§ Second Reading debate resumed.
§ 4.10 p.m.
§ Lord Richard
My Lords, perhaps I may begin by declaring an interest as the chairman of LEASE, which, as some noble Lords may know, is an organisation funded by government grant to provide a much needed source of free legal advice in the leasehold sector, and to advise the Government. There is no doubt that there are major defects in residential leasehold tenure in England and Wales, most of them experienced by the leaseholder. LEASE is extremely busy. It deals with around 17,000 enquiries a year, 90 per cent of which are from leaseholders with a problem. It is on the basis of talking to some 15,000 leaseholders each year that LEASE feels confident that it understands leaseholders' problems sufficiently to talk to the Government about possible solutions.
Perhaps I may also declare a past interest. I was, for a time, a tenant under a long lease in a mansion flat in London, the landlord of which was one of the more notorious gentlemen, or companies, in that particular profession. I emerged from that experience scarred. To that extent, I have to say that my sympathy automatically tends to be on the side of the leaseholder, rather than on the side of the landlord. However, I shall do my best to keep that tendency under control, as I hope that your Lordships will appreciate during the course of the proceedings on the Bill.
I welcome the Bill. I must say at the outset that the Government have listened to advice. I believe that the present Bill represents a series of solutions that have been developed through a long period of consultation and with a consensus of the majority of players in the sector. There is no question but that this Bill will do much to improve the rights of the individual leaseholder and to revitalise common ownership. Of course, it is not perfect. Various other organisations will no doubt express themselves as being irritated with the imperfections. I am thinking particularly about CARL (the Campaign for the Abolition of Residential Leaseholds), which is an organisation that represents a substantial number of leaseholders and which actively participated in these consultations. It is not for me to speak for that organisation, but it takes the view that the Bill does not go far enough. Even if the Bill does not go far enough, is not perfect and omits a number of matters previously proposed by government and others, it provides a firm basis for discussion during the Committee and further stages of our deliberations.
Perhaps I may turn now to commonhold. The introduction of commonhold is greatly to be welcomed. For some reason, England and Wales remain the only countries where ownership of flats is confined to a leasehold interest. When they are fully integrated into the property market, these proposals will place the United Kingdom on a similar basis of common ownership, ownership of the building by the residents, as is presently operating in the rest of the world.
473 It would, perhaps, have been simpler for the Government to have reproduced, in its entirety, an existing and tested legislation; for example, the strata title legislation of New South Wales, or the American community-title law. However, we must accept that the present proposals have been devised specifically for the UK property market. We might also have wished that the Government had chosen to create an entirely new animal in the commonhold association, but I can fully appreciate the prudence of the chosen route of basing the proposals firmly upon existing company and property legislation and procedures.
The Bill, quite rightly, seeks to prevent the creation of new leases out of commonhold. But the present proposals restricting the terms of letting may perhaps be over-restrictive for a free market. However, we can look further at these in Committee. Similarly, the arrangements for conversion from an existing leaseholder-owned freehold to a commonhold, which require the consent of 100 per cent of the flat owners, have been criticised by many individuals and organisations and may also merit further examination during the further stages of the Bill.
The proposals for commonhold are, of course, primarily enabling and will be dependent upon a considerable raft of regulations and guidance. It is important for us to be given some fairly clear indications during the passage of the Bill of the sort of regulations that the Government propose. However, those are minor matters and should not detract from my really quite warm welcome for the introduction of commonhold into United Kingdom legislation.
I turn for a few moments to the right to manage. At present, it must be accepted that the leasehold tenant feels powerless: he owns most of the equity in the building, but has little or no say in how it is run or repaired. The Bill has acknowledged that very basic problem in setting out to provide a statutory right to manage—a right simply to take over the everyday management of the building, without having to prove any deficiency on the part of the landlord and, equally importantly, without having to part with any money for the freehold.
It is this question of actual administrative power that the right to manage provides. The procedures are not simple and can be criticised as intimidating for the average leaseholder. At a later stage, I shall certainly wish to raise the issue of qualification for the right being confined to a single building and not available to whole estates or houses. But this is a bold initiative and, once entered into, it will place the powers of management of the building into the leaseholders' hands without cost to them.
In this context, following the noble Lord, Lord Goodhart, one might also query the need for the presence of the landlord on the leaseholders' right to manage company. I cannot imagine anything that is more liable to create a certain amount of dissension as regards the way in which the leaseholders would wish to try to manage their particular block of flats. While listening to the examination of this point by the noble Lord, Lord Goodhart, it occurred to me that, although 474 it is now thought necessary for the landlord to play a part in the tenants' managing company, it has never really been thought quite so necessary to have a legal basis for tenants' representation in the landlord's managing company. I believe that this provision needs to be reconsidered.
The other major concern that I have about the proposals for the right to manage is the difficulty that I see in leaseholders attempting to manage in the face of defective leases with no simple route to their remedy. Many leases require the payment of service charges in advance, but others do not. It is not difficult to envisage the problems that are likely to be faced by the right-to-manage company in the situation of leases reserving payment in arrears. How will the company be able to fund major works without advance funding? That situation was addressed in the consultation paper in proposals for additional grounds for seeking from the court the variation of leases, effectively widening the very limited powers presently contained in the Landlord and Tenant Act 1987. These provisions are immensely important to effective management by the right-to-manage company, or a responsible landlord. I hope that the Government will be able to consider adding those clauses to the Bill.
I should like to say a few words on service charges. The Bill also recognises the need better to control the recharging of service and works costs to leaseholders in the widening of the 15-year-old definition of service charges, which will now include the costs of improvements and administrative charges. As a result, such charges must now be subject to the requirement for them to be reasonable and to be open to challenge by leaseholders at leasehold valuation tribunals. The proposed ability to dispute administration and legal costs, together with the proposal that ground rent shall not be recoverable unless demanded in a prescribed format, should effectively put a stop to the abuses suffered by leaseholders of houses in the North East and the Midlands, for example, facing spurious actions for forfeiture on the basis of a few days' delay in paying a £5 ground rent. Again, this is evidence that the Government have listened to complaints and are trying to devise specific remedies.
One of the areas of concern for leaseholders is in relation to simply knowing where their money is; that is, moneys they have paid in advance and service charges, which should he held in trust for them by the landlords.
The consultation paper contained proposed requirements for specific accounting procedures by landlords demanding separate, identifiable bank accounts for each property in management. While some landlords claim that those requirements are onerous, this is in fact the current practice of many of the better managing agents. It is a pity that the proposals have been omitted from the Bill. Such arrangements would achieve much in maintaining proper control and accessibility of landlords' handling of their leaseholders' funds and have the backing of ARMA, the professional body that represents managing agents. Again, this is an issue to which we can return at a later stage of the Bill.
475 In regard to enfranchisement, the Bill also, rightly, seeks to widen the availability of the statutory right for leaseholders of flats to buy their freeholds and to simplify drastically the Byzantine procedures of the 1993 Act. These measures have my full support. The removal of the residence test and the raising of the nonresidential threshold will bring a great many more buildings into eligibility. The lowering of the required proportion of participating leaseholders from two-thirds to a half will make enfranchisement easier, and that, combined with the proposed 80-year statutory limit on marriage value, will have the effect of making the purchase cheaper. Leaseholders of houses who have already extended their leases under the rules of the 1967 Act will welcome the new right both of freehold purchase and security of tenure. However, I would have preferred the eligibility tests and procedures for houses to be brought into line with those for flats. There seems little logic, for example, in the three separate residence criteria: no residence required for collective enfranchisement; no residence but two years' prior ownership for lease extension for flats, but three years' residence required for houses. It would be a pity to leave this anomaly in place in a Bill that is dedicated to simplifying and easing red tape in the leasehold sector.
These matters point to areas where there can be further refinement. No Bill is ever perfect at this stage of its passage, but the proposals collectively represent a sound and measured approach towards a radical reshaping of the leasehold sector and the greater empowerment of leaseholders. It comes from several years of intensive work, and a quite unprecedented level of input from the sector itself. It has been the subject of two consultation papers and the most exhaustive discussions. There is no doubt that the proposals represent consensus solutions. They should have the full support of all sides. The Government deserve our congratulations on bringing forward the proposals.
§ 4.24 p.m.
§ Baroness Gardner of Parkes
My Lords, I welcome this long awaited Bill. I begin by declaring an interest. as I own a leasehold property which I bought for the day when I can no longer manage the stairs. I also register an interest as an Australian commonholder with a first-hand knowledge of the New South Wales system.
I believe that commonhold is a much better system than leasehold. I have always found the restrictions on leasehold extremely irritating.
In New South Wales, where I come from and about which I speak, there are two different commonhold titles: company title and strata title. In each case, the unit-holders are the freeholders of the whole property, including the land, and each unit is a shareholder in the body corporate, which is called "the commonhold association" in the Bill.
The difference between company title and strata title is that with a company title, in order to sell on your unit, you have to obtain the agreement of everyone else 476 in the block of flats before you can accept the person who wants to buy your property. I was interested to read in this morning's newspaper that Bill Clinton has been facing this problem in New York. Under strata title, the property is absolutely yours, and you can do with it what you wish provided you are contributing, as are all others in the block, to the amount paid for upkeep and maintenance. For this reason, strata title is very much more popular, and company title is dying out. The number of people wishing to buy company title is very limited. If you do buy company title and then wish to let the property, the other residents in the block may say that they do not want a sub-tenant.
I strongly oppose the proposed restriction on lettings. It is extraordinary that there should be discussion about the danger of creating a new leasehold system when the failure of the Bill to state that all new constructions should now be commonhold is tantamount to continuing the leasehold system. The Government should be aiming for a position whereby all new constructions of residential unit accommodation are commonhold from now on. I realise that big property interests will be opposed to that proposal. They wish to hold on to the land and to have the right to harvest further profit from it. That is the real strength behind leasehold, if you happen to be the owner. There is no strength behind leasehold if you are the owner of a unit or a flat in a leasehold property.
It is absolutely plain that owners want a completely unrestricted strata title. If someone is going abroad, why should they not be allowed to let their property long term? The restriction that one can only let for seven years is complicated and nonsensical. I asked for a legal person's view as to what that meant, and that person said, "It looks as though you could then let it again for a further seven years to the same person". There does not seem to be any merit in that restriction.
As I said, I am the owner of a leasehold property, but, had it been available, I would definitely have bought commonhold—although my legs are lasting better than I expected, and I still hope to hang out a few more years before I need to move into a one-level flat. I might well have been caught in the seven-year plan.
Everyone supports the principle of a body corporate, or the commonhold association, but very few are willing to come forward and do the work. They rely on volunteers from the unit-holders to form the committee that will do the work. Most of the committees in fact appoint a managing agent, but there is still work to be done in checking the work that the managing agent does. Even the meetings of the unit-holders are not well attended unless an item of significant interest to everyone is to be discussed. I recall an application from the occupiers of west-facing units for the cost of sun blinds on their balconies to be met from the general fund. As the building had four corners and four units per floor, only one was west-facing, and 75 per cent of the building faced in other directions. It was a very well attended meeting. All of those who attended made it clear that they had no objection to the 25 per cent west-facing flats having blinds—but at their own expense. Americans say that 477 a sure way of getting attendance at such a meeting is to have as the first item on the agenda plans to concrete over the swimming pool.
Commonhold also applies to commercial premises; for example, professional offices, something that is common in Australia. I am pleased to see that the wider options are included in the Bill.
I do not completely understand the abolition of the residence test in regard to leasehold because I do not know whether it means that the company could have the lease for two years and qualify to buy. I have reservations about the abolition of the residence test, even though it would go against my personal interests because I would have to wait until I had occupied my flat for some time before I could extend the lease. It is a good thing to restrict the right to a longer lease to residents. I have always approved of the fact that in Australia a foreign owner does not automatically have the right to buy anything, anywhere. Anyone has the right to buy a new building, but special permission is required to be able to buy units occupied by Australians. This has helped to keep some property values down and has enabled people to continue to live in them.
I want to respond to some of the points raised in today's debate. The noble and learned Lord the Lord Chancellor said that current leasehold arrangements are unsatisfactory and he discussed the many great merits of commonhold arrangements. If he genuinely believes that they have such merits—I believe that he does—why did he not argue that new constructions should have only commonhold arrangements? I cannot put together his comments on the unsatisfactory nature of leasehold arrangements with those about the aim of continuing them. His statement that the Bill will put on course reform for this century suggests that we should aim at making commonhold the norm. I am aware that professional business interests will resist that; the Government may be concerned about that. When people have the option of buying commonhold, they will not want to return to leasehold again, especially if unrestricted commonhold is available without the lease restriction, which is the biggest drawback in this context. If the Bill will put on course reform for this century, we should support commonhold much more strongly.
My noble friend Lord Selsdon described the situation clearly. He said that the proposal presented no problems for new buildings, although he went on to explain how the whole system of leasehold property is a matter of money. That is exactly right.
I agree with some of the comments of the noble Lord, Lord Goodhart, but not with others. For example, he was not opposed to letting restrictions. I am. He said that there should be no marriage value when a lease was extended. I agree. He also said that very few new houses involved leasehold arrangements. Is not that in itself a sign that developers know that it pays more to build freehold, because that is what people want? The moment that people see blocks for sale with commonhold arrangements they are prepared to pay more because it is their property, their home and their future.
478 The noble Lord, Lord Richard, made some interesting comments on widening the powers under the Landlord and Tenant Acts. I want those powers to be widened in relation to leasehold blocks that do not have a reserve fund or a sinking fund—whichever phrase one cares to use. There should be a provision that allows the courts to alter leases by writing; in the right to provide for a sinking fund or reserve fund. People often find that they are faced with an enormous levy because no one has thought far enough ahead about the major repairs that will arise in a block. Leaseholders who do not promptly pay their service charges should certainly be immediately liable for interest. It is very unfair to other leaseholders if people simply do not pay up. Some people get away with making late or delayed payments year after year. The noble and learned Lord the Lord Chancellor rightly said that we do not want to make forfeiture easy, but neither do we want to allow people to get away with not meeting their obligations. The point about the sinking fund is highly important.
When new commonhold blocks are built in Australia, the nature of the sinking fund is clearly set out. People make contributions to it as they go along. When major expenses come up unexpectedly, funds are available to meet them. When one sells one's unit, people will always ask, "What is the basis of the sinking fund?". If it is in good credit, that helps one to sell one's property. One cannot reclaim the money, but the state of the sinking fund is taken into account during the sale of a property. People who make contributions have not lost their money because there is an assurance that funds are available for necessary work.
The greatest problem with commonhold arrangements, which I hope will be increasingly available, is about what happens when a building goes past the point of being any use. It may have been repaired time and again, but modern buildings have a limited life of perhaps 50 or 100 years—who knows? What are we doing in that context? Are we creating the slums of the future? No country has come up with an answer to the problem of gradually setting aside enough funds to rebuild. The problem with everyone owning a small piece of a property, which may be beautiful to behold, is that the day will come when it ends up a derelict slum unless someone buys out all the other owners and gradually acquires the property to rebuild it.
I welcome the Bill and shall take part in its passage through the House.
§ 4.35 p.m.
§ Lord Hodgson of Astley Abbotts
My Lords, I do not have specific expertise in relation to the Bill but I have some relevant experience. Some years ago, I was a leaseholder in a small block of flats, and we tried to enfranchise but failed to do so.
When I hear lawyers talking about Acts of Parliament and detailed sections, I become cautious because I am no lawyer. I talk from the point of view of someone who has been at the sharp end of 479 enfranchisement. I am astonished by the amount of correspondence I have received on the Bill. Why might that be? Perhaps because the Bill contains the kernel of a very good idea. However, during the process of consideration and consultation, it has expanded like an octopus to cover increasing numbers of areas, and it has piled complexity on complexity. I inform the Minister who will wind up that it reminds me of the Political Parties, Elections and Referendums Bill, which contained the kernel of a splendid idea but which became extremely complex.
I shall give a brief example. I have made clear my interest in enfranchisement. I therefore sought to chase that issue through the legislation. There was much criticism of the questionnaire and in particular of question QENF10, which sought to elaborate the amount of information to be prepared before an application for enfranchisement could take place. I chased the matter through the consultation paper and draft Bill, where it appeared in Clause 94 on page 42. However, in the Bill that is before your Lordships, it appears in Clause 119 on pages 56 and 57. Between the draft Bill and that which appears before your Lordships, the legislation has expanded dramatically. That has made numerous people, who are not experts but who are leaseholders, nervous about what has been added and about how effective the consultation process was. They are wondering whether the sledge is already half way down the mountain.
My experience of being a leaseholder and of trying to enfranchise was dismal. We were, within the block of flats, the bunch of usual suspects: one elderly lady of a nervous disposition, one gentleman who lived in Hong Kong and who sub-let his flat, a barrister who lived in Dorset and who used his flat as a pied-à-terre and two girls who lived on the top floor. Their father owned the flat and the girls used it when they first came to London to work. Against those serried ranks in the blue corner was, in the red corner, an obdurate landlord who was determined to protect his nest egg, which I believe he had passed to his children. He sought to play out the process and to knock every ball into the long grass. When I read the Bill's provisions, I have my real-life experience in mind.
I an anxious to hear the Minister's responses to a couple of broad issues, the first of which involves enfranchisement. As I understand it, people who do not initially agree to participate in enfranchisement can subsequently join in. There is no penalty for sitting out the first round. That is very unfair on those who seek to do the not inconsiderable work of getting an enfranchisement process in progress. In my case, my fellow tenant in Hong Kong was happy to benefit from the work that we did in enfranchising, but he was not prepared to participate in any way or to pay any costs.
As a subsequent point, the information required before one begins the enfranchisement process is lengthy, as per Clause 119. However, subsection (3) refers to such other information as the Minister may require in the future, or words to that effect. I believe that many parts of the Bill provide something of a blank cheque. Several regulations require detail to be 480 filled in. Although many of the principles are fine, as the legislation progresses through the House over the next few weeks, if the details are wrong we shall end up with a Bill which is far from the one which we thought we were approving.
Secondly, I agree that right-to-manage schemes are a good idea. However, I am not clear what they offer over and above enfranchisement schemes—other than to tenants who do not wish to own—except in one important respect. Surely, right-to-manage schemes will gradually allow a shift of power and value to the landlord. Therefore, we must expect that landlords will push those schemes and discourage enfranchisement, which in my view offers better value for the tenant in the long run.
I also share the view put forward by the noble Lords, Lord Goodhart and Lord Richard, with regard to landlords being members of the right-to-manage company. There will be an inherent conflict of interest and inevitable tensions will arise in the relationship. I accept that a landlord has the right to know of decisions by the RTM company. However, if he is to participate in those discussions and, above all, if he is to vote on them, I believe that that will be a recipe for deadlock.
Finally, I agree with the noble and learned Lord the Lord Chancellor that commonhold is probably not controversial as a concept. However, I wonder how far it will be used. I believe that a situation will arise in which developers will find it more advantageous to retain the leasehold concept. After all, that is part of the background to the reasons for bringing forward this Bill. Although market forces may bring commonhold rights, I am not so sure about that and I do not have the confidence that perhaps the noble Lord, Lord Goodhart, has.
Clearly, we are leaving behind a group of people who will continue to hold their property by means of a long leasehold. They will have to live with an outdated and discredited type of tenure and, far from helping those people, as we plan to do in the Bill, we may make their position worse. I believe that we need to look again at whether better and easier ways exist to enable people to transfer from current long leasehold tenure to commonhold arrangements.
The weakness of leaseholders lies in the fact that they lack information, and I see nothing in the Bill which attempts to balance the availability of information. Leaseholders will not be aware of the ticking clock and that at 90 years enfranchisement carries no marriage value. Often leaseholders are not aware that mortgage companies make it more difficult to obtain finance on an 80-year leasehold property. I believe that we need to spend more time in endeavouring to balance expertise.
Again, following on from what the noble Lord, Lord Goodhart said, page 118 of the consultation paper refers to the sensible discussion which has taken place with regard to the form of accounts which should be provided to leaseholders. However, that idea seems to have been dropped, or perhaps it is hidden in the schedule to the Bill and I have been unable to pick it up.
481 I understand the desire and the need to deal with the problems of long leaseholders and I understand the need to strike a balance between the parties involved. However, the Bill appears to be highly complex and, indeed, as we follow it through its consultation phase, appears to increase in complexity. Moreover, judging from the correspondence which I have received, the Bill appears to be unacceptable to a large number of the people whom it purports to help. Therefore, I look forward to hearing the Minister's reply.
§ 4.44 p.m.
§ Lord Lea of Crondall
My Lords, I very much welcome the main thrust of this long-awaited Bill, the rationale of which has been set out comprehensively by my noble and learned friend the Lord Chancellor. At the start, I declare an interest in a London flat which has a 99-year lease with approximately 75 years to run. I shall illustrate some of the issues in the Bill by reference to my direct knowledge arising from that property, and I trust that that is in order. My experience is similar to that of the noble Lord, Lord Hodgson.
Great hopes are being placed in the Bill by residents' associations such as mine—that is (this is an important point) in blocks of flats which have shops and restaurants below. I am anxious that their hopes will not prove to be unfounded.
Having talked to my fellow residents and, indeed, to national representative bodies, it has become apparent to me that a serious gap has been revealed in what the Bill intends to achieve for a significant sector of leaseholders. So far, that issue has not been addressed in this afternoon's debate. Therefore, I am sorry to have to bowl some fairly fast balls at my noble friend Lord Bach, whom I warmly welcome to his first innings at the Dispatch Box. But I am sure that he will find a way to respond in a constructive manner. Those points can be pursued in Committee, but it may be of assistance to the House, as well as to Ministers, if I spell them out specifically today.
My first major question arises from the fact that the Bill is drafted in such a way that the provisions refer to a whole block of flats and to any shops or other commercial premises below. That point appears in Clause 69. Perhaps my noble friend would check whether I am right about that and correct me if I am wrong. Yet, in many thousands of cases the obligation to create a body to cover both residential and commercial premises is not a viable way of dealing with the issue, not least as we run into the 25 per cent rule, which I shall address in a few moments. Of course, there will be common parts and questions relating to the drains, and so on. However, a vast area of interest concerning the residents is quite separate from that relating to the shops and, even more so, the restaurants.
Why do we need to insist that Boots the Chemists in the shop below must have the same managing agent as the residents? In my own block of 22 flats with shops underneath, over the past 25 or 30 years the managing 482 agent for the residential parts has never been the managing agent for the shops or restaurants. which, as I said, bring their own separate array of problems.
I am of course aware that Ministers must balance a number of interests in dealing with legislation on this subject. However, although I believe that chartered surveyors have issued a statement arguing the opposite point of view, I understand that the Association of Residential Managing Agents and, in large degree, the British Property Federation believe that the philosophy of what I shall dub "the whole block and nothing but the block" is rather rigid. Therefore. in such cases cannot there be an umbrella concept and, under that, separation between the right of management of the residential and commercial parts, as I believe has been supported by the Leasehold Advisory Service?
Of course, the Minister will refer to the new 25 per cent rule. That concerns the proportion of the floor area which is not residential and above which the key provisions of the Bill effectively will not apply. According to my discussions, two problems arise in that respect. First, although it may sound most reasonable—I assume that it will be represented as such—the 25 per cent figure is still too low if the interpretation which I now understand is being placed on it is correct.
Let us take as an example a typical five-storey block—that is, four storeys above shops on the ground floor. There is often a basement which is used for a variety of purposes; for example, storage associated with a commercial premises. If the basement is counted with the commercial premises, that area then adds up to two floors out of six—in other words. one-third or 33 per cent—thus disqualifying the residents. So the initial arithmetic in the example I cited we had assumed gave a commercial share of 20 per cent—one out of five—but the interpretation of the Bill, on the contrary, could make it 33 per cent. Am I correct in that assumption? Then there is the question of why the stairs, which are purely for residents, do not by the same token count as residential.
The very disappointing net result of all this—I stand to be corrected but I am referring here to Schedule 6 (1)(4), taken in conjunction with paragraph 1(2) of the schedule (page 78)—is that in my calculation up to half the leasehold flats in the country will not only be on the wrong side of the cut-off point but, given that the 25 per cent rule in effect governs the Bill as a whole, they get no easement of their problems at all, not just on enfranchisement but in relation also to many other aspects of management.
If that is so, these tens of thousands of residents—or it may even be more—will on these key aspects be in the same position as they are now, with no progress towards what they thought was coming their way after all these years. I assume that improvements in the eligibility rules, for example, will be subsumed in the 25 per cent test.
This Bill contains a number of very important reforms, and hundreds of thousands of people will benefit. I congratulate the Government on the 483 carefully worked out arrangements for those affected, but do Ministers agree with my arithmetic covering the large part of the field which is not affected?
In the case I have described, the options appear to be as follows. First, we could further increase the percentage hurdle on commercial premises which preclude RTM and RTE. Secondly, we could revisit the schedule as regards the definition of "common parts" so that the stairs and the basement are counted in a similar way. Thirdly, we could allow residents to manage the residential parts of the property separately, albeit under an umbrella arrangement.
I turn now to my other main point concerning managing agents. Given the circumstances I have described, I attach great importance to the improvement of the lot of leaseholders who, in effect, will continue with the present system but who need much more protection, whether they have decided not to go down the route of enfranchisement or direct responsibility for management or, as I have explained, are actually ruled out of managing their residential area. Unless the Bill is amended, a considerable number of people will be in this category.
May I therefore offer one modest amelioration for those many blocks which will otherwise receive very limited benefit from this legislation as drafted? My proposal concerns the rights and the credibility of the residents' association and its management company. The present law on consultation on the appointment of the managing agent seems to me to mean virtually nothing. We must provide for the proper recognition, with the agreement of the residents' association, of some basic issues, beginning with the appointment of the managing agent, who is of course the point of contact with the residents.
What in practical terms do I mean by that? I mean that the Act should provide for the appointment or dismissal of the managing agent in agreement with the residents' association, no doubt applying the 50 per cent membership rule as in other sections of the Bill. This would in effect amend the 1987 Landlord and Tenant Act.
This is a key aspect in building the confidence of leaseholders. That confidence is necessary, given the complexities of accountancy and other aspects of the present system. This reform would also help the underlying weakness of many such bodies. It is an issue which this debate neglects at our peril. I was pleased to hear my noble friend Lord Richard refer to this. The noble Lord, Lord Hodgson, also spelt out certain practical difficulties.
Most such bodies are actually run on a wing and a prayer. They need independent advice, legal as well as practical, from the managing agent just as much as the freeholder—who is normally, by definition, a much bigger organisation—with all the resources that this implies. I am not talking about occasional advice from advisory bodies, excellent though they are, but about an ongoing relationship based on trust. Perhaps we should accept the concept of the freeholder being entitled to attend statutory meetings. I have been 484 thinking about what has been said on this. Perhaps we could invent a new concept, such as separating an agenda into Part A and Part B.
I am not coming from a position of being a general critic of leaseholding. It is totally unrealistic to talk of abolishing it overnight without damaging somebody's equity. In any event, the underlying reality in blocks of flats is that at the end of the day the relationship between an individual flat and the concept of collective legal responsibility is always there. The commonhold concept will prove its worth over the medium term. Moreover, I am very impressed by the complex, yet essential, tests over the two key instruments of reformed leasehold: the right-to-manage company (RTM) and the right-to-enfranchise company (RTE).
I therefore hope that the Government will agree to look at the small print on this question for the Committee stage. I shall give a note to the Minister summarising where specific amendments would probably meet these points, perhaps as a halfway house. I ask my noble friend not to close the door prematurely on the points I have raised. They could help to prevent many people being disappointed, and the vast majority of those affected will recognise the tremendous job the Government have done in getting as far as this. I very much look forward to commending the final result.
§ 4.57 p.m.
§ Baroness Maddock
My Lords, I must first apologise for not being in my place at the beginning of the proceedings this afternoon. I regret to say that normal service on our railways has yet to be resumed. Perhaps I may also declare an interest in that I am a vice-president of the National Housing Federation, and later I shall raise some of that association's concerns.
This is, as others have said, a long-awaited piece of legislation which has received mixed reviews but which is regarded as quite good on the whole. To some extent of course it depends on where you are coming from, and we have heard that already this afternoon. If you are a resident you have a different view from those involved in the property industry in its wider sense and also perhaps from those in the legal profession—those who now have to deal with the complexity of the law surrounding leasehold tenure.
Many who live in leasehold properties are disappointed that the legislation does not totally replace leasehold with commonhold, as we have heard already this afternoon. In his opening comments the noble and learned Lord the Lord Chancellor said that people were expecting rather too much. I suspect that that is probably due to some of the extravagant language used in respect of leasehold, not only during the passage of the last Housing Bill in 1996, in which I took part, but also in the Labour Party election manifesto. More recently, the Minister of State concerned with the environment, Hilary Armstrong, stated in 1998 in the foreword to the Green Paper that the leasehold system was fundamentally flawed and not fit for the twentieth century, let alone the twenty-first.
485 In addition, those who live in leasehold properties are concerned that the proposals coming forward will be subjected to the very commplicated and onerous burdens of company law, which they believe was designed for something rather different. Procedures are cumbersome, and penalties are rather heavy if you do not stick to the letter of the law. There is also the view held by those living in leasehold properties that the Government have not really taken the opportunity to implement radical, root-and-branch reform and are merely adding to the already bureaucratic system of laws and regulation. We have heard today that there will be much more regulation with the Bill. That view is shared by the Law Society, which believes that further legislation which does not consolidate that which has gone before will merely add to the complex and confusing nature of the issue. That will be a great disadvantage to consumers, which is one of my main interests in the matter.
Those in property in its wider sense have different viewpoints from those who perhaps live in leasehold properties. On the whole, they welcome the thrust of the Bill. However, they have concerns, which I share, and which have been alluded to today. The Government are keen that new build will take on commonh old tenure. However, it would appear that volume housebuilders have not given much thought to that form of tenure. At a British Property Federation seminar in October last year, Dr Stuart Hill, who was at that time Chief Executive of the Housebuilders' Federation, described commonhold as the dark secret of the housebuilding industry, commenting that few knew about it and those that did were not saying anything about it.
That carries over to institutional investors. There is anecdotal evidence that they are reluctant to consider investing in commonhold developments. That may be because that is not a tried and tested system. I look forward to hearing from the Minister when he winds up how the Government propose to address those important issues.
I turn to leasehold property. Both the British Property Federation and the Campaign for the Abolition of Residential Leaseholds (CARL) are concerned about the quality of management. Having been involved in all areas of housing for a number of years, I, too, am concerned about that issue, which has been mentioned by a number of noble Lords. There appears to be no requirement that whoever takes over the management should be competent to do so, nor any requirement for any form of quality control. As the Bill progresses I hope that at the very least it will contain explicit reference to the fact that those who will exercise the right to manage will have to show that they acknowledge formally the types of responsibilities, obligations and standards one would expect in that role.
It has been argued that there has never been a requirement on a landlord to demonstrate competence to manage. However, I believe that there is a desire in all forms of tenure these days to improve the quality of management and to have a decent standard to protect tenants in whatever tenure. I hope that during the 486 passage of the Bill the Government will take that on board. Reference has been made today to the fact that in management not all landlords are of the very best. It is quite easy for incompetent and corrupt landlords to become managing agents of companies and to defraud leaseholders.
I turn to another issue, on which my noble friend Lord Goodhart dwelt at some length; that is, leasehold valuation tribunals. I was responsible for leading on the last Housing Bill in another place for my own party, the Liberal Democrats. I know how strongly people felt at the time about the issue. I was able to persuade the Government of the day of its importance and to amend the Bill. Despite that, recent research by Sheffield Hallam University for the Department of the Environment, Transport and the Regions shows that cases take between 10 and 12 months to resolve. Many people who took part in the survey and who were interviewed felt that tribunals were a much better forum than the county court for insurance and service charge disputes, a point raised earlier by my noble friend. I strongly support him in his view about the importance of legal aid. We hope that the Government will consider that important point, which has been raised by other agencies.
Finally, I turn to the position of registered social landlords, which has not yet been raised today. The National Housing Federation, which speaks for registered social landlords, has one or two concerns which I hope to be able to raise during the passage of the Bill. Perhaps I may touch briefly on one or two. The federation is particularly concerned about membership of right to manage companies in Clauses 71 and 72.
As the Bill is now drafted, assured tenants are not permitted to be members of right to manage companies. It is suggested that landlords should be enabled to vote on behalf of assured tenants. Otherwise, assured tenants will effectively be disenfranchised and their needs within a block will neither be recognised nor given sufficient weight when decisions about the future management and the maintenance of the block are made. I hope that the Government will consider simplifying the voting arrangements for right to manage companies in the legislation. I shall bring forward suggestions at a later date.
I turn to enfranchisement of houses, the low rent test, which appears in Clause 135. Perhaps I may give a little background. The Leasehold Reform Act 1967 empowered leaseholders to acquire their freeholds, which was called enfranchisement, provided they fulfilled a number of qualifications, one of which was the low rent test under which the annual rent, excluding the service charge, should not exceed two-thirds of the rateable value.
The low rent rest was devised because it was necessary to find a way to distinguish the type of tenancy, normally known as the lease—which typically had a low ground rent—from other types of tenancy which had a substantial weekly or monthly rent. Although leases granted by housing associations 487 were excluded from that legislation, it became clear that many had slipped through the net. I refer, for example, to those which were originally granted by another body, such as a local authority. The Housing Act 1996 sought to rectify the situation but failed to do so totally effectively. As a result, a particular group of people, those in shared ownership of houses, may currently acquire their freeholds by enfranchisement. However, that effectively means that registered social landlords can be legally obliged to sell publicly-funded housing for potentially very small sums in a way which we believe was never contemplated by Parliament.
I hope that the Government will consider amending the clause or perhaps inserting a new clause to ensure that shared ownership houses can only be acquired by shared owners through the process of "staircasing"; that is, gradually increasing one's interest in a property to 100 per cent as one's situation improves.
Like other noble Lords who have spoken, I look forward to the progress of the Bill. I hope that we will be able to amend it in the ways mentioned today. Having said that, I know how difficult it must have been to tackle the issue. I am pleased that the Government have consulted as widely as they have. I hope that that consultation will continue through the passage of the Bill so that some of the matters which concern all noble Lords here today can be resolved.
§ 5.9 p.m.
§ Baroness Hanham
My Lords, before turning to the provisions of the Bill, perhaps your Lordships will indulge me in what I was about to describe as a small "trot" but perhaps I should say "canter" down memory lane to put the Bill into context.
It is some 20 years since I was chairman of the housing committee in the Royal Borough of Kensington and Chelsea, a council of which I am still a member. At that time I endeavoured to find a legal process whereby the council could compulsorily purchase the freehold of a block of flats to sell on to the lessees.
It was at the time when many owners of blocks of flats—usually the respected insurance companies which had benevolently held and managed the freehold of these premises for years—saw the opportunity of a rising market to divest themselves of these investments.
As I am sure your Lordships will recall, the property market in the late 1970s was buoyant and increasingly valuable. The freeholds were often bought by companies of overseas investors who, in many cases, as soon as they had made the purchase became invisible to the residents as well as to the authorities in this country. Often the holding companies were registered abroad and no managing agents were appointed. Repairs went undone or were carried out at exorbitant costs; service charges rose dramatically and were unchallenged; and access to familiar and helpful management vanished. In many places, a kind of property anarchy ensued.
488 I recall that two of Kensington's previous MPs, Sir Brandon Rhys Williams and Dudley Fishburn, who will be known to many of your Lordships, were energetic in their promotion of and support for legislation to resolve the problem relating to those who were not the owners of the land on which their homes stood. Like me, they recognised that within this context there were freeholders and landlords who strove to maintain their property and that the legislative efforts to resolve the problems described above threatened their investments and land as well as that of others less motivated.
That is the history of the matter. Now we have a further attempt to redress some of the inherent problems associated with the dichotomy between freehold and leasehold and/or those who rent their homes.
The introduction of commonhold was predicated in the 1996 draft Bill of the previous government. The provisions in this Government's version—which followed a manifesto commitment—nearly five years later have been given only a very half-hearted cheer from those who have been urging change on successive governments: those who represent long leaseholders, in particular the Leasehold Enfranchisement Association and the Campaign for the Abolition of Residential Leaseholds, both of whose briefings I have read and considered.
As constructed, it is fair to say that the Government's proposals are unlikely to result in many successful commonhold associations being formed from among those who currently hold long leaseholds. However, as has already been said, there may be more success where new developments are introduced with commonhold from the outset.
The main stumbling block to success lies in the requirement for there to be a 100 per cent sign-up by leaseholders to convert to commonhold. The possibility of any putative association being able to identify the owners of the entirety of the premises involved, particularly in a large block of flats, is improbable. Many such flats are owned by those who work abroad and let the premises to others on a short-term basis. Some are owned by the freeholders of the block. Some are registered to investment companies with no identified responsible person. Therefore, any group trying to form a commonhold association would struggle to identify the salient parties and in all probability would be frustrated in their efforts to do so. Under those provisions, just one objection would render the whole process inoperable.
Should any association be formed, it would be unlikely to be able to operate as, under Clause 35(3), the same requirement for 100 per cent agreement presents itself. The question here of course is: 100 per cent of what? Is it 100 per cent of owners or 100 per cent of those voting? That situation must be clarified. If the Government are serious in their intention to introduce commonhold, they must reduce the qualifying percentage to a lower figure, otherwise the concept will be just that; an idea only.
489 Concern is also being expressed about the requirement for all commonhold associations to be run under the complicated regime of a company limited by guarantee rather than under specially constructed provisions such as the American or Australian models, which my noble friend Lady Gardner clearly outlined today.
I turn briefly to other aspects of the Bill. The first is the whole question of further enfranchisement of leasehold properties with diminishing leases. There are concerns that, once again, the Government's proposals will be unworkable, particularly because in many parts of the country the estimates of the marriage value of the combined leasehold and freehold values will be so high as to render the passing of the property to the existing leaseholders, other than in the most exceptional circumstances, unobtainable.
Leaseholders whom I know in such situations feel very let down by the current proposals and it may be necessary to consider how to make those arrangements somewhat less loaded against those who want to enfranchise. I hope that the Government will do that. The system is now well established in most areas of the leasehold structure. However, it is still unobtainable to those who did not qualify under previous enfranchisement legislation and who have been looking to this Bill to provide an answer for them.
Finally, I turn to the right to manage. Here again, we have the necessity for those who want to avail themselves of this opportunity being able to do so only by the cumbersome requirement to form a company limited by guarantee. The added requirement that the owner or landlord of the property should be a member of that company seems to defeat the objective of enabling the tenants to manage their premises in a way which is satisfactory to them.
The requirement is particularly strange in that the most likely reason for tenants and leaseholders going to the trouble to take over the management is dissatisfaction with the current arrangements, which are almost inevitably provided by or on behalf of the owner. There should be much more flexibility in this provision so that the freeholder or owner may be a member of the company, but does not have to be. In addition, there needs to be much greater clarity on the variation of leases to prevent bad leases being handed to the new company and on the detailed management of information which is handed over from the landlords to the new management company before it formally takes over.
Curiously, as I understand it tenants of both local authorities and housing associations are excluded from the provisions of right to manage. In these days, when there is considerable interest by tenants in managing their own estates and experience in doing so, it seems strange to prevent those whose local authority may be less enlightened than others having the opportunity to do so.
This Bill has been a long time coming. It would be good if by the time it leaves this House some of the concerns that I and others have raised have been dealt with satisfactorily. I hope to play a part in persuading 490 the Government of the merits of considering changes along the lines I have outlined so that in the end we have a thoroughly good and satisfactory Bill.
§ 5.19 p.m.
§ Lord Williams of Elvel
My Lords, first, I want to declare an interest. Together with my wife. I am the holder of two long leases in London and have been since 1970. I point out to noble Lords—I do not declare an interest—that I was involved in the debates that took place before the 1993 Act during which time many of the problems which have emerged this afternoon were also discussed.
As the noble Baroness, Lady Hanham, pointed out, as a concept commonhold has been around for some time. I am glad that this Bill was a manifesto commitment by my party and that my noble and learned friend the Lord Chancellor has seen fit to introduce it this afternoon. Therefore, in general I support it and very much hope that it will become law. However, when these matters were considered at the time of the previous government, the whole question of human rights was not really taken on board. It is right to acknowledge at the outset that human rights play a large part in this legislation.
This Bill is only one step in the abolition of leasehold. I agree with those who say that leasehold as a form of tenure is out of date. However, one cannot simply abolish it outright. As I argued from the Benches on which the noble Lord, Lord Kingsland, now sits, leasehold is a contract between two parties. Either one buys out the contract in one form or another or one lives with it. When I sat on the Benches opposite I was prepared to accept that imperative because leasehold cannot simply be abolished. Having said that, the Government have taken a number of measures to move towards the phasing out of leasehold.
When I sat on the Bench now occupied by the noble Lord, Lord Kingsland, I emphasised that this was not simply a London problem; it goes much wider. Many people who live outside Belgravia have difficulty with leaseholds, so this is not a problem confined to London.
I turn to commonhold. Apart from new build, there is a question as to who can apply for commonhold. Under the Bill, the freeholder can apply. The reason I intervened during the speech of the noble Lord, Lord Selsdon, for which I apologise, is that the freehold must be owned before an application can be made for commonhold; if not, one must buy the freehold. Unless my noble friend Lord Bach advises me to the contrary, I believe that enfranchisement is a prerequisite for an application for commonhold. Leaseholders who do not have ownership interest in the freehold cannot apply for commonhold. That may be of little consequence. Noble Lords are right to say that the 100 per cent qualification for commonhold is perhaps too much. I do not see how anyone can get 100 per cent of leasehold tenants to agree to something. In my 30 years' experience it is very difficult to get leaseholders to agree to anything at all.
491 I suggest to the Government that under the regulations the courts should be allowed to dispense with the requirement for total consent and accept qualified unanimity; in other words, where people are absent or cannot otherwise vote, the courts may grant a dispensation.
This is really an enabling piece of legislation which is not yet in final form. I understand why the Government do not want to present this legislation in its final form. The noble Baroness, Lady Gardner of Parkes, will agree that when one begins on a process of this kind one must amend it from time to time. One does not want to have to return to this House and the other place for primary legislation to ensure that it is right. I have no objection to proposals to make regulations, but when my noble friend responds I should like him to provide some kind of timetable as to when those measures will be placed before your Lordships' House in the form of a negative resolution or whatever. Therefore, commonhold is welcome but it is only a first shot.
The right to manage without having to prove incompetence on the part of the landlord or agent is very important. During the passage of the 1993 Act, I argued that case from the Benches opposite. I welcome that proposal. However, noble Lords have raised one or two problems. On what basis can an RTM company assume the management of a property unless it has full information before it begins? It will cost a great deal of money because lawyers, surveyors and all kinds of people will be involved. There must be full information before an RTM company begins the process of requesting the right to manage.
I hope that my noble friend Lord Bach will take a close interest in my next point because I may explore it in Committee. I argue strongly for the regulation of managing agents. There are too many cowboys around. If there is to be a right to manage the Government should provide some means to regulate those who act as agents for RTM companies to ensure that they are professionally qualified and are able to look after the properties. I hope that my noble friend will respond to that point when he winds up.
One turns to the variation of leases. Nobody knows the number of defective leases which do not allow proper management; for example, pre-payments on budgets. Therefore, an RTM company which takes over the management of premises will be required to fund the budget and then claim what it believes is appropriate. As I understand it, that provision was in the first draft of the Bill, and I believe that it is appropriate to insert it in this Bill.
As to enfranchisement, I believe it is right that the balance should be 50 per cent and not a higher figure. As to the residency test, I have some sympathy with the point made by the noble Lord, Lord Goodhart. I would have thought that some adjustment might be made. It is no good saying that anyone can buy a lease and suddenly enfranchise without any residence test. I would not be worried if the period was, say, three months. However, I am advised that investors might 492 buy leases and then enfranchise on the basis of 50 per cent, possibly against other investors. I should like my noble friend to respond to that particular point.
In our discussions regarding the 1993 Act, marriage values gave us enormous problems. They do still.
I welcome the provision that there should be a reduction to zero on an 80-year lease. On the other hand, someone who has a lease which has run for 79 years is caught up in the process. I hope that my noble friend can give us some indication that there may be a tapering-off arrangement between 80 years down to whenever, or some sort of formula which was suggested by others outside.
Having said all that, I welcome the Bill. It is a constructive attempt to meet the Labour Party's manifesto commitment and to introduce a new and, I hope, successful form of community management in commonhold. My noble friend knows that there are matters that I should like to discuss in Committee. That does not derogate from my enthusiasm for the Bill.
§ 5.31 p.m.
§ The Earl of Courtown
My Lords, I should first like to thank the noble and learned Lord the Lord Chancellor for his explanation of this detailed and complex Bill. Perhaps with deference to the noble Lord, Lord Williams of Elvel, I should declare a past interest in having practised as a chartered surveyor and being involved in the management of different types of property.
I shall try not to go over ground so eloquently discussed by other noble Lords. In general, like most noble Lords, I support the Bill. But there are a number of areas we need to look at. For example, the practical measures against rogue landlords who make excessive service charges and engage in poor management practice must be welcomed. In theory, the mechanism concerning untraceable landlords appears useful, but, in practice, how will it actually work? It appears somewhat cumbersome.
Concern is raised over converting existing long leases into commonhold. In larger blocks it will be very difficult to get 100 per cent agreement. I hope that the Minister can give some explanation of the Government's thinking. Another area of worry is that of nuisance neighbours who do not fulfil their obligations. This is a fast-growing area.
As my noble friend Lord Selsdon said, the Bill could discourage investors and developers. The noble and learned Lord the Lord Chancellor did not convince me that that is not the case. I look forward to hearing the closing remarks of the noble Lord, Lord Bach.
The noble Lords, Lord Richard and Lord Williams of Elvel, and my noble friend Lady Hanham raised the point of terms of leases in relation to particular service charges that are paid in arrears. That area must be further examined in Committee.
The noble Lord, Lord Lea of Crondall, mentioned the confusion that may occur over mixed residential and commercial properties. The issue needs to be clarified, particularly in relation to the 25 per cent rule.
493 The noble Baroness, Lady Maddock, and the noble Lord, Lord Williams of Elvel, both mentioned factors relating to the regulation of management agents. Many managing agents are members of the Royal Institution of Chartered Surveyors and are regulated by that organisation, but that is not to say that there are no rogue managing agents around. This has been a very useful debate. I look forward to hearing what the Minister says in his closing remarks.
§ 5.34 p.m.
§ Lord Brennan
My Lords, had I the misfortune to have trained as a Chancery barrister, I could relish the refinements of the Bill. However, as a mere common lawyer I have the advantage of addressing it from the viewpoint of practical experience because, like many of your Lordships. I was both tenant, now landlord, of a small investment flat, and also freeholder. But I am particularly experienced in this form of commonhold ownership, or at least the similarity which Spanish property ownership has to it, as I am married to a Spaniard.
I welcome the Bill because it honours a manifesto commitment of the Labour Party at the last election. It is a significant commitment because the Bill creates a new form of freehold tenure and accompanies it with a new form of corporate body to make such property-holding effective. That is an historic departure from the century-old freehold and leasehold land law in this country. So, commendable though this change is, the question arises: what are the practical considerations which will lead to this new form of freehold tenure becoming accepted and, one hopes, eventually replacing leasehold ownership?
First, it has to become accepted as part of our property-owning culture. That is a considerable task. As the noble Baroness, Lady Maddock, pointed out, unless developers, bankers and investors treat this as a vehicle for creating residential and business units, it will not work. The Government, therefore, bear the responsibility—an adventurous and pleasant one in my opinion—of proclaiming the virtue of this new form, not just of ownership but of profitable property development. As my noble and learned friend the Lord Chancellor said, it could embrace property schemes as varied as simple industrial units or residential flats. According to one author, it is a perfect vehicle for residential retirement homes. The prospects are varied and exciting.
It is perhaps even more important to establish among our would-be property owning citizens the belief that commonhold is a worthwhile method of owning property. There are three reasons: first, it allows freehold ownership from the start; secondly, there is no wasting of the asset; and, thirdly, if it becomes accepted culturally, developers will make it a new way of cheaper, one hopes, housing in the private residential market.
I turn from dealing with commonhold in particular to the question which I consider to be central to the effectiveness of this reform—the management of the commonhold development, whether it be residential, 494 commercial or a mixture of both. The management is critically important for three reasons: first, it has to be efficient; secondly, it has to involve reliable accounts; and, thirdly, it has to be effective.
How is it to be efficient? As the noble Baroness, Lady Gardner of Parkes, pointed out, the success of a community association depends upon the enthusiasm and energy of those living in the particular unit. As the College of Estate Management pointed out years ago about commonhold:Successful management depends on the enthusiasm and ability of the individuals concerned".Human nature being what it is, it is inevitable that in commonhold developments a small number of people will run the development. That requires of the legislation that the framework for a community association should be straightforward and easy to manage and not a deterrent to the interests of the unit-holders.
The second matter is that of reliable accounts. Two aspects are important. First, we do not want to create for community associations the commitments which a small private company would have in submitting annual accounts. Accounts, yes, information, yes, but in a straightforward, stereotyped format that can be shuttled from year to year by the community association merely changing that which is different from the year before. Simplicity is the watchword.
I have a second concern about financial management. It echoes the concern of my noble friend Lord Williams of Elvel. The risk that community associations will put their management into the hands of agents is obvious. If the system is to retain credibility, those managing agents must be efficient, honest and reliable. Regulation is surely something seriously to be considered.
My final point about management is that it should be effective. Clause 34 of the Bill has the rubric "Duty to manage". I draw attention to two features in subsection (3). Subsection(3)(a) deals with particular failures on the part of the unit-holder. It says that the directors of a commonhold association,need not take action if they reasonably think that inaction is in the best interests of establishing or maintaining harmonious relationships between all the unit-holders".The felicity with which paragraph (a) is expressed is disarming. It is almost a statement of political principle that where politicians think inaction will create a harmonious feeling among the electorate, they need not act. I do not intend to jest. This is serious.
In every unit of human co-operation there is a dissentient. If one had 10 unit-holders one would be lucky to survive with only one or two at the least. We shall need to examine witrh great care in Committee how this beautifully phrased subsection will work. Otherwise the dissentient will treat it as a free ride at the expense of the others who will pay.
The second consideration arising under the duty to manage is that the directors,shall have regard to the desirability of using arbitration, mediation or conciliation procedures instead of legal proceedings wherever possible".495 I agree. Away with lawyers! They should not be involved in the management of community associations unless it is a position of last resort. Yes, perhaps, to their being involved in the creation or termination of community associations; but certainly not in ordinary management. I commend the objective in the subsection that means of settling disputes other than litigation should be sought.
I emphasise management because following Committee stage and all the refinements made to the Bill, the measure will work only if people think they can manage such associations in a way that will enable them to enjoy their property ownership without stress and inconvenience. I welcome the Bill because it honours a manifesto commitment. I trust that in years to come, when, in my belief, commonhold will be an accepted and major form of freehold ownership, the millions who benefit from it will remember that it was the product of that manifesto.
§ 5.44 p.m.
§ Lord Mackay of Clashfern
My Lords, perhaps I may take advantage of the gap to say that I entertained for some years the ambition to introduce a Bill of this kind. I should like to congratulate my noble and learned successor on the fact that he has been able to do so. I hope that the result is as perfect as he hopes after your Lordships' House has had the opportunity to improve it or at least to amend it in the later stages.
One other observation has occurred to me while listening to the debate. References have been made to the United Kingdom and to the insertion of commonhold into the law of the United Kingdom. It is true that it is being inserted into the law of a part of the United Kingdom; but as far as Scotland is concerned, there is no need for this particular innovation. We have had a system of ownership of flats for some generations.
§ 5.46 p.m.
§ Baroness Hamwee
My Lords, many of us in this part of the United Kingdom have long been envious of the systems in Scotland applying to property.
I should declare an interest as a leaseholder. My experience of holding a lease has been happy, but I am aware of the fragile relationships that can exist between leaseholders and landlords, a relationship that can so easily go sour. In view of the comments of the noble Lord, Lord Selsdon, who suggested that there may be more benefits in this legislation for lawyers than for leaseholders, and of the noble Lord, Lord Brennan, I should also declare that I am a partner in a solicitors' practice. I never go anywhere near a lease or a transfer.
My noble friend Lord Goodhart said that "as a lawyer, not as a human being" he finds this legislation "exciting". Perhaps the noble Lord, Lord Brennan, and I are lacking in the proper level of enthusiasm. The happy thought did occur to me that I might be a little further on the way to achieving a work/life balance because, with all respect to the noble and learned Lord 496 the Lord Chancellor, the Bill is not the most exciting thing happening to me this week. I shall talk to other noble Lords later!
On these Benches we support the Bill. That is because we are instinctively on the side of the leaseholder, coming, as we do, from a belief in the freedom of the individual to control his own destiny, although we recognise the existing rights of landlords. In this context the noble Lord, Lord Williams of Elvel, may feel the same: that the balance of this debate has been very different from the balance of debates on the 1993 legislation. There is disappointment in the scope and the depth of this Bill. The noble Lord, Lord Selsdon, said that there was no opposition to it. I believe that that is manifestly not the case. Many of your Lordships will have received representations from, among others, the Leasehold Enfranchisement Association and the Campaign for the Abolition of Residential Leaseholds. As the noble Lord, Lord Hodgson, said, the Bill is not acceptable to many of those that it purports to help.
The noble and learned Lord the Lord Chancellor said that expectations are not realistic. As my noble friend Lady Maddock said, this must, in part, be because expectations were raised by the Government and by the Labour Party before it became the Government. I am sad that the noble and learned Lord did not take the opportunity to explain in what respect those expectations were not realistic. We may hear from the noble Lord, Lord Bach, on that point at the end of the debate.
The question has been raised as to whether there is any serious chance of the enactment of this legislation. If it is enacted, I am sorry that the opportunity has not been taken to consolidate residential leasehold legislation. The Law Society will have made representations to noble Lords, as it has to me, saying that there is a particular and urgent need to consolidate existing legislation. It refers in particular to service charges.
Reference has also been made to the regulations that will flesh out the Bill. I should have preferred to see the regulations in draft form alongside the Bill itself—not only for my own benefit in terms of understanding the implications of the Bill, but because I believe that time will be needed for thorough consulation on the regulations outside the House as well as discussion on them within it.
The criticisms of commonhold have largely been of the "too little, too late" variety. It is said that this is not a scheme for existing developments and that it will not be one for the future unless the developer and his financier wish it to be so.
I shall be a little more demanding than my noble friend Lord Goodhart in looking at the unanamity issue. I know how difficult it is to bring forward legislation and so I prefer to tackle the question of definition now rather than leave it for a later date. Like the noble Baroness, Lady Hanham, I have difficulty in understanding what is meant in this context by "unanimity". Given that expectations of commonhold are high, it would have been helpful to have an 497 explanation of why the legislation has been so confined. Perhaps the noble Lord, Lord Bach, will be able to help us.
The British Property Federation has commented that the market needs to be convinced about commonhold and has said that there is anecdotal evidence that institutional investors are reluctant to invest in commonhold developments. The noble and learned Lord the Lord Chancellor said that he did not expect opposition to the proposals for commonhold. That seems to be the case, but we should not be too complacent about what it will achieve and how long it will take.
The point has been made that company law is too complex for flat management. While I appreciate that, as a lawyer, I may have gone a little native on this issue, it is not a point with which I agree. However, I entirely agree with the noble Baroness, Lady Gardner, about the need for volunteers. Too often in blocks of flats the management becomes difficult because of the personalities of the few people who are prepared to do the work.
The noble Lord, Lord Brennan, referred to the accounting provisions for companies. I believe that the accounting obligations on small companies in general should be simplified. They could perhaps be less rigorous while still retaining propriety. We shall need to look at the detail of the legislation.
Reference was made during the debate to the restrictions on leasing. I should be concerned if there were tight restrictions on leasing. I say that for the perhaps philosophical reason that I should like to see the rental market reinvigorated. It should not in any way suffer from more restrictions.
The noble Baroness, Lady Gardner, raised the fundamental question which cannot be ducked for ever—what will happen when a building is past its sell-by date? As has been said—in this respect I read the legislation in the same way as the noble Lord, Lord Williams—one has to start with a freehold which will then be transferred to a commonhold. I should be grateful to know whether any questions of stamp duty arise as a result of the Bill. I make that point now because of the difficulty faced by this House in making amendments with tax consequences.
I turn to the right to manage and the right to enfranchise, both of which points do not lend themselves well to Second Reading comments. I suspect that they will attract a weight of amendments at future stages of the Bill. The right to manage has been said to be the second best option. Like other noble Lords, I am concerned about exclusions. I refer in particular, as did the noble Lord, Lord Richard, and my noble friend Lord Goodhart, to the landlord's involvement. I agree with a great deal of what was said by the noble Lord, Lord Lea.
I was struck by the many comments made on the difficulties which stem from bad management by management agents, whose role is central. I suspect that, unlike the noble Earl, Lord Courtown, not many of them are members of the RICS. The Bill will not solve that problem. The Government must have 498 received responses to their consultation calling for regulation of such matters as transparency in accounting, audit requirements, and so on. Did the Government consider and discard the inclusion of provisions in the Bill to regulate the activities of management agents? Was that seriously considered? If it was too difficult to include in the Bill, may we expect it to be dealt with in the future?
On the right to enfranchise, how serious are the Government about phasing out leasehold, given that the qualifications for enfranchisement still present a significant hurdle. Questions have been asked about the value of enfranchisement and whether it is right for the leaseholder to pay anything. Although I take seriously the point that a 50:50 split is ECHR-proof, in London it is not evident for more than very short leases that the leaseholder is not paying the same as he would for a freehold property of a similar size. That is a matter of principle, although we shall no doubt see amendments on the point.
We on these Benches will also raise through amendments the issue to which my noble friend Lady Maddock referred and which may at first sight seem inconsistent with the stance I outlined at the beginning of my speech. I refer to enfranchisement where the housing in question is publicly funded, where there is shared ownership and where the intention has been to increase the ownership by what is known as "staircasing".
The need for support for the leasehold valuation tribunals in various ways, including financial, has also been referred to. It is not perhaps a matter we can advance through amendment, but it is certainly a serious point.
Many of the points that were raised by noble Lords are technical and are more suitable for later stages of the Bill. I am conscious, too, that important business is to follow this debate. We wish the Bill a fair wind. We wish it a safe arrival in harbour, in a good state, before the tempests of the general election are upon us.
§ 5.58 p.m.
§ Lord Kingsland
My Lords, I begin by declaring an interest. I am a tenant of the Honourable Society of the Middle Temple—on a very short lease! Like the noble Lord, Lord Brennan, I am not a chancery lawyer; but, unlike him, I am obliged to give as convincing an impression as I can that I am one.
As with so many other imaginative initiatives for law reform since the war, the noble and learned Lord, Lord Wilberforce, did much of the initial creative thinking in the United Kingdom, although he would be the first to admit that an idea something like commonhold had been around in the United States for many decades. Furthermore, in Australia, stratum estates or strata title started in 1960 in Victoria and soon became widespread.
In effect, the Bill aims to introduce the idea of stratum estates into English law. As my noble and learned friend Lord Mackay of Clashfern has pointed out, my own party sought to do so in the early and mid 1990s. It was to his great disappointment that 499 ultimately he was unable to take the legislation forward. It is of course the policy of the Opposition, therefore, to support the concept of commonhold.
As regards the part dealing with commonhold, my principal difficulty with the Bill is its lack of detail. If your Lordships consider the great property reforms of the early 1920s initiated by a great predecessor of the noble and learned Lord, the Earl of Birkenhead, it would be noted that extremely detailed consideration, over a long period of time, was given to the five Bills involved. Most of the detail in the legislation, moreover, was finally included either in the main clauses or in the schedules to the Acts.
I should express a real concern here. We heard earlier from the noble Lord, Lord Brennan, that the difficulties with the Bill are not so much difficulties as regards land tenure, but difficulties as regards estate management. The noble Lord set out, in what I thought was convincing detail, the nature of the problems that will need to be confronted if commonhold is to prove a success. But it is clear from Part I of the Bill that none of those issues is grappled with in the clauses. They will be dealt with in regulations.
I submit that those issues should form schedules to the Bill. I wonder whether the noble Lord, Lord Bach, when he comes to wind up for the Government, will be prepared to address this matter. Are the regulations available in draft form? If they are, then surely the noble Lord would have no objection to tabling those regulations before we consider the Bill in Committee. However, if the regulations are not yet in draft form, then I put it to the noble Lord that the Bill is premature. Ultimately it will be impossible to reach firm conclusions on the desirability or otherwise of the concept of commonhold unless we know the detail, in particular with respect to those issues already set out so authoritatively and convincingly by the noble Lord, Lord Brennan.
It is not for me to speculate how the noble Lord, Lord Bach, will respond to noble Lords, but I, for one, would be most reluctant to move on to the Committee stage without a clear idea of what the noble Lord's answers will be to the questions posed by his noble friend Lord Brennan.
I shall turn now to one or two of the more detailed considerations in relation to leasehold reform. It is a matter of great regret that we have not been offered, in addition to the proposals covering commonhold, a Bill to consolidate the rights of tenants under the vast array of leasehold legislation. Those noble Lords who have a passing familiarity with the law as regards landlord and tenant will know that the rights acquired by tenants over the past 15 to 20 years are contained in a large amount of statutory material, most of which is extremely difficult to analyse unless one is an expert in the field.
For that reason, I wonder whether the noble Lord, Lord Bach, will say something about the intentions of the Government on consolidation. Given the reported imminence of a general election, his statement could 500 well be only of academic interest. Nevertheless, I should like to know what are the thoughts of the Government in relation to this matter.
That is important because I believe that it will be difficult for existing tenants to convert to commonhold. The Government have imposed a requirement that a shift from a leasehold tenure to commonhold is possible only if 100 per cent of the tenants agree to make that move. I wonder why such an onerous requirement has been placed on tenants in those circumstances. There may be a reason for it which is not apparent to me. Moreover, as a number of noble Lords have already pointed out—I recall in particular the striking speech of my noble friend Lady Gardner of Parkes—it is a pity that no requirement has been set down for all new building involving blocks of flats to be held by commonhold tenure.
The right to manage leasehold property is covered in Part II of the Bill. Here again my principal criticism is similar to the criticisms I made on the commonhold proposals. It is difficult to make an objective assessment as to whether the right to manage companies will work until one knows what is to be their structure, what will be their relationship with individual tenants and, perhaps above all, how they are to take over their obligations from those nominated companies which have been fulfilling that task so far.
For example, will an obligation be imposed to take over long-term contractual arrangements which have previously been entered into en bloc? Alternatively, will this be treated as a matter of "take it or leave it"?. As far as I can tell, the only consideration of that matter set out in the Explanatory Notes to the Bill has been a requirement to negotiate. I should be grateful if the noble Lord could explain that notion if he feels that he can do so at this stage.
The issue of collective enfranchisement by tenants deserves a little more detailed consideration. Noble Lords will be aware that the Leasehold Reform, Housing and Urban Development Act 1993 gives certain tenants of residential flats the right to compel the owner of the freehold in the property to sell it to them. That right does not apply to premises where more than 10 per cent of the internal floor area is neither occupied for residential purposes nor forms a part of the common parts.
As a number of noble Lords have already pointed out, the Bill proposes that the relevant percentage of floor area for this exclusion be increased from 10 per cent to 25 per cent. As far as I can discern, no reason appears to have been given for this proposal. In my judgment, its effect is likely to be to dissuade the freeholders of premises from granting long leases for flats above shops or offices; to give the occupiers of flats above such shops or offices a potentially unjustified windfall, to the detriment of the freeholder; and, in other respects, to achieve no purpose that is obvious to me.
Another existing limitation on the right to collective enfranchisement is that only qualifying tenants of flats can exercise the right. A qualifying tenant is a tenant 501 of a flat under a long lease which is either at a low rent or for a long term. The Bill proposes to delete those requirements. The effect would be to extend the right of collective enfranchisement to tenants with leases of between 21 and 35 years whatever the rent; it is presently exercisable by tenants with leases between 21 and 35 years only if they are paying a low rent.
The purpose of the low-rent test, in addition to the requirement that the lease be for more than 21 years, is to differentiate between a true long lease of a flat, in relation to which the lessee might be said, colloquially speaking, to be the owner of his flat, and a rent-paying lease, where the lessee is really a tenant and not an owner. However, the length of the lease alone is not always a sufficient indicator of this. Some leases of more than 21 years have annual rents equivalent to or approaching the rack-rent, and the holders of such leases should not be entitled to exercise the right to collective enfranchisement. In short, there appears to be no good reason for extending the right to collective enfranchisement in this way.
I should like also to say something about Clauses 115 and 116, which concern a matter which has also been addressed by a number of your Lordships. The apparent aim of the clauses is to facilitate collective enfranchisement by removing the requirement that at least two thirds of the qualifying tenants in a block must participate; and that at least half of the participating group must satisfy a residence condition. The removal of the first requirement may be welcomed, but the removal of the second is rather more controversial.
The removal of the requirement for two thirds of the qualifying tenants to participate is beneficial. It could prove an obstacle to an otherwise valid claim, particularly where there is a small number of flats in a block. The Bill, of course, will not allow a minority of tenants to enfranchise, since the participating tenants must be tenants of not less than one half of the total flats.
The arguments surrounding the merits of leasehold enfranchisement were settled by the 1993 Act. The long leasehold system can work unfairly towards occupying tenants, and this in itself provides the best justification for the principle of enfranchisement. The requirement for a two-thirds majority cannot be justified as necessary to protect any tenants who do not wish to participate; and there would seem to be no compelling reason to retain the requirement as beneficial to landlords.
The removal of the residence condition is more controversial. The intention of the enfranchisement provisions in the 1993 Act was to give rights to residential occupiers. It was not their aim to benefit investors. Although under the 1993 Act investors can participate, they can do so only if at least half the participators satisfy the residence condition. That is a reasonable requirement, since it prevents enfranchisement by investors acting alone. It allows residents who wish to enfranchise to rely on the participation of non-residents in order to achieve the necessary level of participation.
502 Given the proposed removal of the requirement that two thirds of the qualifying tenants must participate, it is surely not unreasonable that half of the 50 per cent of the tenants who must participate should satisfy the residence condition. The removal of this condition will allow investors to acquire the freehold. If, for example, all the leases of flats in a block are owned by foreign companies for investment purposes, those companies will nevertheless be able to enfranchise. There would seem to be no justification for this. While it is legitimate social policy to protect home-owners, there is no reason to enlarge the rights of investors in order to give them an uncovenanted benefit at the expense of the freeholder.
Moreover, it is arguable that in giving such rights to investors the Bill would be held to infringe the landlord's human rights. Although the confiscatory nature of leasehold enfranchisement was held in connection with the Leasehold Reform Act 1967 not to breach the landlord's right not to be deprived of his possessions, that was on the basis that Parliament was entitled, under the margin of appreciation, to conclude that the long-leasehold system generated injustice and that the tenants under long leases had a moral entitlement to the freehold. Such reasoning would seem not to apply to an investor.
Presumably, the purpose of removing the residence condition is to assist the resident leaseholder in achieving a 50 per cent level of participation by enlisting the support of absent tenants, should it be required. However, a rather less desirable consequence could be that a majority of investors was enfranchised against the wishes of the residents and proved to be undesirable landlords. Thus, even if the rights of the landlord are thought insufficient to justify a residence condition, it may be that a requirement for at least some participation by residents should exist in order to protect resident leaseholders.
Chris Brown, a member of the urban task force working party and a director of urban renewal at AMEC Development, has said that if the proposals in the Bill are put into effect in their current form developers will be scared off from investing in mixed use buildings. He described the proposals asa nail in the coffin of urban renaissanceand said thaturban renaissance is all about achieving mixed-use buildings, and in order to achieve that you need to find investors prepared to invest in the commercial part of those buildings—usually the ground floor and maybe the floor above. Those investors like to have an element of control over their investment and redevelop it when necessary.He said that, despite its being relatively easy in the past for investors to keep control of buildings, it was still hard to find backers for this type of venture. He added:now the Government is going to find that much more difficult with two measures in this legislation. Firstly, increasing the threshold of commercial space in the buildings from 10% to 25% under which leaseholders can buy the freehold".The proposal remains in the published Bill.
503 Secondly, he was concerned that the Governmentare also proposing to do away with the low rent test—very often with these city centre buildings, the rents were too high for the buildings to be caught by the legislation. These two provisions will result in virtually all mixed-use buildings being caught by the legislation".The proposal to remove the low rent also remains in the Bill. Mr. Brown suggested thatan investor in the commercial element of a mixed-use building used to be reasonably confident that he could continue to own that investment and management for the foreseeable future. Now there is a major risk that this will be taken away from him. Why should anybody invest in the commercial element of a mixed-use building when they can invest in free-standing commercial buildings which are not mixed use? It will be much harder to find that already hard-to-find animal which is the investor in the commercial element of mixed-use buildings.The second part of Part II concerns the replacement of nominee purchasers by RTE companies. Once again, in my submission, it would have been much more desirable to have the details of these companies and the relationship between them as corporate entities and the leaseholders on the face of the Bill, in the form of a schedule, rather than being left to regulations.
I apologise to your Lordships for taking rather more time than I would normally have wished, but we did not open in this debate, and therefore I have subsumed the opening in the "wind". So I should like to speak for just a little longer if your Lordships will allow me.
I turn now to Clauses 122 and 124. These clauses amend Schedule 6 to the 1993 Act, which regulates the purchase price payable by a nominee purchaser, now the RTE, on an exercise of the collective right of certain tenants of flats to enfranchise under Chapter I of the 1993 Act. Paragraph 210 of the Government's Explanatory Notes states that this clauseamends Schedule 6 to the 1993 Act to provide that the various values included in the price payable by the RTE company shall be determined as at the 'relevant date'—that is, the date of service of the initial notice—instead of as at the 'valuation date'—that is. the date at which it has been agreed or determined what freehold interests will be acquired by the company.That appears to be an accurate statement of its effect.
The relevant date is defined by Sections 38(1) and 1(8) of the 1993 Act and the definition of the valuation date in paragraph (1)(1) of Schedule 6 to that Act. The change will clearly favour the enfranchisers to the extent that it will remove any incentive to the freeholder to delay enfranchisement in a rising property market.
Paragraph 211 of the Explanatory Notes states that Clause 123 (Clause 98 of the draft Bill),amends paragraph 4(1) of Schedule 6 to the 1993 Act to provide that the freeholder's share of marriage value should be 50% in all cases, rather than the greater of (a) such proportion as is agreed by the parties or determined by a leasehold valuation tribunal and (b) 50%".The change will clearly favour the franchisers at the expense of the freeholder and the owners of intermediate leasehold and other interests by providing that the freeholder's share of the marriage value will be 50 per cent and no more in every case, 504 whereas at present it cannot be less than 50 per cent in every case. To the extent that the freeholder's share of marriage value on a fair valuation might be held to exceed 50 per cent, that effectively means that he will lose the excess over 50 per cent. It will not fall within the compensation provisions of paragraphs 5, 8 and 13, which apply only to loss resulting to the freeholder and the owners of the intermediate leasehold. The loss to the persons whose interests are being acquired will depend upon what would otherwise have been the marriage value in any given case.
It seems, nevertheless, to constitute a form of expropriation which serves no obvious social purpose. It will not even result in the avoidance of a valuation exercise of determining the marriage value, or the computation of the respective shares of those entitled to share in the freeholder's share.
Paragraph 212 in the Explanatory Notes states that Clause 124 of the Bill,amends paragraph 4 of Schedule 6 to the 1993 Act to provide that where the unexpired term of each of the leases held by participating members of the company exceeds 80 years, at the relevant date, the marriage value shall be taken to be nil".Clause 99 of the draft Bill contained a similar provision in relation to unexpired terms of 90 years, and no explanation has been given for the reduction of the relevant period in the Bill. The change will favour the enfranchisers, again at the expense of the freeholder and the owners of intermediate leasehold properties. I find this a particularly curious change to have made. What is the logic of dropping from 90 to 80 years? If it makes no difference, why make the change? If it does make a difference, this is surely potentially an act of expropriation by a public authority of a property holder. Perhaps the noble Lord, Lord Bach, will comment on that as well.
Lastly, I turn to leasehold evaluation tribunals. The Minister will be aware that the jurisdiction of leasehold valuation tribunals has increased incrementally over the years. It now covers not only the valuation of freeholds, extended leases and modern ground rents under the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993, but also questions relating to the right of first refusal under the Landlord and Tenant Act 1987, the appointment of managers under Section 22 of the Landlord and Tenant Act 1987, the reasonableness of service charges under residential leases and the landlord's choice of insurer under the Landlord and Tenant Act 1985. In some cases the jurisdiction is exclusive, while in others it is concurrent with that of the county court.
As the noble Lord is aware, the Bill will extend the leasehold valuation tribunal's jurisdiction further. Some of the proposed new areas of jurisdiction are likely to involve more questions of pure law and non-expert fact, thus taking the tribunal further away from its traditional areas of valuation and surveying expertise, where questions of law tended to be purely ancillary. It may be questioned whether the tribunal is an appropriate forum to determine such matters.
505 As to costs, the tribunal presently has no power to make any order as to costs. On matters of valuation, the landlord's valuation costs, which a tenant must pay, do not include his costs before the tribunal. As many of your Lordships are aware, applications to the tribunal can often involve very large sums of money.
§ Lord Williams of Elvel
My Lords, I am sorry to interrupt. The noble Lord has spent 26 minutes giving the House the benefit of his undoubtedly sensible views. Perhaps he might feel it appropriate—and I make only a suggestion—that he draws his remarks to a conclusion to allow my noble friend to respond to the debate. I think that there are other matters which need to be taken on the Floor of the House.
§ Lord Kingsland
My Lords, I thank the noble Lord for his observations. I hope that the noble Lord agrees that in normal circumstances I am, on the whole, a speaker who takes up very little of your Lordships' time. On this occasion we had no opening speaker; this is a highly technical Bill that involves matters which, in my view, ought to be on the face of the Bill, but are not; I think I am entitled to draw the attention of the noble Lord, Lord Bach, to these issues. They affect the fundamental rights of property owners, whether on the side of the landlord or of the tenant, and therefore are matters of great personal interest to them. I am entitled to point out the flaws in the Bill where I see them. The Bill involves complex issues of law and, therefore, my explanation of where those flaws lie is sometimes likely to take slightly longer than normal.
In one sense, the noble Lord has had great success, however, because I cannot remember where I was.
Paragraph 10 of Schedule 11 to the Bill would provide for the first time that a tribunal may award costs against a party in proceedings before it, but only if an application is dismissed on the ground that it is frivolous, vexatious or an abuse of process, or where the party in question had acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in connection with the proceedings. The amount payable cannot exceed £500.
In my submission, the tribunal should be given a broader discretion as to both the circumstances in which costs may be awarded and the amount of such costs. At the very least there should be an express power to award costs occasioned by an adjournment. In high value matters, at any rate, there is no reason why the tribunal should not be able to award costs related to the outcome, particularly given that much of its jurisdiction is now devolved from the county court. In exercising its power the tribunal could have regard to the financial resources of the party.
More generally, the Explanatory Notes to the Bill say that it provides a power to make regulations enabling the tribunal to exclude the whole or parts of cases of parties who fail to comply with directions. No such power appears in Chapter 6 or Schedules 11 to 12. Tribunals ought to have such a sanction, either instead of or in addition to the costs sanction to which I have referred.
506 Paragraph 8 of Schedule 11 provides for procedure regulations to include provision for the determination of applications or transferred proceedings without an oral hearing and by a single panel member. It is not known what sort of application is envisaged to be appropriate for determination in this way. At the very least, in order to satisfy the human rights convention's right to a fair and public trial, it should be stipulated that any such regulations should include provision entitling an aggrieved party to a hearing before a full tribunal. In the circumstances, it is to be doubted whether the regulations envisaged by paragraph 8 will have any real use.
I had intended to go on to consider the provisions on forfeiture, but in the circumstances I think I will sit down.
§ 6.30 p.m.
§ The Parliamentary Secretary, Lord Chancellor's Department (Lord Bach)
My Lords, I first declare an interest as a leaseholder of a London flat. I am grateful to all noble Lords who have taken part in this debate. In their different ways, individually and collectively, they have all shown enormous expertise in this difficult but important matter. The debate has highlighted large and small issues, which, of course, will have to be teased out in the normal way as the Bill progresses. I hope that the House shares the Government's view that the policy aims of the Bill are good and that the Bill itself is a suitable vehicle by which to achieve those aims.
If I were to attempt to deal with even one-third of the good points made during the debate, I would succeed only in making myself even more unpopular than I already am on all sides of the House. I do not intend to do that. I intend to limit myself to 20 minutes. I have no doubt that I shall be reminded by those behind and in front of me if I exceed that estimate. I shall try in due course to deal with some of the major points that have been raised. That is not to say that those which I omit are not major, but it seems to me that there are some essential Second Reading points that need to be dealt with. The others can wait until another day, perhaps not very far off, when we meet again in Committee.
As my noble and learned friend the Lord Chancellor said in opening, the concept of commonhold goes back many years. Noble Lords will recall that the previous government twice consulted on draft commonhold Bills during the 1990s. In that regard, I should like to say what a pleasure it was to hear, albeit shortly, from the noble and learned Lord, Lord Mackay of Clashfern, who played such an important part in drafting that proposed legislation. Your Lordships will not be surprised to hear that our Bill achieves its end with greater simplicity than did previous draft attempts. Having heard the debate today, I may have to revise that assumption. However, we are speaking only about matters of detail and angles of approach. At base—and this is very important—all the schemes that have been developed are very similar, and I believe that there is widespread support for the principle of commonhold.
507 We are also grateful for the support for our objectives in relation to leasehold reform in Part II of the Bill. Our reforms are intended to address the current imbalance that exists between landlords and their leaseholders, and to provide leaseholders with greater security and control over their own homes. We are confident that those objectives will be achieved by this Bill. A number of very interesting suggestions have been made. We do not have a closed mind on these matters. We shall give them proper consideration. It is a complex subject. We want to make sure that it is correct. However, our view is that some of the aspirations of some leaseholders are unrealistic. We have to recognise the legitimate interests of landlords. We shall not be able to accept some of the more radical changes that leaseholders have demanded. On the other hand, I am sure that some less reputable landlords would prefer that we did not legislate at all on this issue. In drawing up our proposals, we have tried to strike a fair balance.
Before dealing with the specific points that have been raised, I should like to make a general point. The Bill has been described by some as a missed opportunity. They believe that we should now act to prevent the building of any new, residential leasehold developments. I shall return to that point. Others take a harder view, namely, that we should act now to, in effect, abolish leasehold tenure and hand existing properties to their leaseholders in a gigantic windfall. We have tried to strike a balance. We therefore do not have much sympathy for that view. We believe that even to follow the less extreme view would be irresponsible.
We have been described, as have all governments in their time, as arrogant. It would be unforgivably arrogant to do away with a historic tenure, however open it is to criticism, without being certain that the replacement scheme will work at least as well. We believe that the Bill does the trick. First, it introduces commonhold, which, under a variety of names, is a well tried and trusted means of managing co-operative living all over the word. The speech of the noble Baroness, Lady Gardner of Parkes, is living proof of that. Her experiences in New South Wales were of particular interest to the House. Secondly, it greatly improves the lot of those living in leasehold properties, by giving them a much easier route to enfranchisement and a no-fault right to manage their developments. We believe that those two innovative sets of provisions will work well. However, we must allow for fine tuning. To act precipitately would be to take risks with a fundamental part of the lives of millions of people.
First, I deal shortly with why we believe that the requirement for conversion from leasehold to commonhold should be 100 per cent. We may, of course, return to that point. The Government take a firm view on this. We recognise that it is a high hurdle to jump. However, the alternative would be to allow conversion with anomalous leaseholders remaining. One of the fundamental tests of commonhold governing its establishment, operation and management is that all unit holders have an equal 508 interest in the commonhold. If conversion with less than 100 per cent agreement were permitted, the resulting residents' group would not be a commonhold.
I turn to the speech made by the noble Lord, Lord Selsdon, for which I thank him. We shall need to consider many of his points. However, I deal at this stage with only a couple of them. First, with regard to finance for leaseholder management companies, we cannot dictate to lenders. That is because leasehold management companies may have little to offer as security, but we shall be very willing further to explore the issue with representatives of those lenders.
A further, general point made by the noble Lord, Lord Selsdon, was that the Bill should go further to harmonise the rules for houses and flats—for example, that the valuation date for the enfranchisement of flats should be the date of the initial notice. We agree that it would be desirable to bring the rules governing the enfranchisement of houses and flats more in line. We are glad to say that Clause 122 of the Bill already meets the noble Lord's specific point in relation to flats. As for houses, the valuation date will now be the date of the initial notice.
I turn to the general point raised by a number of noble Lords—latterly, and perhaps with most feeling, by the noble Lord, Lord Kingsland—about why there is a need for so many regulations. The noble Lord will recall, not because he was there but because of his knowledge of history, the monolithic nature of the 1925 legislation. The Land Registration Act, sections of which have been much criticised, relies to an enormous extent on the regulations associated with it. We believe that a completely new Bill is required to bring about the changes necessary for the new century. We are incorporating into the regulations the changes that we believe may need to be made over time. I can tell the House that we hope to have a model CCS, a memorandum and articles, available for Committee stage. The most significant matters relating to the formation, operation and winding up of commonholds will be detailed in those model documents.
Commonhold will provide a new way of holding property in England and Wales. For most people, the Bill will be an introduction to commonhold terms and concepts. Therefore, it is appropriate to strive as best we can for simplicity and brevity on the face of the Bill. It must be stressed that the Bill is a fully comprehensive framework for the establishment and management of commonhold. We have made significant progress in drafting the main regulations, taking into account the welcome comments made during the consultation process. We are on track for having drafts available by the time the Bill reaches Committee stage. That was one of the matters raised by the noble Lord, Lord Goodhart, in his helpful speech.
I turn now to the rights of landlords to be members of the right to manage company; in other words, an RTM. We recognise that leaseholders will often be prompted to exercise the right to manage by some degree of dissatisfaction with the landlord's 509 management. However, to exercise that right—this is an important change in the Bill—they will not have to prove that the landlord is at fault in any way. Therefore, the presumption must be that, as someone with an interest in the property, the landlord is entitled to a continued say in the management of the block, alongside leaseholders. That is why we believe it is only right that he or she should be entitled to be a member of the right to manage company.
§ Lord Goodhart
My Lords, I am grateful to the Minister for giving way. Is it not the case that the landlord's interest can be exercised ultimately through a right to compel the RTM to comply with its obligations as to the management of the property? He does not need to be a member of the company to do so.
§ Lord Bach
My Lords, I heard what the noble Lord said in his speech; and that may be so. We shall, of course, reconsider the issue as a consequence of today's debate. However, because we are convinced at present that the landlord's interests will, in nearly every case, be a minority one, we shall need some persuading that landlords should have no right to be a member of the company. Under the Landlord and Tenant Act 1987, leaseholders can apply to a leasehold valuation tribunal for a replacement manager to be appointed if they are unhappy with the landlord's manager, or to the courts for an order entitling them to acquire the freehold compulsorily. Under those procedures the LVT or the court will need to be persuaded that the landlord's management is seriously defective and that the appointment of a new manager is an appropriate solution. We shall no doubt return to that issue at a later stage.
I move on to the removal of the residence test and the argument that that will open the door to purchases—predatory purchases—by speculators. We agree that the purpose of the right to enfranchise is to benefit bona fide residential occupiers, not speculators. But it has long been apparent that the residence test, which was introduced in the 1993 Act during its passage through this House ostensibly as a safeguard against speculation, was intended by its designers as a means of complicating and frustrating legitimate attempts at enfranchisement. It has certainly been routinely exploited in that way.
The 1993 Act contains another anti-speculation measure, which, in our view, is perfectly adequate. Section 5(5) of the Act prevents a leaseholder from qualifying for the right at all if he is the long leaseholder of more than two flats in the block. Therefore, a speculator cannot acquire the right to enfranchise by a process of piecemeal acquisition of the individual flats in the block. In addition, Section 5(6) prevents anyone getting round that obstacle by acquiring the flats under arranged different names. The residence test itself requires 50 per cent of the enfranchising group to have occupied their flats as their only or principal homes for the past 12 months, or for periods amounting to three years in the past 10 years. Occupation by a company does not count for this purpose. Clearly a recent purchaser cannot pass 510 the test; nor can someone who bought the flat for his or her own occupation but then proved unable to sell a previous home and had to rent it out; or, someone whose main home is in the country and who has a. pied-à-terre in town; or, indeed, someone who is working abroad but intends to live in the flat upon his return. None of those class of people can be fairly described as "speculators".
Some landlords have gone to enormous lengths and have subjected leaseholders to intrusive questionnaires. They have even resorted on occasions to hiring private detectives to check out leaseholders' compliance with these rules if an attempt to enfranchise is begun, or even mooted. Moreover, since the 1993 Act, some landlords have resorted to a policy of letting to companies only—a genuine residential purchaser will be required to take out his lease through a company. The purpose of that manoeuvre is to deny purchasers' their right to enfranchise. Meanwhile, in a large block with a rapid turnover of leaseholders, the residence test has proved something of a nightmare for many who have attempted to initiate and sustain an attempt to enfranchise. We believe that it is high time that the residence test was removed.
I shall now talk briefly about a reserve fund, a "sinking fund", usually to facilitate saving for large items of expenditure, or a reserve fund to finance the repair and maintenance of common parts or units (to be used should any major works be required) that the annual commonhold assessment or budget would not cover. We still have an open mind on the issue as to whether the maintenance of a reserve fund for specified purposes should be a legal requirement of the commonhold association. I hope that we shall return to that point in Committee.
My noble friend Lord Lea of Crondall made some very interesting points. However, I do not have sufficient time to deal with all of them. He raised the difficult matter of how the right to manage should apply to properties that are a mix of commercial and residential units. The Bill provides that the rights, and now also the right to enfranchise, will apply to such properties provided that no more than 25 per cent of the property is in non-residential use. My noble friend suggested that that limit will prevent leaseholders from exercising their right.
We believe that the limit of 25 per cent has been chosen for good reason. If the non-residential area is any greater than that, its value will tend to exceed that of the residential part of the building. The Government did not consider that it would be right to empower residential leaseholders to take over the management of a block in which their interest represented less than half the value. My noble friend also made a number of interesting points about precisely how we should calculate the residential and non-residential proportions. He was concerned over how any common parts should be taken into account. We shall also consider those points most carefully.
Several speakers, especially the noble Baronesses, Lady Hanham and Lady Maddock, raised the question of whether using a company is. perhaps, too 511 bureaucratic and expensive. This right to manage is a collective right. Creation of such a right raises questions about the relationship between the individuals concerned and the body through which it is exercised. On the one hand, the choice is leaving that relationship for the individuals and, on the other hand, prescribing the form that it should take. The 1993 way of doing so was to be exercised by a nominee purchaser appointed by the leaseholders. That Act said nothing about the nature and constitution of the nominee purchaser and the relative rights and responsibilities of the purchaser and the participating leaseholders. Although that had attractions, we also believe that it had drawbacks. Our view is that it is now time to take a more prescriptive and uniform approach, based on a company limited by guarantee as regards collective enfranchisement, the right to manage and the commonhold association. We shall no doubt explore that issue at greater length elsewhere.
I have one further detailed point to make. The noble Baroness, Lady Hamwee, mentioned stamp duty. We consider that the registration process should not involve transfers of value and that they should not attract stamp duty. But we shall have to consider the matter further to ascertain whether or not we are right in that respect.
I thank again all those noble Lords who participated in this Second Reading debate. We believe that the proposals in Part I of the Bill will deliver commonhold—a long overdue alternative to leasehold—which has been used all over the world with great success. As I said earlier in relation to our commonhold proposals, we expect to have model forms of the commonhold association's memorandum and articles and the commonhold community statement ready for the Committee stage. We also aim to have available the necessary government amendments, which we hope to table seven days in advance of the first Committee day.
Part II of the Bill will, we believe, considerably strengthen leaseholders' rights and provide an effective remedy for those abuses that have, in spite of earlier legislation, continued to flourish.
My noble friend Lord Whitty and I hope to conduct the Committee stage on behalf of the Government. We intend to hold a meeting with all interested noble Lords of all parties before Committee stage begins in order to discuss the Bill further in a more informal setting. I commend the proposals to noble Lords.
On Question, Bill read a second time, and committed to a Committee of the Whole House.