfall profits and that such an interpretation was a misreading of the Bill. I hope that that deals with the anxiety expressed by my noble friend Lord Stewartby when he feared that windfall profits would be made. Any gain is shared.

My noble friend Lord Peyton, in his speech on charities, asked whether I realised the great anxiety felt with regard to charities. That point was echoed by my noble friend Lord Stewartby. As drafted, the amendments affecting charities would require tenants to pay 50 per cent. more than the market price for their property if their landlord is a charity. I appreciate that that is not my noble friend's intention. It is that the landlord should receive all of the marriage value. But I feel that that would be unfair. It cannot be right to discriminate against a tenant on the basis of his landlord, still less should organisations raising money by commercial means be allowed to exact a ransom from tenants simply because of use to which they put their income.

The principle remains the same, it would not be fair to allow a charity to receive more than other landlords. I have explained that marriage value is shared because that is what the open market provides. Our proposals are fair and they are fair to all parties, whatever the identity of the landlord or tenant.

Some of the amendments which the Committee has been asked to consider affect the division of marriage value. We have been presented with a number of options affecting that division. It has been suggested that the marriage value floor should be deleted, or raised to 75 per cent., or that the landlord should automatically receive all of the marriage value. I do not consider that any of those amendments are fair, or necessary. We have provided that the landlord should receive at least half the marriage value, as an equal division of marriage value is very common. This recognises that the parties have to reach an agreement or the marriage value is lost. By specifying 50 per cent., we hope to reduce the scope for argument, thereby making enfranchisement quicker and cheaper. Equally, it would not be fair to award all the marriage value to the landlord automatically. If the landlord were to sell to any other purchaser, then the extra value would not be released. Enfranchisement is maximising the possible gain which a landlord can receive from his asset. That is because the landlord receives all his marriage value share at enfranchisement. If there were no enfranchisement, he would not receive any marriage value. If he were to receive any it would he spread over a number of years as and when individual tenants wished to extend their leases.

Perhaps I may respond to my noble friend Lord Gisborough. None of the provisions in the Bill prevents a landlord from receiving more than 50 per cent. of the marriage value. We have been careful to ensure that where the market would provide the landlord with more than 50 per cent., and he can produce evidence of that from actual sales, then that is what will happen. In some instances he may well receive considerably more than 50 per cent. For example, where the tenant's case is weaker because his lease is short and he will have difficulty selling it in the open market, he may be keen to buy and therefore the landlord will receive a larger share.

My noble friend Lord Clark said that the freeholder must receive the full freehold value of the property. The marriage value is not part of the freehold value; it is the extra created by enfranchisement and belongs to neither freeholder nor leaseholder.

The noble Lord, Lord Monson, spoke of profit on a flat. Enfranchisement is a collective right. A foreigner cannot simply buy a flat, enfranchise and then sell. He must organise two-thirds of the others in the block. That will take time and effort. In the Bill there is no prospect of easy killings for anybody.

We have had a full and useful debate on the subject of the proper valuation. I listened with great care to the points made by Members of the Committee. I believe strongly that the basis for valuation must be one which is fair both to tenants and to landlords and without discrimination as to the identity of either. By following the open market practice on valuation, we have sought to ensure that our valuation provisions are fair.

Compensation for the acquisition of private property has always been on the basis of the price paid to a willing seller, whether the purchaser is a private company, as in the building of the great railways in the last century, or the state, as in our own century with the building of roads. I said at the beginning that my noble friend Lord Gisborough said that tenants should pay full value. I hope that I have demonstrated that that will be the case. We have provided that the landlord will receive the full open market value of his asset. That, I believe, is fair. The amendments under consideration would change the valuation provisions to make them unfair. It is on that basis that I ask that they be withdrawn.

Lord Williams of Elvel

Before the noble Lord sits down, perhaps I may intervene. He referred to foreign leaseholders—a matter which has arisen from time to time in speeches from the Benches opposite. However, it is not only leaseholders who may be foreign; a large number of landlords are foreign also. The amendment of the noble Lord, Lord Gisborough, may therefore have the opposite effect to that he supposed. In fact, our information is that many of the worst cases of landlord misbehaviour are where a foreign landlord company is concerned.

Lord Gisborough

I thank my noble friend for his reply. However, it is irrelevant whether it is a foreigner or otherwise or a rich man or a poor man who is benefiting. That has nothing whatever to do with the point.

Much has been said about the fact that leaseholders always knew what they were getting into. But when they bought the lease they paid a sum which was equivalent or related to the rent that they would otherwise have paid over a number of years. As the number of years reduced, so the cost of the leasehold for them went down. As the noble Lord, Lord Monson, said, it will be possible for somebody, provided all the flats in the block are being enfranchised, to buy their leasehold and to sell it immediately as a freehold for a windfall gain. To my mind that is redistribution of wealth from one individual to another or from one charity to another. I find it politically confusing. On the one hand, the Conservatives are going Left-wing with this funny redistribution of wealth affair; while on the other hand we read in the press that the Socialists are busy going Right-wing in abolishing Clause 4. I am extremely confused.

There have been more speakers against the amendment than for it. The ones for it have either been quiet or are not here. I therefore beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Viscount Goschen

I believe that this may be a convenient moment at which to take the Statement. I beg to move that the House do now resume.

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

House resumed.