SCHEDULE 1A VALUABLE REVERSION CONDITION

HL Deb 18 June 1996 vol 573 cc166-200

.—(1) The following provisions shall have effect for the purpose of determining whether the landlord's interest in the premises satisfies the valuable reversion condition set out in this Schedule and referred to in section 34A ("the valuable reversion condition").

(2) In the event that the valuable reversion test is satisfied, the premises shall be premises to which section 34A does not apply.

(3) The valuable reversion condition is satisfied if the present value, as assessed in accordance with this Schedule, of the landlord's interest or interests (taken together) in the premises is equal to or greater than one fifth of the aggregate present values, as assessed in accordance with this Schedule, of each of the qualifying tenant's leaseholds.

(4) For the purposes of this Schedule the present value of the landlord's interests in the premises shall be assessed as the sum of the present values of the landlord's interest in the reversion of each leasehold comprised in the premises together with the sum of the landlord's other interests if any) in the premises, the present values of which shall he assessed in accordance with paragraph 6 of this Schedule.

(5) The present value of the landlord's interest in the reversion of each leasehold comprised in the premises shall be assessed as follows—

1. (a) the value of each such reversionary interest shall be assessed as the sum of R+I# where—
1. (i) R = the present value of the right to re-entry on the expiry of the term of years of the lease; and
2. (ii) I# = the present value of the right to receive for the term of years of the lease the rent reserved by the lease;
2. (b) R shall he assessed in accordance with the formula (100-x)/100∗f where—
1. (i) x = the percentage figure for the unexpired term of years of the lease taken from the table at Schedule 8 to the Taxation of Capital Gains Act 1992 or such other curved line amortisation table for wasting assets as may be prescribed by the Secretary of State, and
2. (ii) f = the open market value of the leasehold at the relevant date valued on the assumption that the leasehold has an unexpired term of 999 years and that all other terms, including the rent reserved, were unchanged;
3. (c) I# shall be assessed by applying such arithmetic formula for the calculation of the present value of a known future stream of income as may be prescribed by the Secretary of State and if no formula is prescribed, 1# shall be assessed by applying any recognised formula.

In applying the relevant formula, the 30 year Treasury Bond yield at the relevant date, or such other long-term interest rate as may be prescribed by the Secretary of State, shall be adopted as the relevant internal rate of return.

(6) All of the landlord's other interests (if any) in the premises shall be assessed at their ordinary open market value.

(7) The present value of each qualifying tenant's leasehold interests shall be assessed in accordance with the formula (x)/100∗f where—

1. (a) x #x003D; the percentage figure for the unexpired term of years of the lease at the relevant date taken from the table at Schedule 8 to the Taxation of Capital Gains Act 1992 or such other curved line amortisation table for wasting assets as may be prescribed by the Secretary of State, and
2. (b) f #x003D; the open market value of the qualifying tenant's leasehold at the relevant date valued on the assumption that the leasehold has an unexpired term of 999 years and that all other terms, including the rent reserved, were unchanged.

(8) For the purpose of assessing the aggregate value of the qualifying tenants' interests in the premises, any leasehold that is the subject of possession proceedings, but in respect of which no unconditional court order for possession has been made, shall be included in the calculation.".").

The noble Lord said: When a long leaseholder is faced with a bad freeholder or bad landlord, the leaseholder theoretically has two ways out of the dilemma. One way is to find some means so that the leaseholder, with other leaseholders, can manage the common parts of the property; alternatively, the leaseholder and other leaseholders can secure enfranchisement of the block of flats in which they live. This amendment concerns the right to manage. The amendments in the group which follows relate to enfranchisement or seek to find better ways of achieving enfranchisement.

With regard to the right to manage, the aim is to give the right to manage in such a way that leaseholders may choose who will manage the property on their behalf. That, therefore, will subject to market forces the property manager so selected. He will have to pass tests in order to demonstrate that he can deal with the management more effectively than others.

At present, a freehold landlord can provide such services as he sees fit. Normally, he has a monopoly in the supply of maintenance, decorations, building works, insurance and other services. He can earn a profit in the form of a management fee for his work. In that situation, there is bound to be potential for abuse in that one party has a right to spend another's money.

There would be safeguards under the scheme proposed by the amendment. If the leaseholders fail to organise the management properly, the freeholder can apply to the court to regain control of management. Under the scheme, the management obligations will be discharged by a professional managing agent, typically a member of the appropriate professional body.

In contrast, the Government's proposals, as contained in the Bill, seek temporarily to replace a bad manager with a professional agent chosen by the leasehold valuation tribunal. But that managing agent would still be the agent of the freeholder, who could therefore still exert an influence over the overall management of the property. The LVT would be under the pressure of many applications. Indeed, at present it already takes several months for a leaseholder to obtain an enfranchisement hearing in the LVT, such is the pressure of work on that tribunal. Further, there would be the need to test the reasonableness of the proposition, which may be hard to prove. A difficulty may arise with what happens to the leasehold valuation tribunal order if the freehold interest were to be sold to another freeholder. In the meantime, the properties would be blighted and a leaseholder would find it very difficult to sell a property under that type of management.

The Government have made clear over the years their wish and intention to give council tenants the right to manage their own property. Indeed, that was confirmed two years ago in the 1993 Act. It seems to me wrong in principle that the Government, who are willing to give council tenants the right to manage their properties, so far have denied a similar right to long leaseholders.

The history of the scheme set out in the Bill is as follows. The right to manage was originally put into the Bill by the Standing Committee in the other place. It was removed by the Government at Report stage in the other place. That was when the Government, I think for the first time, invented the idea of giving the leasehold valuation tribunal the power to appoint a temporary manager.

I am sure that other Members of the Committee will have received letters from leaseholders about issues contained in various parts of the Bill. Perhaps I may quote from just one letter from a leaseholder in W11 He speaks of the chance to improve the Bill and writes: We cannot let this opportunity drop. I urge you to rigorously oppose the matter"— that is the present scheme— in the Lords and pursue amendments which will give tenants, lessees, the right to manage. I am not at all persuaded that the European Court of Human Rights would overturn such legislation".

The reference to the European Court of Human Rights is, I understand, because the Government used that as an excuse for not maintaining the change introduced by the Standing Committee in another place. The Government felt that there would be an appeal to the European Court of Human Rights. I do not understand that argument. I am not even sure that the Government still wish to sustain it. But that was the argument that was used. Without the right to manage, many leaseholders will be left with only one option, if they can exercise it—namely, to enfranchise—in order to escape from landlords who treat them badly.

Perhaps I may make three final points. First, leaseholders typically in a block of flats probably own nearly 100 per cent—perhaps 98 per cent.—of the equity of the building. Theirs is the significant financial stake, not that of the freeholder who may have bought the freehold for a fairly small sum in relation to the interests of the leaseholders.

Secondly, as I said earlier, it is the freeholder under the Government's scheme who is spending the leaseholders' money. Thirdly, it is the leaseholder's home which is at risk in these matters. It is not the freeholder who takes the risk. After all, he simply manages the block as a business proposition and may be doing it badly. I do not say that most freeholders do it badly.

I argue that the amendment will protect quite a large number of leaseholders from the minority of freeholders who do not treat the leaseholders properly. It is a matter of a business proposition on the one hand for the freeholder, and on the other hand the very home of the leaseholder. In that rather unequal equation I believe that it is right that the leaseholders should have more say, if they wish it, in the management of the common parts of the properties in which they live. I beg to move.

3.15 p.m.

Baroness Gardner of Parkes

I have very mixed views on the amendment. I feel that it is desirable for tenants and leaseholders to have a significant say in how the money is spent in a block of flats. But I speak from my own experience when chairman of housing for an area on the Greater London Council. In those days, when we attempted to give tenants the responsibility to manage their flats, many did not want it. There were always just one or two people in a particular block who were keen to take on the responsibility and took an active part.

The suggestion in the amendment is that managing agents should be appointed to fulfil the management function. But someone still has to instruct and give directions to the managing agent. So I am not so sure about that part of the provision.

The noble Lord covered very clearly the situation of a freeholder who manages the properties. But frequently the freeholder has a head lessee. The head lessee is not the freeholder but is the person who appoints the managing agents to run the properties. So there is an additional layer of management in the middle. The noble Lord did not mention that situation, and I wonder what would happen.

I also wondered what the situation would be in terms of how much tenants and leaseholders would have to pay to compensate the head lessee for losing his business. That would be the case if they had the right to take over his management.

I shall be grateful if those questions could receive answers.

Viscount Montgomery of Alamein

My noble friend Lady Gardner is quite right. There is the problem of the head lessee, which is very important. Coming back to the main thrust of the amendment, I agree entirely with what the noble Lord is trying to do. I do not know whether the wording of his amendment is the right way to do it. It would be interesting to hear a few comments from my noble friend on the Front Bench.

The fact is that the whole of the leasehold enfranchisement which was attempted in the 1993 Act has not worked. I was much involved with that legislation and at the time declared a number of interests and received a good deal of stick, mostly from my colleagues on this side of the Chamber, for my efforts in that Bill. No doubt I shall do so again today, but that is one of the hazards of this sort of activity.

The leasehold enfranchisement Bill was emasculated by the activities of a number of senior landlords, and of course it has not really worked. I wonder how many enfranchisements have taken place. It would be very interesting to see whether the Government have any figures on this matter. I accept that I have not given my noble friend notice of this question so, if he does not have the information to hand, I should be quite happy if he writes to me subsequently. I believe that what the noble Lord, Lord Dubs, is trying to do is going in the right direction. Whether we get there in the end remains to be seen, but I do hope so.

Baroness Hamwee

First, I apologise to the noble Viscount and to the Committee for having missed the first few sentences of the noble Viscount's speech. Nevertheless, I have no reservations in supporting what I suspect he will have said, and from these Benches we will do so. I should like to respond in particular to two points which have just been made and which go to the heart of the issue.

During the passage of the 1993 Act there were a number of discussions about tenants wanting the opportunity to manage their own affairs, and for many tenants it was that rather than ownership which was at the heart of the issue. The noble Viscount mentioned that he had received some "stick" for his position at that time. It seems to me that one of the problems with which we are dealing here—and we should not have to deal with it—is that somehow the landlord's position has become identified at one end of a very polarised spectrum and the tenant's position is at another end. I do not believe that we should be seeing the positions of either in that politicised fashion.

To take up a comment made by the noble Baroness, Lady Gardner, in relation to the position of an intermediate head leaseholder and that leaseholder's business, is that not also one of the things that has led to such problems, that the leaseholder sees it as part of his business to make money on the term of "exercising management functions"? That is bound to disadvantage the tenant and, while I accept that in the case of a leaseholder who has bought an interest and therefore expects to be able to profit from it—one cannot disregard that there is an investment there—nevertheless, the sooner we can get away from that head leaseholder benefiting at the expense of the tenant as part of running a business, which is a business which has been interposed between freeholder and tenant, the better.

Lord Lucas

I listened with great interest to what the noble Lord, Lord Dubs, had to say. I suspect that there are one or two things in his speech which I will need to think about and I will write to him later. But it is clear in general from what he and other noble Lords have said that what lies between us here is a political difference and one of principle. None the less, I hope to be able to persuade him to withdraw this amendment because we do not feel that there is any way in which this alternative road that he is proposing can be traversed satisfactorily in the time that we have available to us. I will come on to the detailed problems that we have with these proposals towards the end of what I have to say but, as my noble friend Lady Gardner of Parkes indicated, there are a number of difficulties with the detail.

I will write also to my noble friend Lord Montgomery of Alamein, as I do not have the figures he requested with me. I promise to be polite to him and not to say anything rude either now or in the letter.

The leasehold system is based on a clear set of responsibilities. The landlord normally has responsibility for the repair and maintenance of the overall structure and the common parts and for insuring the building as a whole. Individual leaseholders look after the interior of their flats, and meet through service charges the landlord's costs in discharging his responsibilities. The amendment of the noble Lord cuts right through that structure, by allowing the tenants—or presumably a group of tenants acting together—to elect to take over the management of the property. That right would apply whether or not the landlord was doing a good job or not.

We have already given leaseholders the right to buy out the landlord's interest in the property if they wish, under the enfranchisement legislation. Through that they gain complete control over the property.

Under the "right to manage" proposed by the noble Lord, Lord Dubs, the leaseholders take on half the function of being a landlord. The landlord receives no compensation whatever for that. The price the landlord pays for property reflects the income available from management. If management is the landlord's job, then management has a value to him.

As anyone who has lived in a block of flats which is well managed will know, having a good landlord who performs his function well is a worthwhile thing. It saves the tenants a great deal of trouble and argument which they would otherwise have in organising the management themselves and is a function well worth paying for if it is done well. It is a valuable business for the landlord, yet the proposal of the noble Lord, Lord Dubs, contains no provision for any element of compensation.

As the noble Lord, Lord Dubs, said, this raises the question of whether this is contrary to the European Convention on Human Rights. The convention allows deprivation of a property right only where this can be justified in the public interest, which must be doubtful in this case, to say the least, and where fair compensation is paid. The noble Lord, Lord Dubs, proposes to pay no compensation whatsoever. I cannot see how he can think that his scheme would be certain or even perhaps likely to survive under scrutiny under that convention.

This right to manage, to our mind, would therefore be quite unfair to the many sensible landlords who undertake their responsibilities in a conscientious manner. It offends the basic premise of the leasehold system, which is that a lease is a private contract freely entered into. It is a voluntary agreement between landlord and tenant which gives rights and obligations to each party with regard to the other.

Of course, it is quite a different issue where the landlord is failing to behave in a reasonable manner, and it is clearly right in these circumstances for Parliament to intervene. It is because a minority of landlords are behaving in this way that we are discussing this Bill.

This Bill includes the strengthened right for leaseholders to seek the appointment of an independent manager in cases where they can demonstrate that the freeholder has not been carrying out his responsibilities in a proper manner. Under existing legislation, leaseholders have to go to court to ask for the appointment of a manager. Clauses 81 and 82 provide an easier and more effective way for tenants to gain access to independent management in these circumstances.

The jurisdiction for these cases is being transferred from the court to a leasehold valuation tribunal. That, in combination with the codes of practice to be issued by my right honourable friend, will provide a much easier and more sure method for leaseholders to achieve justice. It will be a much more accessible system, too.

There is a further linked provision in the Bill in Clause 84 which will mean that once a manager has been appointed by the tribunal in cases where the landlord has misbehaved himself and once that manager has been in place for two years, the tenants have a sufficient ground to apply to a court to acquire the freehold interest. This offers an attractive route for the tenants to purchase the freehold at a fair and open market value.

Turning now to the particular proposals put forward by the noble Lord, Lord Dubs, I would like to draw to your Lordships' attention some of the difficulties as we see them. The new Schedule 1A attempts to define which groups of leaseholders would qualify for the right to manage and, as the noble Lord has explained, it would apply only where the landlord's interest was no more than 20 per cent. of the aggregate value of the leases. But we are not clear what is the case for setting the limit at 20 per cent. For example, the effect of this 20 per cent. rule would be to exclude properties where the unexpired term of the lease was 20 years or less. It would also exclude mixed-use blocks where the amount of retail floor space exceeded 5 per cent., which hardly seems consistent with other amendments to be moved by the noble Lord, Lord Dubs, in relation to the commercial element of a block and collective enfranchisement.

Although the amendment which has been tabled is already complex, I do not think we will find that it resolves all the difficult issues in order to ensure that this right could work effectively. For example, the clause contains no definition of "qualifying tenant", or indeed of "common parts". Nor does it define what proportion of the qualifying tenants need to agree to activate the procedure. Much more needs to be done to flesh out what is only in reality a skeleton proposal.

Any proposal would have to tackle the difficult issue of what is "management". Managing a building can involve many different functions. Obviously, it involves maintenance and repair, the sort of things for which service charges are paid. But it can also involve managing any flats let on short term tenancies, including choosing tenants and collecting the rent. It can involve developing parts of the land and insuring the structure of the building. To which of those does the "right to manage" apply? No doubt the noble Lord will say that all those issues can be solved. But his current proposal does not deal with them adequately, so he is rather asking the Committee to accept on trust that this intricate web of rights and responsibilities can be unpicked, and unpicked in a way that is both practical and fair to all parties.

I know that the noble Lord has a more detailed proposal up his sleeve—he was kind enough to show me a copy. Indeed, that would be a useful starting point. But there are many difficult questions to be addressed. There is a great deal of detail to be gone into. There is a requirement for extensive consultation if we wish to go down that route and it would quite clearly not be possible to incorporate such a proposal in this Bill without extensive Henry VIII provisions. Under those circumstances I hope the noble Lord will realise that even should we favour his proposals—which we do not—it would not be appropriate to proceed with them in this Bill.

3.30 p.m.

Lord Williams of Elvel

As the Committee is aware I promised to take trapist vows on this part of the Bill because I am a leaseholder, but I wish to correct certain matters of fact. I am not speaking in my own interest but on matters of fact.

The facts are that a freeholder sells a long lease under the terms of the definition of the 1993 Act. The freeholder sells the lease on the basis that the leaseholder will be responsible for paying rent, which may be low—that will be a matter which the Committee will discuss in due course—but also he will pay service charges. It is the service charge problem that has given rise to my noble friend's amendment and to the amendment in another place.

It is not simply a matter of saying that the leaseholder will pay all service charges whatever they may be. It is not even a matter, as the noble Lord said, of a return to the freeholder. The freeholder sold a lease for a capital value and that is his return, plus the ground rent. Unless I am much mistaken, the freeholder does not expect to get anything out of the service charge. It is the manager who obtains the return from the service charge.

Normally, freeholders appoint a manager. A number of estate agents of distinguished credentials run blocks of flats with long leases. The problem is that at the moment most leaseholders—I am trying to put this in the most objective manner that I can—do not know whether or not they are obtaining proper value for money from the service charges they pay to the agent. That is the problem that my noble friend is trying to address. It is nothing to do with the landlord or the head leaseholder; it is whether the leaseholder who has a flat, as I do, on a long lease, who pays a small ground rent, who could enfranchise— but as the noble Viscount, Lord Montgomery, said, I have no intention of enfranchising under the present arrangements, or at all—is receiving value for money.

I speak for myself at this point. With regard to service charges—I am not complaining about my flat or the service charges I pay—leaseholders need to do what is called "market testing". I thought the Government were in favour of market testing. The estate agent in charge of the property may have decided that after five years or so the whole property should be refurbished on the outside. That is the landlord's responsibility. They may have commissioned painter X or decorator Y. But we do not know under what circumstances they have been commissioned; we do not know that they were commissioned under competitive procedures; we do not know what the estate agent management take is and we do not know whether there could be any better management of the properties in which we live.

The intention is not to break through anything that the noble Lord described. We recognise, having signed and bought a long-term lease, the obligations. It is a question of market testing as to whether anybody—there are plenty of people in the business—could do it better than the present manager of the property. That is all my noble friend is saying.

Viscount Caldecote

The noble Lord, Lord Williams, is perhaps confusing the issue. He said that it was nothing to do with the situation of the head lessor. It is very much to do with the head lessor. If a tenant has a long lease from the freeholder he has certain obligations to keep the building properly painted, the structure maintained, and so forth. If he does not carry out those requirements then he may be sued by the freeholder.

The problem arises when the freeholder sells a long lease to a head lessor and the head lessor then has to pass on the requirements for maintaining the buildings to the sub-tenants. The head lessor appoints a managing agent to carry out the work on his behalf. The problem arises because some head lessors act in a most improper way, as do their agents, and the sub-tenants have no comeback to deal with the situation when they are being done down by the head lessor. I declared an interest in this matter the last time we discussed it and I speak from the experiences I mentioned then.

Lord Williams of Elvel

I am grateful to the noble Viscount for allowing me to intervene. I am trying to stick to the facts rather than pleading any interest. Whether or not the instruction of a manager is from the freeholder or the head lessor is, to my mind, irrelevant. Somebody has got to instruct a managing agent to manage the property, whether it is the freeholder or the head lessor. My problem is that I do not believe the Government are right in the facts of the matter; that is to say, the Government are not right in saying that there should not be some form of market testing whether it is from the freeholder or head lessor down to the person who actually holds the long lease of the property. I hope that I have made my factual contribution clear.

Viscount Caldecote

I am not sure whether I understand the noble Lord when he says that he is dealing with the facts and perhaps implying that I am not. I am trying to do just that.

The fact is that the head lessor can and does appoint managing agents and the tenants of the head lessor have to accept the service charges and other charges that the managing agents impose on behalf of the head lessor. If that is done properly, there is no problem. But how does the sub-tenant deal with a head lessor who is not acting properly and whose agents are not acting properly and where the charges are excessive?

One way of getting round that problem is simple but may be expensive; that is, for the tenants to buy out the head lessor, which is a satisfactory solution. This Bill gives greater power to the sub-tenants to buy out the head lessor when the head lessor changes. He will not get out of his responsibilities so easily now in giving the sub-tenants the first right of refusal to buy him out as he could before this Bill.

That is therefore a great improvement; but the problem still arises in a case where the head lessor does not sell on his interest. The sub-tenant still has to put up with the difficulties and disadvantages of overcharging by the managing agents. As I say, the solution is to buy out the head lessor. In my own experience we have found that to be extremely satisfactory. A great deal of money is saved by the sub-tenants, as they were, who have taken over the head lease and manage the flats on their own behalf and employ what agents and surveyors they wish. The whole thing is much more open and a great deal of money is saved. I hope that the Government will look again at this problem of protecting sub-tenants from head lessors who do not act properly at a time when they are not proposing to sell and when they are now much better protected.

Lord Monkswell

As something of an outsider in this kind of debate, it seems to me that the amendment my noble friend Lord Dubs is putting forward is trying to separate the service charges and management from the ground rent and the capital sums and returns on capital. The noble Viscount, Lord Caldecote, suggested that one way of resolving the problem is to buy out the head lessor. That obscures the problem. It is rather like the Government's argument, "You can enfranchise yourself".

We should look at the two charges separately. There is the ground rent which is like a return on capital for the landlord. The other is the service charge which is for maintenance, repair and management of the building, which is an on-going function. It is not to do with a return on capital. One of the problems that we are faced with in the market place is that people operate as though the service charge was some sort of return on capital and do not use the money to maintain and manage the building. My noble friend's amendment effectively encapsulates that by saying, "The tenant should have the right to effectively manage the service charge and maintenance of the building". It should he taken away from whoever was previously responsible. The sub-tenants are paying the money and they are living in their own homes; therefore, they should have the right to ensure that the money is properly spent in the management and maintenance of the building and that it is done properly. I am just a simple guy, but that is the way I see it and that is why I support my noble friend's amendment.

Lord Weatherill

I had not intended to participate, but listening to this debate I am very sympathetic towards what the noble Lord, Lord Dubs, said. I have recently encountered a problem where one of my former constituents lives in a block of flats in which some of the tenants are protected and others are not. The problem appears to be that those who have bought long leases pay substantial service charges to the landlord and in this particular instance no work is ever carried out. It seems that the landlord is using the money which he gets by way of service charge to do up the flats when the protected tenants die or leave for other reasons, and sell them on. As regards the former constituent, there appears to be no redress whatsoever. The amendment of the noble Lord, Lord Dubs, may not he absolutely correct in its wording, but I hope that the Government will agree to take it away for reconsideration and then bring forward an amendment which will cover this particular difficulty.

3.45 p.m.

Baroness Hamwee

Perhaps I may take up one point made by the Minister given that this is the first debate on this subject. He said that agreements between landlords and tenants are contracts freely entered into. I do not dispute the importance of contract nor the importance of providing means for its enforcement; but it is worth recalling that in this area the contract is perhaps a little different from, say, a contract to purchase goods where there is a freer choice.

In the housing market one is affected by a number of issues such as the location, price and so forth. It may well be that all that is available within one's price range and the place where one needs to move is a flat which is the subject of a lease and one purchases the, benefit of that lease. One may not even be in the position of making the contract afresh. These days I guess that there are rather more existing leases than there are new leases being created. A purchaser buys an existing lease and does not have the opportunity to alter its terms. So in talking about a contract I do not believe that we can regard this contract as being quite like others.

Lord Lucas

I believe that Members of the Committee on all sides agree with the definition of the problem and are determined that it should be dealt with. Quite clearly, these abuses should not be allowed and that is what this part of the Bill is about. We have chosen a route which preserves the rights of landlords. Through Clause 79 onwards we are setting up a structure which allows tenants to deal with landlords who are misbehaving without expropriating the landlord's property and rights. The noble Lord, Lord Dubs, proposes to deal with the matter by jumping on landlords without compensation.

Lord Williams of Elvel

No!

Lord Lucas

I believe that that is the basic difference between us.

Lord Williams of Elvel

I must correct the noble Lord. Again, let us stick to facts. There is a contract between a freeholder and a long leaseholder. That contract has one thing in it which is open-ended: the ground rent is closed. The capital value has been sold, whether it is an original lease or a lease which has been bought from somebody else. The one point which is open-ended is on the service charge, and that is a problem. It is not a question of shifting the balance between the landlord and tenant. My noble friend is trying to make sure that the leaseholders have the possibility of alternative arrangements should they find that they are paying excessive charges. What is an excessive charge can only be determined by, as I say, market testing. I should have thought that the Government were in favour of that.

Lord Lucas

That is exactly what we are setting out to do within Clause 79(2A). I believe that the words are very clear. There are provisions in earlier legislation. Section 42 of the Landlord and Tenant Act 1987 states that service charges must be held in trust. The Leasehold Reform, Housing and Urban Development Act 1993 states that tenants can call for a management audit. Section 20 of the Landlord and Tenant Act 1985 states that the landlord is required to obtain alternative quotations for any work undertaken. So there are provisions within existing legislation. In this Bill we are providing that, A tenant by whom, or a landlord to whom, a service charge is alleged to he payable may apply to a leasehold valuation tribunal for a determination—

1. "(a) whether costs incurred for services, repairs, maintenance, insurance or management were reasonably incurred,
2. "(b) whether services or works for which costs were incurred are of a reasonable standard, or
3. "(c) whether an amount payable before costs are incurred is reasonable".

That deals with the kind of abuses which the noble Lord, Lord Williams, has outlined and will provide tenants with the sort of power that they need to make sure that the service charge they are paying is proper. But at the heart of it is our belief that the provision of the management service to tenants is a business which is owned by the landlord and ought not to be taken away from him lightly or without compensation.

Baroness Gardner of Parkes

I must declare an interest in that I have a small flat for my retirement when I can no longer manage stairs, but I am not living in it at the moment. The ground rent is £50 a year and the service charge is £5,000 a year for a one-bedroom flat. Service charges can be very high. Even more irritating is that part of the electrical work that is being done this year was done last year. The people who are doing the work this year say that the work done last year was unsatisfactory. Tenants find it very disconcerting to have to pay twice.

I like my noble friend's Clause 79. I believe that it gives people the right to go to a leasehold valuation tribunal. To go to court can be time consuming and expensive and it cannot be done by an amateur. Can my noble friend tell me whether, under Clause 79, an individual acting on his own behalf, and at comparatively low cost, can go to a leasehold valuation tribunal to query these matters, or will that be an expensive process?

Lord Lucas

How expensive the action is depends upon the complexity of the case. We believe that the basic charge will be about £500. In relation to a £5,000 service charge for each individual that does not seem excessive. Any individual tenant can apply to the leasehold valuation tribunal or a number can get together as a body and challenge the matter. The cost is the same. The cost may be £500 for something simple or £2,000 a day for a more complicated case.

Lord Williams of Elvel

Leaseholders respond to their freeholders. Generally, except in certain circumstances, leaseholders are not individuals who are aggravated by difficulties. Some are and some are not. In referring any matter to a leasehold valuation tribunal the leaseholder, whether individually or collectively, confronts the landlord. If as a leaseholder one confronts the landlord one is liable to find that the service charge next year is not £5,000 but £6,000. That is a major problem in many of the big estates in London and outside London. This problem does not apply simply to London. I have certain knowledge of this matter. To go to a leasehold valuation tribunal (a) incurs costs and (b) requires confrontation with the landlord. On the whole, leaseholders who have brought a contract do not want that kind of confrontation. It makes good sense to say that perhaps a service charge of £5,000 should be put out for competitive tendering. There are plenty of people in London and elsewhere who manage properties.

Earl Bathurst

I declare an interest as a leaseholder who hopes to be a freeholder. If leaseholders decide to take their case before a tribunal not only do they confront the landlord—which is a perfectly reasonable thing to do—but for perhaps four or five days they will confront a legal team of top QCs with whom they will have to do battle—and I mean "battle". That is a difficult, time-consuming and nerve-wracking business for an ordinary tenant. I hope that the Minister will give serious thought to accepting something on the lines of this amendment.

Lord Lucas

I believe that my noble friend describes the current situation where these matters must be worked out in the courts. We propose and believe that the leasehold valuation tribunals will be much simpler, quicker and cheaper. As regards that procedure, to the extent that I am allowed to do so from the Dispatch Box I would back my noble friend Lady Gardner of Parkes against a landlord any day of the week.

I deal with a number of other matters raised by the noble Lord, Lord Williams of Elvel. First, the landlord's right to develop the property further is a valuable right which the amendment of the noble Lord, Lord Dubs, may well extinguish. Secondly, the leasehold valuation tribunal fee may not be the same irrespective of the number of tenants. I am sorry that I gave a wrong answer in that respect. It is certainly cheaper than several cases, but it may be more than one individual case. We have not finalised the details.

Lord Monkswell

Do the Government seriously suggest that it is quite legitimate for a service charge to be used to redevelop property? Surely, the person who develops a property should put his own money into it by way of capital investment rather than use the service charges. That is the implication of what the Minister has said.

Lord Lucas

No. I said that the service charges must be held in trust and could not be used for other purposes. But the landlord has the right to develop the property further, and that right may be interfered with or taken away by the amendment of the noble Lord, Lord Dubs. The amendment would take away from the landlord the right to manage the roof, which might have to be removed in order to build on extra storeys, and give it to existing tenants.

Lord Dubs

This debate has been extremely interesting. The noble Baroness, Lady Gardner of Parkes, referred to having a £5,000 service charge. The Minister said that he would back the noble Baroness against any freeholder. That is true. However, not all leaseholders are as articulate, fluent or persuasive as the noble Baroness, Lady Gardner. We must have a system which works for the generality of leaseholders.

The Minister said that I wanted to expropriate some functions of the freeholder. That is the last thing that I want to do. But where there is a contract between the freeholder and a leaseholder whereby the former provides certain services—which is the basis on which the original lease is acquired—we should not lock the leaseholder into that contract in perpetuity, because the freeholder may, for his part, fail to meet the terms of that contract. It seems to me that when leaseholders pay for services they ought to get something back. When that fails because the provider of services is not doing so adequately, or it is being done at too high a charge, it is reasonable that the leaseholder should have other options. It is called the market economy. It gives the consumer a choice.

It is my contention that the scheme in the Bill is not adequate. It is bureaucratic and costly. To go to the leasehold valuation tribunal can be costly, particularly if the freeholder assembles expensive counsel for his part. It is costly and is a difficult burden for leaseholders. I believe it is possible to have a scheme that works more easily and effectively. I still believe that the balance ought to lie with leaseholders, because in almost all instances they account for 95, 98 or 99 per cent. of the equity. That is where people have made an investment in their own homes.

The Minister has referred to the right of leaseholders to enfranchise as an alternative to my scheme about management. He omits to say that the majority of leaseholders are not able to secure enfranchisement. I understand that about 65 per cent. of leaseholders cannot do that. We will discuss that matter in more detail in the next group of amendments. To offer enfranchisement as a way out when dealing with a bad landlord is not the answer, unless the Government accept the other amendments. If they do that, it may change the terms of this particular debate.

As regards intermediate landlords—head lessees—under my scheme the right to manage will be transferred, and the leaseholder will be able to secure the right to manage whether it is the freeholder or the head lessee who has appointed the managing agents. The point is the same in both instances.

The Minister said that he did not believe it was appropriate to accept on trust some of the points within this particular amendment. I point out that the Government's system relies on a Royal Institution of Chartered Surveyors code of conduct which itself has not yet seen the light of day, so the Minister also asks the Committee to take matters on trust. As my noble friend Lord Williams of Elvel pointed out, there are three elements in the contract between leaseholder and freeholder: the purchase price or capital sum; the rent; and the payment for service charges. That is what we are talking about. We are talking about a particular service for which the leaseholder has agreed to pay in return for certain things happening. When they do not happen we need remedies. It is my contention that the remedies proposed in the Bill through the complexities of the leasehold valuation tribunal are simply not adequate and will not work.

The Minister gave the game away at the beginning when he said it was not a matter of the details, it was a matter of politics. Those were his words, not mine. He said "political principle" and the political principle seems to be that we do not want to weaken the position of landlords. I am sorry he takes that view because I thought the Bill was about the rights of leaseholders and giving leaseholders a fair chance in this particularly difficult market.

I shall refer finally to a point the Minister made. He said I did have another amendment. I accept that given the complexity of the legislation and the procedures, my amendment may be—I think it is usually Government parlance—technically not fully effective, or technically slightly defective. Those are the normal words. Yes, I accept that. That is why I sent the Minister a longer and more detailed amendment which came to some 24 pages, in the hope that I could persuade him to show sympathy for that one and then he would not argue that there were technical flaws with this one. I am not sure where his comment leaves us. I did not want to have another rain forest bite the dust by having a 24-page amendment put down when it is a point of principle we are talking about. I very much regret that the Minister sees this as a political issue and not as one about the rights of leaseholders. I wonder whether I can tempt him to say a little more.

Lord Lucas

No.

Lord Dubs

In which case I should like to return to this on Report. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

4 p.m.

On Question, whether Clause 98 shall stand part of the Bill?

Lord Dubs

I beg leave to speak to this and also to the other amendments on the Marshalled List. It may be for the convenience of the Committee that we take all these amendments together, because they deal with closely related issues.

We are talking about the low-rent test, and, related to that, the argument about whether the period should be 50 years or 21 years. The purpose of my amendment is to exclude agricultural or rural tenancies from the provisions of the clause. I have therefore used the same words as are contained in the appropriate paragraph in Schedule 8.

My understanding is that the position is quite complicated. As regards a low-rent test there are in fact three separate tests depending on when the lease was first signed. For leases before April 1963 the calculation of the low-rent test is that the ground rent has to be less than two-thirds of the letting value estimated for that period. For the period April 1963 to April 1990, the formula for the low-rent test is that the ground rent should be less than two-thirds of the rateable value; previously it was the letting value. Thirdly, for post-1990 properties the ground rent has to be under £1,000 in London and under £250 elsewhere.

Those are arbitrary figures. There is a lot of scope for landlords to evade the figures by setting the rents in such a way that they can avoid the possibility of enfranchisement. Indeed, landlords have done that.

Also, in the case of leases going back before 1963 it is very difficult to define what should have been the letting value at the time; and there are many hard luck stories of leaseholders who have failed, and are failing, to secure enfranchisement simply because they are caught by these particular provisions.

In answer to the question, "Why is there a need for a low rent test at all?" the Government argued in 1993 that the absence of a low-rent test might undermine the rented market by allowing those paying a rack rent to enfranchise. There is no evidence that I or anyone else has been able to find of this as a likelihood, or any evidence that it has been happening.

The original 21-year limit was a perfectly adequate safeguard because it clearly differentiated leasehold properties from rented properties. Anybody who had under 21 years of a lease would therefore not be able to enfranchise. That is the present position. For reasons which are not totally clear the Government have increased this time period to 50 years. It was virtually admitted by the Secretary of State in the other place that it is an arbitrary figure. It is far too long. No evidence has been produced to suggest there was anything wrong with the 21-year period. Indeed the Lord Chancellor's Department, when it consulted on commonhold in 1990, took the view that there was no justification for a low-rent test in relation to commonholds. The argument applies equally to this amendment as it does to commonholds.

There are other difficulties with the low-rent test. It is inequitable between individual leaseholders. There may be leaseholders in the same block, of whom one would be allowed to enfranchise and one would not because of the way the formula works. The last domestic rate revaluation was in 1973. Rents have risen since then and the longer the period since 1973 when a long lease was granted, the less likely it is that the rent would have been fixed at less than two-thirds of a 1973 rateable value. In other words, the way in which the formula works is capricious; it is arbitrary, and it is very unfair.

When the Bill was debated in the other place there was considerable discussion about how this place would react to the contents of the Bill. I wonder whether I could read from a letter sent by a Conservative Member of Parliament to one of his constituents. This is a letter dated 15th May. I quote: There is very considerable resistance to leasehold reform in Parliament, principally in the House of Lords but also to an extent in the Commons. The Leasehold Enfranchisement Bill was badly mauled by the Lords, resulting in a considerable weakening in the Government's original intention. It is very important that the leasehold reform aspects of the Housing Bill should not be weakened in the same way. In fact, it became quite clear that the Lords would probably have struck out all of the leasehold reform aspects of this Bill had the reform been too radical. Those of us who are in favour of radical reform, therefore, had to ensure that as much reform as possible was included in the Bill that was consistent with it being accepted in the Lords. The final paragraph states: Although there is still a risk that the Lords may water down the leasehold clauses, I am now reasonably confident that they will grudgingly let them through. I am puzzled by that letter. I understand that there was some concern in the other place, prompted by the Government, that the Committee might be more resistant to these measures and to any improvements in them than even was the case in the other place. It is puzzling but I quote it just for the record.

There is another difficulty about the low-rent test and the period involved. Between 1963 and 1990 a surprisingly large number of leaseholders had a nil rateable value. This is because of extensive building works which took place at the time they acquired their leaseholds, especially in the late 1970s and the 1980s when nil-rated houses were being converted into flats which were often sold off the drawing board. So we have the anomalous position that because of that accident of history leaseholders would have no right to be enfranchised.

So, the low-rent test is essentially arbitrary and unfair. It affects not just people living in SW1 or in Kensington but people living in many parts of the country. Indeed, people in Kensington and SW1 may themselves be lacking in affluence. The case is that there is no need for a low-rent test at all. My proposition is that the low-rent test should not apply except in the case of agricultural or rural tenancies, and that the 21-year period is a sufficient qualification. The various amendments together would achieve that end.

Lord Strabolgi

I support everything that my noble friend Lord Dubs has said about the low-rent test. Thousands of genuine long leaseholders throughout the country will be disqualified from any right to enfranchisement by that test. That is because the low-rent level is so low—on average it is probably no more than 5 per cent. of the full letting value—that landlords granting long leases have for some considerable time been able to fix ground rents just above the limit, without significantly affecting the premium paid for the lease.

The low-rent test is therefore unnecessary and inequitable. The desired division between owned and rented property is preserved adequately by the restriction of enfranchisement to long leases. As the Committee will be aware, the low-rent restriction was removed entirely by Standing Committee in another place. It would have meant relief from impossible situations for very many leaseholders. When the Bill returned to another place on Report, the Government reversed that amendment which had been passed by Members of all parties in Standing Committe and imposed, for reasons of their own, their own amendment giving exemption from the low-rent test only to those with leases of over 50 years when granted and to those not living on country estates.

That is surely discriminatory legislation of a highly divisive nature and favours one long leaseholder over another in an unacceptable way. The test of a long lease has always, but always, been whether it was for over 21 years when granted. Anyone buying a lease of 21 years or more would always have expected that any legislation applying to long leasehold tenure would apply to him. What the Government have set up in that hastily thought through amendment is an entirely new and unjustifiable barrier of 50 years, which bears no relevance to the established criteria of lease lengths or even to the low-rent argument.

I remember the departmental housing booklets over the years. They are booklets that the department brings out. It does it very well. They are for the information of the public and those who are not specialists. Those departmental housing booklets, giving advice to tenants and leaseholders, issued by the Government, have always defined a long lease as 21 years. They made it clear that leases below that figure did not qualify for enfranchisement.

Now, at a stroke, the Government propose to alter that figure to over 50 years. Why that volte face? There seems to be no reason for it. The Government remind me of Humpty-Dumpty, who said: When I use a word, it means just what I choose it to mean—neither more nor less". So, 21 now means 50—neither more nor less. It is a real looking-glass world indeed. I support the amendments.

Lord Hamilton of Dalzell

I have one question that I should like to ask the noble Lord, Lord Dubs. I am advised that despite his intention not to remove the exemption from rural properties, his amendments would in fact do that. I wonder whether he will accept that his amendments are flawed in that respect.

The noble Lord, Lord Strabolgi, and others have wondered why the time period has increased to 51 years. I have never understood why it should be 21. Did it have something to do with the fact that it used to be the age of majority for adults before that was changed by Harold Wilson?

I used to speak in these debates as a trustee of Smiths Charity. It of course no longer has properties, so I no longer do that. Smiths started selling 60-year leases in response to demand from the tenants to be able to roll up their rents in a single payment in order to take advantage of the mortgage relief which the Government had offered them; 60 years is the point on the graph that reflects the way a leasehold diminishes. It was considerably to the advantage of tenants to do that.

I asked what the statistics were. One could in 1960 have bought a 60-year lease of a good Smith flat for £10,000. When we were discussing leasehold reform in 1993, the freehold of that flat was valued at about £500,000 to £550,000. The remaining 30 years of the lease was worth £350,000, but the rack rent on the property had by that time increased to what would have been £35,000 a year. Therefore there is no logic in the 21-year period.

When late in the debate on leasehold reform we began to discuss the low-rent test, the Government excluded any debate on the 1976 Act. Therefore we could not get into the question of whether it should be 21 years or 60 years. It is high time that we debated that matter. There is every logic in the time being much longer than 21 years.

4.15 p.m.

Lord Boardman

I must first make it clear that I have no personal interest in this. I am not a leaseholder. I own my own home and I am a short-term tenant in my flat. I say that because when I spoke on previous occasions there was some suggestion that I had some interest in the matter, but I have not.

I oppose the amendments for one simple reason: they amount to government interfering in a contract freely made between tenants, lessees of premises, and the freeholder. I was amazed to hear the noble Baroness, Lady Hamwee, in the previous debate saying that we should not worry too much about contracts relating to property because of the short supply. She suggested—I am sure that when she reads Hansard she will be surprised to see what she said—that there are two types of contract: one which is normal and the other relating to property which, because of the shortages and one thing and another, can be ignored or one need not be bound by it. If I have misquoted the noble Baroness, I apologise. She will be interested to see what she said on the subject.

When a leaseholder enters a contract to take a lease—never mind for the purposes of this argument whether it is for 21 years or 50 years—the terms are agreed. The ground rent, the service charge basis, the term and anything else are agreed. Those are the terms of the contract which is entered into. It is suggested that Parliament should come into that and say, "We think you might have had a hard-luck story to tell. We believe that we should interfere and put it right". That cannot be right. It cannot be our duty to interfere in contracts freely and honourably made.

If someone was badly advised when he entered into a contract, that person has another remedy. He had better go for his adviser. Let me give an example of a highly honourable man who in 1970 took a flat with a 50-year lease at a rent of £200 a year. At that time and today he had no power or right to enfranchise. There was no such right in 1970 when he took the flat. There is no such right today. Because he is just outside the over-50-years limit in the Bill which would entitle him to enfranchise, and because his rent is just too high to qualify as a low rent, he is outside the exemption. He feels—I understand this and have great sympathy for him—that he has had a raw deal. He is a highly honourable man.

That man believes that Parliament should come into the picture and say, "All right, you have had bad luck. Your landlord told you at the time you took the place that sometime later if you wanted to buy the freehold you could do so". Now we are saying that we are not prepared to do that. That is bad luck, but it is not the responsibility of this place or of Parliament as a whole to say, "We will remake that contract for you". That is what the amendments tabled by the noble Lord, Lord Dubs, seek to do. They seek to remake a valid contract that was honourably and properly made but which happens not to be as favourable as if it were amended as the amendments seek.

I cannot support the amendments. I do not believe that it is our role to interfere with such contracts and to remake them in order to make them more favourable because we did not get it right first time. I oppose the amendments.

Lord Strabolgi

But these contracts were not always entered into in the way in which the noble Lord, Lord Boardman, describes. Very often they were contracts which the tenants were forced to enter into because speculators took over blocks of flats and threatened them with expulsion—they were people with ordinary rentals—unless they entered into long leases. That is why they had to scrape together to get the money, by borrowing or raising mortgages and so on, in order to maintain themselves in their homes. I do not believe that one could describe them as contracts freely entered into, as the noble Lord, Lord Boardman, said. He used to say so in 1988, and I used to say the same sort of thing too. It rather took me back when he spoke just now. I am glad that he did, but I believe that historically this is a special case.

Also, the Government believe in leasehold enfranchisement. They say so on almost every occasion. The Prime Minister has said so many times. They say so in theory and maintain it in theory, but when it comes to it, they do their best to undermine it.

Viscount Caldecote

This is a very complex issue. I am slightly confused because the noble Lord, Lord Dubs, said that he was speaking to his proposition that Clause 98 should not stand part of the Bill and also to his other amendments, to some of which I have my name. Surely, since the whole purpose of Clause 98 is to give effect to Schedule 8, if Clause 98 does not stand part of the Bill then Schedule 8 falls to the ground and all the other amendments will not be called. I believe that that is the situation.

However, I believe that it is in order to speak to Schedule 8 on the Motion that Clause 98 does not stand part of the Bill. As the noble Lord, Lord Dubs, said, Schedule 8 deals with the low rent qualification which applies to long leases of less than 50 years. I appreciate that the logic behind the concept of a low rent qualification is not to give to what may be described as temporary tenants on relatively high rack rents the same rights as tenants who are long leaseholders who regard the property as their permanent home.

Long leases are now defined by Section 3(1) of the Landlord and Tenant Act 1987 as those exceeding 21 years. The schedule now proposes to increase that to 50 years. There seems to me to be no justification whatever for removing the rights of many long leaseholders through a low rent requirement nor for discriminating between long leases of 50 years and 21 years which has always been the custom in the past and as is now proposed under paragraph 1 of Schedule 8.

But now I diverge from the noble Lord, Lord Dubs, who says that he wants to keep the exclusion of people who live in rural places. It has been pointed out that he does not actually achieve that by removing Clause 98 and with it Schedule 8. But surely there is no justification in fairness or logic for excluding wholly from the right of enfranchisement people living in rural areas. I understand the argument that has been used to justify that exclusion; that it is to protect the freeholders of certain types of houses on country estates. That is a perfectly understandable point of view which others can put much more clearly than I can. But in general, it seems to me to be an unacceptable point.

In my view, it is quite wrong to use that logic to exclude everyone who lives in a village house, on rural estates, from the right of enfranchisement. Surely the right solution to the problem is to withdraw Clause 98 and with it Schedule 8 and to insert a specific exclusion to deal with the houses which justify being kept separate on rural estates, and leave with the right of enfranchisement all the other village houses which many people have occupied all their lives and perhaps also in the lives of their parents. I have heard mention of dower houses and so on as being an example of those which should be excluded and they should be dealt with by a special provision.

I hope that the Government will look again at this matter. Even if this amendment is not put to a vote, I hope that the Government will agree to look again at this whole question in relation to low rent disqualification, the 21 to 50 years and the rural disqualification. It is something of a muddle at present which needs to be looked at afresh.

Perhaps I may comment briefly on what my noble friend Lord Boardman said. I entirely take his point that contracts freely made should not be upset by legislation. But I believe that to take that principle in this case is going rather too far. After all, before any of the recent Acts were passed, if you were a long leaseholder and your leasehold came to an end after, for example, 100 years, you had no rights at all. That was the condition on which you took on the original long lease.

Parliament felt that that arrangement was so unjust and unfair that it should be altered, as it has been altered by a number of Acts which have been passed. Therefore, this proposal is merely an extension of that principle; namely, to ensure that long leaseholders, who have been occupying their property as their home for many years, are subject to fairer conditions. I support the proposition of the noble Lord, Lord Dubs, that Clause 98 should not stand part of the Bill, but I ask the Government to look very carefully at the whole of this problem. They should try to tidy this area and not use a blunderbuss, particularly in relation to rural areas, which causes great injustice.

Lord Carnock

First, I must declare an interest. I am a leaseholder in the process of extending my lease but I have no financial interest in the subject of this debate.

I had in mind to refer to two anomalies in the existing law, both of which have been referred to by the noble Lord, Lord Dubs. I shall say nothing about the first but I should like to enlarge upon the second. That concerns property which underwent major works of reconstruction after the war and at a time when it became uninhabitable so that its rateable value was reduced to nil. Such a house does not meet the low rent test. But if you compare that with a property which was newly reconstructed, you will find that there is no rateable value at all when the house is under the process of construction and becomes first rated after the building is complete. Such a house would comply with the low rent test.

I ask the Minister whether, if these amendments are not accepted, the Government would he prepared to amend the 1993 Act so as to avoid the anomaly that a property with a negative rateable value could qualify under the test.

4.30 p.m.

Baroness Gardner of Parkes

Having earlier declared my interest in a flat, I should indicate that that is non-enfranchisable and so does not come in any way into any further discussion on this Bill. The home I live in is already freehold. In my time on the estates committee of one of the major London hospitals we were faced with this problem of how to re-let the houses that were becoming vacant. At that time—I am going back 15 years—we were well aware that 20 years was not considered a long lease and that it was a safe period for a hospital to let their property on a rack rent. There has been an awareness of the 21-year term for a long time. I do not think there is anything new in that.

A genuine matter of concern is the situation as regards properties on a rack rent. I feel that the 50 years might be significant if it were going to exclude properties on a rack rent, or market rent or full rent for today. This has been put to me in two different ways. The Leasehold Enfranchisement Association has said such leases do not exist, so I went to the British Property Federation and asked them to produce chapter and verse on it. The federation told me that they have produced chapter and verse to the Secretary of State, to the department, asking for proof that such leases did exist; and they do exist. There do not seem to be a great many of them, but the evidence had certainly been produced. Therefore, I will ask my noble friend the Minister to confirm that to me. If that is the case and such rack rent properties exist, then they should he treated differently from other properties.

I would support the points made by my noble friend Lord Carnock about properties that were not on the rateable list. Indeed, everyone I have spoken to, including the British Property Federation, acknowledges that that is an anomaly and that it was unfortunate if your house was undergoing major repairs. Everyone wants to see that corrected so that people who are in that position are not disadvantaged through it.

A very interesting point was made by the noble Lord, Lord Dubs, about the difficulty of tracing the rents that would have been applied to leases before 1963. I am unclear as to why there is such a difficulty because I thought this was a country full of documentation on everything going back hundreds of years. I would have thought it would have been easy to produce something. After all, 1963 was not that long ago.

There are people who want to be able to buy a property at a lower value if they are buying a lease, and currently these people buy a short lease. There is a problem that exists there, that if we reached the point where property owners were only prepared to sell really short leases, say, 20-year leases, in order to secure the return of their property at a later stage, would we then face a situation where people would not be able to get mortgages? In my time as a director of a building society I know that with any term less than 50 years it was not very easy to get a mortgage because the building society wanted 25 years remaining after you had paid off the 25-year mortgage, in order to give it a degree of security.

That is something we should look at carefully. We should take care not to kill off a market in shorter leased, affordable property for people, but also make it financeable for people, because, unless they can afford either to rent or to buy, it is not much good creating a market for short leases, which landlords have opted for, in order to protect their property interests.

None of these things is as simple and straightforward as we would like to think and whatever we decide in this law we will be affecting so many other decisions made by people. If we do develop a really short leasehold market and a longer leasehold market and enfranchisable and non-enfranchisable markets, we will definitely see differentials in values in the property market, and those people who have a lease that is enfranchisable will find their property worth relatively more than those who have one that is not enfranchisable.

On the rural position, I have had a considerable number of letters on both sides of that argument. The people from Adlestrop in Gloucestershire, who I understand have written to many Members of this Chamber, are concerned that some of the village are able to enfranchise and others are not, but I have had just as many letters from other people saying that on no account do they want the rural exemption lifted and they would like to see it more restrictive. This is a very complex matter and the point made by my noble friend Lord Caldecote is an important one; namely, that if the Government would really consider reviewing this whole issue I would not oppose the present clause standing part. I would rather see that than nothing, but I really hope that there are many aspects of this matter that should be looked at again.

Baroness Hamwee

I do not want to repeat any points that have been so thoroughly aired. Perhaps I may confine myself to saying that this should in no way be taken as a lack of strength in what I am saying. I wish to associate myself very much with the support for ending the discrimination with which we have found ourselves, and which was the thrust of the argument of the noble Viscount, Lord Caldecote. It is important that we take this opportunity to eradicate those discrepancies as far as we possibly can. In the best of all possible worlds it might be better to start again and have something that reads clearly and easily. I suspect that opportunity will not be before us.

Lord Coleraine

We are debating the question that the clause stand part and I have tabled an amendment, Amendment No. 254E, which is designed to probe my noble friend as to the meaning and purpose of the rural exclusion. If the question is put that the clause stand part and the noble Lord, Lord Dubs, is successful, then, of course, my amendment will not be debated. To some extent the amendment has already been pre-empted by my noble friend Lord Caldecott who has drawn clear attention to the problems of the rural exclusion.

It seems to me that this is possibly the moment at which I should explain that my amendment is intended to be a probing amendment because I see some force in what I believe to be the desires of the Country Landowners' Association, which I believe is behind it. Yet, on the other hand, I suspect that it goes too far in some directions and not far enough in others. What I am trying to find out from my noble friend on the Front Bench is why there should be this rural exemption to the provisions of the Bill which sweep away the no-rent test in respect of leases over 50 years, and exactly what the exclusion is trying to achieve and how, if at all, it does so.

I want to tease this information out of the Front Bench if I can, because in the debate in another place on Third Reading on 30th April the Secretary of State was not able to explain the rural exemption. The nearest he came was to comment (Official Report, Commons, 30/4/96 cols. 927–928) that some leases of under 50 years are found in rural areas where they are granted as part of a management strategy as regards looking after a farming estate. It remained for Mr. Nick Raynsford to bring up the matter in relation to leases over 50 years in length. Apparently advised by the Country Landowners' Association, he produced (at col. 939) the information that there are some 200 or 300 such leases in the whole country, where, as part of agricultural arrangements, properties are let for over 50 years without a premium. I would ask whether my noble friend agrees with this figure and, if so, why have the Government so singly failed to identify even one rack-rented lease granted for more than 21 years over the years in which we have been discussing this matter of the low rent test? Can my noble friend explain how the areas of rural exemption are to be worked out? Would the areas be the same as the rural areas referred to in Clause 17 of the Bill?

During the passage of the 1993 legislation exception was taken by those concerned with both interests—landlords and lessees—to the power given in the Bill to the Secretary of State to allow to be changed by order the percentage area of the building used for non-residential purposes which would exclude the right to collect enfranchisement. That provision would have varied, according to the will of the department, the valuable property rights of landlords and lessees and, on that occasion, the Government gave way to the argument and that right to regulate matters by order was taken out of the Bill.

What the Government are effectively doing by the arrangements that they have in place for the rural exclusion is achieving exactly the same undesirable result. There is also the case that the rural exclusion relates to houses in rural areas adjacent to other land in the ownership of the freeholder. That seems to me to be a definition which may have some pragmatic background, but one which is completely lacking in any principle because there is no particular reason why, if you happen to be the lessee of a house and your freeholder landlord happens to own the land next door and not occupy it for residential purposes, you should not have the right to enfranchise. As I understand it, the provision would also leave open the possibility that a freeholder who found himself with an isolated house on the wrong side of the road could go and buy some land adjoining the house in question and thus collect the right to enfranchise. Again, that seems to me to be wrong in principle.

My final question is to ask why the Bill provides no exemption for future leases granted in rural areas for more than 50 years? If there is a case for the exemption, it seems to me that it should operate in the future. It may well be that the answer is to be found in other parts of the Bill, but I have not as yet discovered it.

So far as concerns the substantive matter regarding Clause 98 stand part—namely, the low-rent test—I believe I am right in remembering that it fell to me to move the amendment to abolish the low-rent test in 1993. I should like to declare my support for the amendments tabled in the name of the noble Lord, Lord Dubs, in so far as they would achieve that aim. I do not wish to make many points on the issue, but, having read the report of the Third Reading debate in another place, it seems to me that a great deal of misunderstanding still exists in the highest places as to what the low-rent test is meant to achieve.

In that debate, my right honourable friend the Secretary of State said: The policy has been to give enfranchisement rights to leaseholders who might be regarded as owner-occupiers. That policy lies at the heart of the discussions: how does one distinguish between those who are leaseholders, as one understands that term, and those who may be leaseholders in the sense that they hold a lease but who have been paying a proper market rent as tenants would? I believe that to be a very fair way of setting out the question. Then, a few sentences later, my right honourable friend said: Two tests establish whether the leaseholder is an owner-occupier. First, there is the length of the lease, which should generally he more than 21 years. Secondly, the tenant must pay only a nominal ground rent rather than a market rent". In the same debate, my right honourable friend also said: An amendment was carried in Committee, to remove the low rent test. That decision was based not on the idea that renting tenants should be given enfranchisement rights, but on the fact that a low-rent test has caused difficulties in practice".—[Official Report, Commons, 30/4/96; cols. 921 to 923.] It is correct to say that the low-rent test has caused difficulties in practice, but that is not a reason why those who oppose it do so; they do so because it is conceptually flawed and because the low-rent test does not begin to meet the requirements set out previously by the Secretary of State regarding the justifications that he gives for having a low-rent test.

Perhaps I may give Members of the Committee an example of a case where the low-rent test has caused difficulties in practice. It was one that was canvassed at great length during the debate in another place and it has been brought to my attention by Mrs. Joan South of the Leasehold Enfranchisement Association. It is a situation where one has to prove that before 1963 the rent was less than a certain percentage of the letting value. It has been made perfectly clear many times that that has been almost impossible to achieve. Indeed, I do not need to refer Members of the Committee to the evidence given by Simon Marr-Johnson who is a very well-known and well-respected valuer with great experience in such matters. He made it quite clear that there are very few cases where you can actually show what the position was as long ago as, say, 1948. That is certainly a case where difficulties have occurred in practice.

I should like to draw the attention of the Committee to two other ways, which have already been mentioned, where the whole low rent test is conceptually flawed. First, a lease granted for a premium in the 1980s, after the inflation which had taken place since the rateable revaluation of 1973, was certainly never going to satisfy the low-rent requirement. Yet, almost invariably the valuable property in the flat or house passed to the lessee without any doubt at all.

Secondly, I should mention the position since 1990, where, in London, a property will fail to pass the low-rent test where the lease was granted after 1990 if the rent is greater than £1,000 a year. No one in their right mind would suggest that a lease at a premium of £1,000 a year in central London was one in which the property passed indisputably to the lessee. That clearly rebuts any suggestion that the low-rent test achieves the desired objective of differentiating between leases which are genuine rack rent leases and those where the property passes to the lessee. For those reasons—and, indeed, for others—I support the amendments tabled by the noble Lord, Lord Dubs.

4.45 p.m.

Lord Hamilton of Dalzell

Perhaps I may enlighten my noble friends Lord Caldecote and Lord Coleraine on the point of view of country landowners in requiring rural areas to be exempted from this enfranchisement. One has to realise that landowners who, basically, own agricultural property only own houses by default. They have acquired such property because of the vast diminution of the number of people required to work on farms. As such, they regard such properties as part of their estates.

A country cottage is now worth an enormous amount of money. My noble friend Lord Caldecote talked about how one could exempt dower houses or houses in the village. But how does one define village and dower houses? Our children are now perfectly prepared to go and live in a cottage previously lived in by a country workman.

We have made all sorts of curious arrangements as landowners. I can give Members of the Committee one instance regarding a house which was enfranchised as a result of the 1976 legislation. The agent of the property who worked for a firm in London asked to be able to live in the country on the property. That was thought to be a good idea. He was given a house which was in a state of extremely bad repair and he restored it on a 50-year lease. The agent spent his entire life making arrangements regarding agricultural properties on tenant relief where the costs of the improvements are written off over a number of years. But, of course, the enfranchisement allowed him to enfranchise so that he bought, for an absolute fraction of its worth, a cottage which was made over to him in perfectly good faith under certain arrangements to enable him to use it for his own convenience and pleasure.

The whole business of enfranchisement in the countryside has been riddled with such arrangements which have been overturned by laws and which have disrupted the rules of contract, as my noble Lord, Lord Boardman, said. Many landowners have become extremely angry about the situation—and quite rightly so. We are considering all sorts of requirements. For example, we have people we wish to live in houses from time to time and properties have been let over periods so they would be occupied until the families needed them. However, many such arrangements have been overturned. We are enormously grateful that the Government have produced a rural exemption. Anything which tended to upset it I would resist and vote against with all my heart.

Viscount Caldecote

I wish to respond to my noble friend. I understand that there are great difficulties here—I said that when I spoke earlier—but is my noble friend really saying that a family who have lived in a house for perhaps two or three generations should not, when the lease comes to an end, have the same sort of enfranchisement rights as someone in a London flat in the same sort of situation? Surely that is totally inequitable. I entirely take his point about the difficulties and the unfairnesses in the other direction; all I am asking is that the Government should look at this with the Country Landowners' Association, and with other people who are interested in this matter from the other side, to see whether some reasonable solution can be found to what is an extremely difficult problem.

Lord Hamilton of Dalzell

Is not my noble friend arguing my case? If he is talking about three or four generations living in the same house, that will involve a 75 to 100 year lease, and not one of 21 years.

5 p.m.

Lord Lucas

The noble Baroness, Lady Hamwee, said that these amendments were about ending discrimination—of course they are not. What we are arguing about is how the discrimination should be made. We have to discriminate between properties which may be enfranchised and properties which may not. What the noble Lord, Lord Dubs, proposes is that there should be a cut off at 21 years. Any term of fewer than 21 years is not enfranchisable; any term of more than 21 years is enfranchisable. What we are proposing is that there should be one cut off at 21 years—anything below that should not be enfranchisable—and another cut off at 50 years, or thereabouts—in that case any property with a lease longer than that should always be enfranchisable—with a grey area in the middle where a property could be one thing or the other, to be determined by the low rent test.

The noble Lord, Lord Dubs, and my noble friend Lord Coleraine spent a good deal of time going into the details of the low rent test. But that is not what the amendments of the noble Lord, Lord Dubs, address; they do not address how the low rent test operates, they just sweep it away. They sweep away the possibility of letting properties for a term of between 21 and 50 years at a rack rent, not subject to enfranchisement. When we look at the way in which we feel the property market should develop, we think that that is unreasonable. We think that it should be possible to let properties for a term, say, of 30 or 40 years and to have those as rack rent properties. That may well be a deal which suits both sides perfectly. People may want that length of lease and be happy to do it on rack rent terms. I do not see why we should restrict the property market to the essentially artificial cut off of 21 years, and make it impossible for anyone ever to be granted a lease which is longer than that without the danger of enfranchisement.

The noble Lord, Lord Strabolgi, said that the figure of 50 years was without foundation. In all my relatively short years as an accountant 50 years has been a figure of great significance as regards leases. Fifty years is the point at which a lease begins to depreciate. Beyond that, for longer terms, a leasehold is essentially freehold and can be treated in the same way for accounting purposes. Below that it is a depreciating asset. That is why the figure of 50 was chosen. It may not be perfect but it is a good baseline to take in terms of ordinary business practice and common sense as regards the point beyond which it is not sensible to look at the thing as being a rented property. Those are the two options which are offered to the Committee. What we have—with the patch in the middle—to my mind represents the real world rather more than the cut off at 21 years.

If the amendments of the noble Lord, Lord Dubs, were accepted, there would obviously be some properties which had been rented at proper rack rents for over 21 years which would suddenly find themselves enfranchisable. As my noble friend Lady Gardner said, we have been provided with a list of half a dozen of these properties. I do not suppose there is a great register of these, but certainly the British Property Federation knows of half a dozen. In the list the length of lease varies from between 50¼ years and 30 years. The basic question is, what sort of structure do we want to provide for the future development of the property market? To our mind, restricting rack rent arrangements to 21 years, making it impossible to give anyone a longer security of tenure than that without risking enfranchisement, would not be good for the future of the property market.

We have wandered on to the question of Amendment No. 254E in the name of my noble friend Lord Coleraine. With the leave of the Committee I think it right to address that now because certainly if the Question that the clause stand part was disagreed to, my noble friend's amendment could not be put. He and others have asked a number of questions to which, if I may, I shall answer in writing in order to give a proper, full and correct answer. However, I shall provide an explanation of the basis for this exclusion.

Schedule 8, in providing for the exclusion of certain houses in rural areas, looks to those which form part of larger estates. Even if these are let on leases of more than 50 years they will not—under the Bill—be able to enfranchise unless the low rent test is satisfied. The reason for excluding rural areas is that some landowners, for good estate management reasons, have let property on relatively long leases at market rents. In these cases the landlord fully intends to use the property in future, but because the house may be surplus for a generation or more he may have offered tenants long-term security. In some cases the landlord would have left the property empty or demolished it rather than allow it to be sold from the estate, and so would not have let it with long-term security had there been any question of enfranchisement rights arising.

The exemption applies only to houses (not flats) in designated rural areas where the land is owned with other land which is not used for residential purposes; for example, if it is on a farm or other estate. We aim to designate the same areas as will be designated under Clause 17 for the rural exemption from the right to acquire. The case for this exemption was accepted, I believe, by the Opposition spokesman in another place, and the amendments to Schedule 8 moved by the noble Lord, Lord Dubs, do not seek to remove it. A question has been raised as to whether they are technically effective in failing to remove it. I do not have an opinion to offer on that.

Various of my noble friends referred to Adlestrop village. I believe that a number of noble Lords have been written to on behalf of that village. I am afraid to say that the villagers have neglected to write to me. However, I am aware that it appears to be a settlement of a number of leasehold houses, let for over 50 years, some on low rents and others on rents above that limit. Because, so I understand, it is a settlement of fewer than 3,000 people and the landlord owns agricultural land, it would appear to be covered by the exemption.

I do not believe that it would be right to remove the rural exemption merely to bring the leaseholders of Adlestrop within the scope of enfranchisement. However we frame the rural exemption, there will always be some people who look to have a good case caught on the wrong side of the line. I recognise that we are moving the line, figuratively speaking, closer to Adlestrop, but the leaseholders there who will still be unable to enfranchise will not be worse off than at present, even though there will be others who will be better off. Nothing in this Bill removes the right to enfranchise from anyone; it merely gives additional enfranchisement rights, perhaps not to everyone who wants them, but that is what it does.

Various noble Lords have raised specific points. My noble friend Lord Cannock asked about leases which have a nil rental value. That sort of question is one which we are quite happy to look at. There may be problems around the edges of our proposed scheme. It may be possible, for instance, to solve this problem by reducing the figure from 50 years to some slightly lower figure, perhaps rather than tackling the problem in the ways he proposed. I certainly look forward to amendments at Report stage which discuss the way in which the low rent test operates, which is really what the noble Lord, Lord Dubs, and my noble friend Lord Coleraine addressed themselves to, but which these amendments do not. We are not caught on any point of principle. We are happy to look at ways in which matters might be improved.

There is nothing further that I need say on the amendments but I can see that I shall be asked questions.

Lord Strabolgi

Before the noble Lord sits down, perhaps I may raise this point. I have listened with great interest to his definition of the grey area between 21 and 50 years. But do the Government believe in leasehold enfranchisement or do they not? The issue was in their manifesto at the last election, as was commonhold, on which they are supposed to be working. It never seems to come to fruition. The matter is complicated but the Government are working on it. The Government make public their belief in leasehold enfranchisement. Yet at the same time they do their best to undermine it. Between 21 and 50 years there will be little leasehold enfranchisement because the landlord will hope to get round it by an increase in the low-rent test. Therefore, that belief means very little. The period is increased to 50 years. I note what the noble Lord says. However, the Government are undermining their own policy.

Lord Lucas

It is a matter of how one regards leases of less than 50 years. They are not normal leases to the extent that one buys a leasehold as though it were a freehold. Such leases are difficult to mortgage. They are normally sold only to cash buyers and those who can raise bank finance. They are generally found on some of the London estates and in some rural areas where they are granted as part of the management strategy for looking after a farming estate.

Some leases may be granted at low rent in which they will be considered as leaseholds with the leaseholder having the greater part of the equity. Some may be essentially long term contracts at a rack rent, in which case the equity remains with the freeholder.

I understand that the noble Lord, Lord Strabolgi, does not consider that the low-rent test is perfect. These amendments are not aimed at that. The purpose of the low-rent test is to discriminate between those two types within the 21 to 50 year period. I am arguing that it is right to have the 21 to 50 year period: that that is the right structure for the future of the property market. The noble Lord may argue that we should discriminate within that in a different way. Yes, we believe in leasehold enfranchisement; and, yes, we think that the principle is right. But we do not believe that there should be one single cut-off at 21 years.

Lord Dubs

I have listened with interest to the many contributions made in the debate. Perhaps I may make a few comments.

First, the noble Lord, Lord Boardman, referred to interference with contracts. Yes, my amendment seeks to interfere with contracts: it seeks to change the legislative basis on which those contracts were originally entered into. But I suggest that all legislation on leaseholds over recent years has interfered with contracts. A great deal of the legislation in the Bill interferes with contracts. Therefore, the concept that legislation, in the sense in which the noble Lord defines it, interferes with contracts is not a new departure; and, yes, that is what my amendments will achieve.

The noble Baroness, Lady Gardner, was surprised, given the amount of paper that we have, that there was difficulty in establishing rent values prior to 1963. Perhaps I may quote from a letter from an eminent fellow of the Royal Institution of Chartered Surveyors. As regards the working of the present system, he states: I have no hesitation in saying that section 4(l) of the Leasehold Reform Act 1967 is extremely difficult to interpret in any particular case. It affects only leases starting before April 1963, so the valuer is put to proof as to the letting value of a property more than 33 years ago. Frequently I find that the County Court has serious problems in understanding the valuation aspects of a case, and more often than not, the matter goes to appeal". He then gives examples of cases that went to court. Later he states: From time to time I am instructed to advise on doubtful cases under section 4(1); only too frequently I am obliged to include words in my report such as 'I am certain that the rent at the start of the lease was indeed low within the meaning of the Act, but I am far from certain that I would be able to prove it in court'". Finally he states: The section works in a capricious manner, and in my opinion it often does prevent proper claims under the Act from getting through the qualifying process". That is one expert. It seems to me that he speaks with some authority.

As regards the key points of difference between ourselves and the Minister, I have had a number of letters from individuals concerned with the low-rent test and the 50 year period. I shall not take up time by quoting them, but they all say clearly that there are many unfairnesses and anomalies. I am not convinced that the Minister's reasoning underlying the low-rent test is persuasive. He states that the British Property Federation provided him with six examples of rack rents on the basis of which he believes that there is a case for the low-rent test. I find that hard to accept given the evidence put forward as to the sheer difficulty of making the low-rent test work, the unfairness between one leaseholder and another, and the many anomalies. To support legislation based on six examples is not a good way forward when we have so many instances of how badly the system works.

The Minister said that as an accountant he regarded 50 years as a key figure. My understanding is that in the property market 21 years has normally been the accepted term. If someone has a lease of, say, 40 years that is a long term commitment to living in that flat. It is not a short term commitment saying, "I'm renting this for a couple of years between living in London and elsewhere". A 40-year lease, or one of that order, is a long commitment to a specific property. It seems anomalous that a Government committed to enfranchisement of leaseholders should then say that in many instances those who have the bad luck not to have been in the property for 50 years will simply not qualify. The last legislation failed to achieve its intent given the low number of instances of anyone managing to enfranchise. The present legislation will make it even more difficult.

I understand the technical point as to whether I have achieved in the amendments the rural areas exemption that I sought. I concede that technically the system would not work. But it would be fairly easy for me to amend Clause 98 in such a way that Schedule 8, as amended, still stands part of the Bill and, therefore, would have the desired effect.

The Minister gave us a small crumb of comfort by saying that he would look at some of the details. Perhaps he will give us a larger crumb of comfort by considering the comments made from all sides of the Committee and taking them into account at Report stage. That would enable us to proceed on an amicable basis.

Lord Lucas

I always pay great attention to what is said in this Chamber and this occasion will be no exception. I have not heard sufficient today to give me clear guidance as to the way forward that the noble Lord wishes us to take if we accept our proposal that there should be a grey area, and we are talking about how the low-rent tests should work. He may wish to make his own proposals on that matter on Report.

However, it is clear that we believe in the enfranchisement of leasehold but not the enfranchisement of people who are merely paying a rack rent. It is necessary to distinguish between the two in some way.

Lord Dubs

I do not wish to take up the time of the Committee. We have been debating these amendments for some time. The Minister will know the arguments as to what constitutes a rack rent, and why I do not accept the principle underlying his argument.

I wish to reflect on what has been said and read carefully the comments made so clearly in support of some of these amendments. I reserve the right to bring these issues back before the House on Report. I withdraw my opposition to the Question.

Clause 98 agreed to.

[Amendments Nos. 254D to 254K not moved.]

Schedule 8 agreed to.

Clause 99 [Collective enfranchisement: multiple freeholders]:

Lord Dubs moved Amendment No. 255:

Page 64, line 33, after ("enfranchisement)") insert—

1. ("(a) in subsection (1)(b), for "10" substitute "25", and
2. (b) ").

The noble Lord said: I hope after the length of time spent on previous amendments we can dispose of one or two subsequent amendments in less time.

The proposition is simple. At the moment for enfranchisement to be possible in a block of flats not more than 10 per cent. of the total floor space may be taken up by non-residential activities—usually shops on the ground floor of a block. The purpose of the amendment is to increase that to 25 per cent., thereby allowing more flats to be enfranchised.

The difficulty is that flats above shops, as one sees all too often when travelling in parts of our cities, through not being able to be enfranchised, frequently fall into a dilapidated state. The figure of 10 per cent. is pretty arbitrary. I fully accept that 25 per cent. is also an arbitrary figure; but it is a better arbitrary figure than 10 per cent. It would achieve the aim of allowing more people to be enfranchised. I cannot see any disadvantage in doing that. In the past, people who bought a flat above shops may not have been aware of the disadvantages that would follow in regard to the 10 per cent. formula. Twenty-five per cent. is a better arbitrary figure. I beg to move.

Lord Strabolgi

I support my noble friend's remarks. I shall speak very briefly. There is surely an added reason for supporting this measure. When the late Mr. Nicholas Ridley was Secretary of State for the Environment, he very much altered the rules in relation to changing domestic property into commercial property. A great deal of domestic property that had hitherto been reserved for that purpose and not changed to commercial use was allowed to be changed. Therefore there was a sort of infiltration of commercial property into what had been domestic. That is an added reason why the percentage should be increased in line with this new form of thinking.

5.15 p.m.

Lord Lucas

As the noble Lord, Lord Dubs, said, quite simply a balance has to be struck between the need to encourage commercial development and the rights of leaseholders`. It is our view that the 10 per cent. rule strikes the balance in the correct place. My right honourable friend the Secretary of State for the Environment spoke eloquently at Report stage in another place about the Government's strenuous efforts to protect and enhance the position of town centres. That is where most of the flats over shops will be found and why we do not want to do anything to harm the commercial element in these developments. We do not want to place any impediments in the way of further such developments.

It has been made clear to us that many institutional investors, on whom we depend for the continued health of our commercial property market, would have severe doubts about investing in developments where there is a risk of being enfranchised. That is not unreasonable. If you run a commercial development and you particularly want to keep the property in good repair, looking good and generally a credit to the neighbourhood so that shop people are keen to have shops underneath and people are keen to shop there, you want to be in control of what happens in the whole property. To try to manage a shop property where you do not have control over what happens above it could turn out to be a complete nightmare. The property would certainly be worth a great deal less money than if you had control over the whole block. So merely from a practical point of view we want to encourage people, when they are putting shops in town centres, to build residential property above them. We feel that that is healthy for town centres and results in healthy communities. Merely from that practical point of view we do not want to include anything in the Bill that would discourage that from happening.

I appreciate that this will be a disappointment to some leaseholders who will be denied enfranchisement, although it is important to realise that if there is a significant element of commercial development in a block, the cost of enfranchisement will be greatly increased and many leaseholders would not be able to afford the price. With the 25 per cent. figure that the noble Lord, Lord Dubs, uses one would expect the cost of enfranchisement to be at least doubled by the commercial property—the property would represent at least half the purchase price. We think that the potential group of enfranchisers who are effectively denied by the 10 per cent. limit is much smaller than first appears.

I also stress that we are not leaving these leaseholders entirely unprotected against the possibility of encountering unscrupulous landlords and bad management. They will still in most cases be able to seek lease extensions under the 1993 Act, and the rights and safeguards against unreasonable service charges, including the additional provisions contained in the Bill, will apply to them as to all long leaseholders. This includes the protection against forfeiture proceedings and access to the leasehold valuation tribunal to seek a determination about the reasonableness of service charges and the appointment of a manager. If the freeholder decides to sell the block, the requisite figure for the residential floor space becomes 50 per cent. In those circumstances many leaseholders will have the right to buy their property.

Lord Dubs

I see that the Minister is not to be persuaded. I want to reflect on what he has said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 99 agreed to.

Schedule 9 agreed to.

Clauses 100 to 105 agreed to.

Lord Lucas moved Amendment No. 255ZA: After Clause 105, insert the following new clause—