§ 4.5 p.m.
§ The Lord Chancellor (Lord Irvine of Lairg)
My Lords, I beg to move that this Bill be now read a second time. It is barely five months since I last moved the Second Reading of the Commonhold and Leasehold Reform Bill. Since that time noble Lords on all sides of the House have devoted time and energy to detailed debate of the proposed schemes, taking five sessions at Committee stage and one day at Report stage.
That careful scrutiny enabled the Government to make certain amendments to the Bill as it proceeded through its parliamentary stages. Sadly, it was not possible to make more progress than we did with the Bill in the previous Session. I hope that the fact that the Government are re-introducing the measure at this early stage of the new Parliament, backed by a manifesto commitment, and with the introduction of important new clauses to Part 2, will persuade your Lordships of their determination to relieve the plight of residential long leaseholders by reforming the existing leasehold system and to offer a robust and well tried alternative scheme in commonhold. I shall outline the new proposals later. I am sure that we all look forward to what will prove to be a distinguished contribution from the noble Lord, Lord Best, in his maiden speech.
Those noble Lords with an established interest in this area will no doubt still have in their minds a clear picture of what the Government intend in the Bill, so I can be brief in describing its content. Both parts of the Bill address the problems faced by long leaseholders. Part 1 will introduce commonhold—a scheme providing for the ownership of the freehold of interdependent properties, or units as the Bill calls them, and the corporate ownership and management of the associated common parts by the unit owners. No one in this scheme will have a greater interest in the individual unit than the registered unit-holder. No 886 landlord will be able to interfere with the unit-holder's quiet enjoyment of the unit. The unit-holder, owning as he will the freehold interest in his unit, will not suffer a diminution of the unit's value as does the long leaseholder as the lease term begins to run out.
It will be remembered that the scheme is necessary to overcome the problem that our law at present does not allow for the obligations of positive covenants to pass to successive owners of freehold properties. It is this difficulty which has led to the overwhelming majority of residential flats in England and Wales being held on leases, the terms of which allow for the obligations created by such covenants to pass on changes of owner. Perhaps it is the greatest strength of leasehold property that, on the sale of a lease, the buyer normally takes the property subject to positive and restrictive obligations alike. It makes leasehold the only system which can work in a building where there are several owners and shared parts, and in consequence owners of flats are restricted to leasehold ownership with all the drawbacks which are all too well known.
It will also be remembered that commonhold, under a variety of different names and with differences of detail appropriate to the jurisdictions in which it operates, exists in almost every other country in the world and the scheme we propose owes much to the experience of others.
Bearing in mind the nature of the debate on the former Bill, I take this opportunity to remind your Lordships that the usefulness of commonhold will not be confined to blocks of flats. Although I am aware that it is there that leaseholders suffer most at present, the scheme we propose will be as useful for a business park or a large out-of-town shopping centre as it will for mansion flats in Kensington or leafy suburban housing estates. It could be employed for something as mundane as a shared car park.
Noble Lords will recall that a commonhold will consist of two elements: units, which will be owned by individual unit-holders, and common parts, which will be owned by a commonhold association.
The commonhold association will be a private company limited by guarantee. Its members will be the unit holders. The Bill provides for its constitution and for the mechanics of voting for various purposes, and places on it a duty to manage the development. The details of its memorandum and articles of association will be set out in regulations.
The Bill provides for the production of a commonhold community statement (CCS), which is a combination of plans and rules of management. Together with the memorandum and articles of association, it forms the central governing document of the development. Rules governing the use and maintenance of units should be set down in the CCS. Much of the documentation will be standardised, and will not have to be drafted for each individual commonhold. We believe this to be a very important feature of commonhold.
887 Let me stress that the Government are taking careful note of all the arguments put against the rule which requires the consent of 100 per cent of the prospective unit holders for conversion from leasehold to commonhold. We doubt that allowing long leaseholders to continue physically within, but legally at least semi-detached from, the commonhold arrangement would be a sensible way through. The only alternative, which would bring a non-consenting minority within the new arrangements, might be characterised as expropriation.
However, if a well-judged amendment were put forward, for which there was substantial cross-party support, the Government would listen to the debate and consider it very carefully. That said, the position which the Government have hitherto maintained, and to which they still adhere unless persuaded to the contrary, is that, although there is undeniable merit in not allowing one person out of step with the proposed new regime to obstruct the entire commonhold arrangement agreed upon by the others, the sensitivities inherent in expropriating that one person may be an overriding consideration the other way. But the Government will listen.
Perhaps I may now deal briefly with the proposed measures in Part 2 of the Bill. The Bill introduces a new right for leaseholders of flats to manage their building without having to prove shortcomings by the landlord or pay compensation. This new right will give leaseholders the chance to make a better job of managing the property. Its very existence will encourage landlords to give their leaseholders better value for money. The rules are as simple as possible to minimise the scope for challenges. They are similar to the proposed new rules for collective enfranchisement.
To ensure clear allocation of responsibility, democratic management and effective dispute resolution, the right will be exercised by a company with a prescribed constitution suitable for residential property management. All leaseholders will have the right to join.
As there is no need to prove that the landlord is at fault, we need safeguards for the landlord's legitimate interests. We have tried to strike a fair and workable balance.
The Bill makes a number of changes to the right of collective enfranchisement for flats. We propose to simplify the eligibility rules by abolishing the residence test and remove the requirement for two-thirds of the leaseholders in a block to participate. We will raise the proportion of the building that can be occupied for non-residential purposes from 10 per cent to 25 per cent and remove the low rent test where it still applies. The Bill will also restrict the existing exemption for resident landlords.
Leaseholders will have to use a company with a prescribed constitution similar to that proposed for the right to manage and commonhold. That will ensure democratic management and an effective mechanism for resolving disputes. All long leaseholders will have a right to join. At present, leaseholders can be unfairly excluded once the two-thirds majority currently required has been achieved.
888 We share leaseholders' concern about the cost of enfranchisement but we also recognise landlords' legitimate interests. They are entitled to a fair market price, which, despite criticisms from some noble Lords during the debate, should include a share of any marriage value. As disputes over the price can result in leaseholders incurring costs which amount to as much as the price itself, we intend to reduce the scope for costly arguments.
The Bill amends the right of individual leaseholders of flats to buy a new longer lease. Many of the changes reflect those proposed for collective enfranchisement. It will remove the existing three-year residence requirement to help leaseholders who occupy their flat as a second home or sublet it. To prevent short-term windfall gains by speculators, leaseholders will need to hold a long lease for two years before being able to exercise that right.
The Bill provides new rights for leaseholders of houses who have extended their leases under the Leasehold Reform Act 1967. They will be able to buy the freehold after the extended lease has commenced. They will be entitled to remain under an assured tenancy when the extended lease expires.
The Bill amends the definition of "service charge" under the Landlord and Tenant Act 1985 to cover improvements where these are payable under the terms of the lease. It will also give leaseholders new protection against unreasonable administration charges. Let me make it clear that administration charges and service charges for improvements will only be payable where the lease provides for their payment.
The Bill extends existing requirements to consult leaseholders on proposed works or services The Bill provides that ground rent is only payable when demanded. If paid within 30 days, the landlord will be prevented from making additional charges or starting proceedings.
The Bill introduces new restrictions on the use of forfeiture. Landlords are able to threaten forfeiture, often on spurious or non-existent grounds, to persuade leaseholders to pay unreasonable charges. Landlords will be prohibited from commencing forfeiture proceedings for any contested breach of covenant unless a leasehold valuation tribunal or court has determined that a breach has actually occurred.
The Bill makes a number of changes to the leasehold valuation tribunals in order to improve their effectiveness and speed up dispute resolution. Leaseholder interests, in particular, were critical of the Government on the grounds that they believed that the previous Bill did not go far enough in its protection of leaseholders. Part 2 of the Bill includes important new provisions to strengthen leaseholders' rights. These are intended to address concerns put forward by noble Lords during discussions in Committee. I am grateful to noble Lords, in particular, the noble Lords, Lord Goodhart, Lord Williams of Elvel, and Lord Richard and the noble Earl, Lord Caithness, for their helpful and constructive comments.
889 The new provisions make changes to the qualifying rules for the enfranchisement of leasehold houses similar to those proposed for flats. They improve existing accounting requirements to provide greater transparency and discourage fraud. They include a new right for leaseholders to withhold service charges where requirements have not been met. Further, they will make it easier to remedy defective leases. The grounds will be clarified and extended and jurisdiction transferred to leasehold valuation tribunals. Lastly, they will make it clear that the right to seek the appointment of a manager under Part II of the Landlord and Tenant Act 1987 applies where a third party is responsible for management, and will restrict the current exemption for resident landlords.
We hope that these important additions to Part 2 of the Bill will help to meet some of the criticism levelled at the Government during debate on the former Bill. We realise that perfectly proper expectations had been raised by our consultation process, and we are pleased to be able to include them now.
We continue to believe that this is a good Bill. Principled differences of view arose during debate in its former incarnation. I do not doubt that some of those differences will arise once more. I repeat that, if a well judged amendment is put forward, for which there is substantial cross-party support, to the effect that less than 100 per cent of the prospective unit holders should be necessary for conversion from leasehold to commonhold, the Government would consider it carefully, despite their reservations about what could be regarded as expropriation.
When the Bill was last considered, there were some who suggested that we should forbid any further leasehold development and require existing leasehold developments to be converted to commonhold. But we shall continue to maintain the position that stopping leasehold in its tracks is not the most prudent way to proceed. Instead, we shall continue to attempt to win the hearts and minds of potential developers, investors and buyers to ensure that commonhold is established as the preferred alternative for those building interdependent properties. I commend the Bill to the House.
§ Moved, That the Bill be now read a second time.—(The Lord Chancellor.)
§ 4.20 p.m.
§ The Earl of Caithness
My Lords, I am extremely grateful to the noble and learned Lord for that clear exposition and resumé of the Bill. As he rightly pointed out, we are re-treading ground which is still fresh in our memories. I should like immediately to thank the Government for certain amendments which have been included. It is clear that they have taken on board some of the points that were made. I hope, too, that at this stage it might be in order for me to congratulate the noble and learned Lord, Lord Falconer of Thoroton, on his new appointment. I look forward to working closely with him on housing matters. The noble and learned Lord will soon become used to the team. We 890 are not a big team, but we are quite vociferous. Although we may have different points of view, I believe that by and large most of the noble Lords concerned are very well briefed.
I had not intended to say much about commonhold because I felt that I was one of those noble Lords who was bashing his head against a brick wall and getting nowhere. However, given the remarks made by the noble and learned Lord the Lord Chancellor in his introduction, I now think that perhaps there is a crack in the wall and, if I continue to bash my head against it, we might knock a little of that wall down.
§ Lord Williams of Elvel
My Lords, I am most grateful to the noble Earl for allowing me to intervene. I did not put my name down to speak in the debate on Second Reading because I, too, thought that we were bashing our heads against a brick wall on the matter of commonhold. However, now that my noble and learned friend has said that there might be a chink, then I shall certainly participate in the proceedings in Committee.
§ The Earl of Caithness
My Lords, I hope very much that the noble Lord, Lord Williams of Elvel, will be with me in Committee. I felt that we formed a good team earlier in the year. We might be an even better team now. I did not like the provision that required 100 per cent agreement to move from leasehold to commonhold. It seemed to defeat the object of moving to commonhold in the first place and I felt that it could not progress all that far. However, I believe that we might now have an opening to develop that point.
I wish to concentrate my remarks on Part 2 of the Bill, covering leasehold reform. At this point I should note that today we are lucky enough to have one noble and learned Lord opening the debate and another noble and learned Lord closing it. That is most fortunate. Could the noble and learned Lord who is to sum up say a little more on why the Government have made the amendments set out in Chapter 4 of the Bill? That appears to be the part of the Bill which has changed the most since it was first introduced in the last Parliament.
The underlying principle of leasehold enfranchisement has always been to give leasehold homeowners the right to buy the freehold. Over the years that principle has been steadily eroded and, what is of key concern, will eventually disappear completely under the terms of the Bill. That is perhaps surprising when even the Government's most recent consultation paper seemed to accept that legislation should not benefit speculators and professional property investors. I believe that the Bill represents a fundamental flaw in the Government's thinking because it will do exactly that.
The original 1967 Act did not expressly exclude commercial property from its provisions and, to that extent, mixed-use properties could fall within it if the building reasonably could be called a dwelling-house. However, in practice, the great majority of mixed-use property was excluded because of the low rent test, the rateable value limits and the residency test. The 1993 891 Act changed that by the removal of the rateable value limits, although again a large number of mixed-use properties continued to be protected by a combination of the low rent test and the residency condition. The 1996 Act made further inroads into that by removing the low rent test for leases over 35 years. The current Bill originally intended to make no further amendments, but I see that the Government are now proposing to abolish the low rent test and the residency test for houses, but with the saving of a two-year residency test for mixed-use properties.
What will be the effect of these cumulative amendments? I believe that as regards a mixed-use building—whatever the proportion of commercial use—if it is let to an individual on the standard institutional 25-year term and he lives in the residential unit for two years he will then be able to buy the freehold of the building. Furthermore, under the terms of the 1967 Act, there is no right for the landlord to claim a leaseback on the commercial unit; he loses the whole thing. I believe that to be fundamentally unfair. All one is doing here is exchanging one landlord for another to no great benefit.
Incidentally, the abolition of the residency test for houses has one particularly odd consequence; that is, to allow the head lessee of a building comprising flats to buy the freehold. From my experience as a surveyor, which I ought to declare—I declared it two days ago before my remarks on the Land Registration Bill; I am an active surveyor and I have friends who are surveyors, property owners and solicitors deeply involved in this field (I have now also declared everyone else's interest)—I can think of a great number of people whom I might term as unsavoury property speculators who hold head leases on residential buildings in certain parts of London. They will relish the prospect of the Bill in order to increase the value of their premises—again, for no real good cause, which had been the original idea behind enfranchisement.
Under the 1993 Act, a tenant cannot be a qualifying tenant for the purpose either of a collective claim or a lease extension claim if he has a business tenancy. So far as I can see, no changes have been proposed to that. Furthermore, a building will not qualify for a collective enfranchisement if more than 10 per cent of the internal floor area has non-residential use. Also, at least half of the participating tenants in a claim must fulfil a residency test. However, the Bill proposes to abolish that residency test and to increase the nonresidential limit to 25 per cent.
Perhaps I may cite the example of a standard, four-storey mixed-use building comprising a ground floor shop with the upper parts divided into three residential units. The shop is let on a standard institutional 25-year term, with each of the flats sold on a long lease held by an offshore investment trust. If the Bill as drafted is passed, then the three offshore investors will have the right to buy the freehold of that building. I accept that the landlord has the right to a leaseback on his commercial unit, but he will lose the freehold of his building and the ability to manage it as part of a larger holding. Again I must ask the noble 892 and learned Lord: what is the justification for this? All that is being done here is transferring the right to buy the freehold from one landlord to three offshore landlords. I do not think that that would benefit the people living in the building.
I shall remain with the question of mixed-use buildings. We have all heard sagas of excessive service charges. I shall cite one instance that I know of well. It is worth recounting the facts to noble Lords for the simple reason that it supports a major plank of my next argument. The building in question has a commercial use of more than 25 per cent with six residential flats above. The owner had an agent, Agent A, who managed the property from 1993 to 1999. Over that time, the agent's fees amounted to 62 per cent of the total service charge. Additional items were set down, for which fees were charged; namely, for exceptional repairs which, during a period of six years, amounted to over £58,000. The owner then changed agents. Agent B has now applied to the tenants for a further £22,000 for redecorations and repairs. We have tried to secure from the original agent a breakdown of how the costs of over £58,000 were incurred. There are no details; no specifications; no invoices; no guarantees; the freeholder denies all knowledge; and, of course, the new Agent B also denies all knowledge. We have had surveyors look over the property and they cannot see how that sum can readily be accounted for. The matter has been reported to the appropriate institutional body—the chartered surveyors—but, sadly, that body is not proving as effective as I had hoped it would be and it does not seem to be taking any action against the agents.
The point of the example is that that property will receive no benefit under the Bill, and the six residential tenants and the commercial tenant continue to be penalised.
At the end of the last Session, the noble Lords, Lord Lea of Crondall and Lord Goodhart, and I, attended a very constructive meeting with the noble Lord, Lord Whitty, who was then the Minister in charge of the part of the Bill dealing with leasehold housing. The noble Lords, Lord Lea and Lord Goodhart, and I—all from different sides of the House—had the combined agenda that more important than the right to enfranchise was the right to manage. There should not be too much read across; they are two very separate items. I hope that the noble Lord, Lord Goodhart, who is to speak next, will pick up on that point.
I have given your Lordships a classic example of a property where all the tenants want is sensible management, and they cannot get it. The Bill does nothing to help them to get it. The residential tenants do not want to enfranchise and the commercial tenant does not want to enfranchise, but they cannot get the requisite information, and the professional bodies involved do not seem to be able to help.
I should like to see changes in the Bill which allow a greater scope for right to manage. I am sorry that the noble Lord, Lord Lea, is not on the list of speakers because he has particular experience of this issue. I hope that he will come in at Committee stage. 893 Surely, in this instance, there is no reason why a combination of the commercial tenant and residential tenants should not be able to take over the long-term management of that building. That leads me to my second point—which concerns the totally unsatisfactory nature of some of the agents with whom we are faced. Putting it as mildly as I can, some of my fellow agents are not the best people to be looking after property. All agents should be licensed; we should all be trained and regularly retrained to a high standard; and there should be draconian penalties levied against us when we do not perform. It is a scandal that fellow agents are not able to produce those invoices, those specifications and those guarantees.
When we previously discussed the Bill in Committee, I tabled an amendment to that effect. It is a vital ingredient which would help the noble and learned Lord the Lord Chancellor's Land Registration Bill. If we can get a better quality of surveyors in this country, who are trained to a high standard, the whole process of the housing market, the commercial market, the leasehold market and the commonhold market will improve. People will start to gain confidence in agents who will be held accountable. I hope that on those two issues we can get some movement from the Government.
§ 4.34 p.m.
§ Lord Goodhart
My Lords, I rise to speak on what should be described as the Fourth Reading of the Bill. We had a First and Second Reading before Dissolution; we have had another First Reading and we are now having the second Second Reading. We also had five days in Committee in the Moses Room before Dissolution and one day on the uncompleted Report stage. I hope that that will help us to shorten the proceedings.
I, too, should declare an interest as the holder of a lease on a flat. The flat is Crown property—the Crown Estate is the freeholder—and so it is not in exactly the same advantageous position as other flats, but I still should declare the interest.
I am grateful to the noble and learned Lord the Lord Chancellor. Like the noble Earl, Lord Caithness, I congratulate him on a clear presentation of a number of complicated issues. I am also grateful to the noble Earl, who has raised a number of important points on Part 2 of the Bill. I believe that those points have a great deal of force behind them. I have little doubt that we shall support many of them when we get to the Committee stage.
Perhaps I may start with a general statement of my party's position on this matter. We are strongly in favour of both the introduction of commonhold and a further stage of leasehold reform. We feel that in some respects these proposals do not go far enough. It is a highly detailed Bill and we believe that, in a number of cases, the details are wrong or could be improved.
We regret that the break between the abandonment of the Bill on Dissolution and its return could not be used to make further improvements. As I understand 894 it, most, if not all, of the additional provisions which now appear in the Bill compare to those which appeared for Report stage. They are, in fact, amendments which were put down for debate on Report but which were not incorporated into the Bill because of the termination of the Report stage. I should be interested to know whether there are any amendments which are additional to those tabled by the noble and learned Lord at Report stage.
We welcome the principle of commonhold. For the reasons explained by the noble and learned Lord, freehold ownership of flats is impracticable. Long leaseholds also present serious problems, particularly in regard to the difficulty of obtaining mortgage finance when the outstanding term of a lease falls below 30 to 40 years. Various forms of collective ownership have been developed in other parts of the world, the most relevant of which, perhaps, are those in the USA and Australia. They have undoubtedly worked well there and there is no reason whatever why they should not work well here. We therefore warmly welcome the introduction of commonhold.
But there are a number of problems, some of them serious. As the Bill now stands, the main problem is the requirement for 100 per cent consent from all interested parties—freeholders, leaseholders, chargees—before the conversion of existing properties to commonhold is possible. This will make it very difficult to convert existing leasehold blocks to commonhold. It might be possible in some small buildings containing, say, no more than three or four flats, but hardly any larger blocks would be likely to convert. The great majority of commonhold would be likely to be new build.
I was particularly interested to learn, therefore, that the noble and learned Lord the Lord Chancellor is prepared to consider amendments and has an open mind on the subject. Indeed, he obviously favours the principle of removing the 100 per cent consent rule if an appropriate alternative can be designed.
I would reject any idea based on expropriation. I believe that it is perfectly possible to devise a workable scheme where a small minority of leaseholders—no more, say, than 20 per cent—refuse their consent. This would involve the commonhold association acquiring the freehold and simply leaving the leases of non-consenting parties outside the commonhold scheme until the leases expire. We tabled amendments to that effect on the previous Bill. We shall look at the text of our amendments again to see where they can be improved, and we shall bring something back for that purpose.
Another serious problem with commonhold is the question of the recovery of arrears of service charges and other liabilities due to the commonhold association from unit- holders. At present, of course, with leaseholds the threat of forfeiture is usually enough to secure payment. But if forfeiture is not available, that is not possible. It is true that a charging order can be obtained for arrears, but that involves an application to a court—which is likely to take some time—and, of course, existing charges on the property 895 take precedence over a charging order. This could mean serious cashflow problems for commonhold associations even if they do eventually get their money back. Prompt payment is vital; and it will not occur without effective mechanisms for securing it.
Therefore, I should like to see arrears of service charges treated as priority debt, so that if a mortgagee sells a commonhold unit the mortgagee must pay off the arrears before reimbursing itself. The Council of Mortgage Lenders is, I understand, unhappy with such a proposal, but I believe that any detriment to the council is outweighed by the probable benefit in securing better and more effective maintenance of buildings, which will benefit mortgage lenders as well as commonholders.
Finally, as regards Part 1, there is the question of the best corporate structure for commonhold associations. The Government propose a company limited by guarantee. Some critics have raised the objection that the structure is too formal and complicated.
I accept that there undoubtedly must be a corporate structure for commonhold associations; however, I believe that the structure and administration of limited liability partnerships under the Limited Liability Partnerships Act 1999 is likely to be a good deal simpler. For commonhold associations with no more than 10 members, a limited liability partnership could well be more appropriate than a company limited by guarantee.
Limited liability partnerships are a novel form of incorporation. It may perhaps be premature to provide them as an alternative available at present. However, the Government should at least include powers in the Bill to enable them to introduce a limited liability partnership at a later date if it looks likely to be beneficial to small commonhold associations. That point applies also to the right to manage and the right to enfranchise companies as well as to the commonhold associations.
I move on to Part 2 of the Bill, Clause 69 onwards, dealing with leasehold reform. We did not, of course, have the benefit of a debate on Report. Again, we support the principle of extending the right to manage to enable tenants to form an RTM company without having to prove mismanagement by the landlord. Where property is well managed, lessees are probably unlikely to want to take over the management themselves. But the need to prove mismanagement has deterred lessees from claiming the right to manage where management has been unsatisfactory or incompetent rather than grossly oppressive.
Part 2 contains what is perhaps the only significant earlier concession by the Government; namely, their acceptance that RTM and RTE companies should not be mutually exclusive. Under the original proposals, a member of an RTM company who did not wish to become involved in the cost of enfranchising would have lost the right to participate in management when the company proceeded with enfranchisement. The provision needs strengthening.
896 Our main disagreement with the RTM proposals relates to the automatic right of a landlord to be a member of an RTM company. RTM companies should be representative of tenants and should he able to deal at arm's length with the landlord. We accept that where the landlord is also the occupier of a flat it may be reasonable that he should be a member of the RTM company. However, it gives an unjustified advantage to non-resident landlords to enable them to have the right to be members of that company.
We believe also that the Government have not dealt properly with the position of management contracts subsisting at the time of the take-over of management by an RTM company. There was a confused debate on the matter at the Committee stage. It appears that the Government are assuming that existing management contracts will be terminated on the take-over of management by an RTM company, although that is a matter of general law rather than the consequence of any provision in the Bill. That may be technically correct, but if so it seems to us to be undesirable. Management contracts may be contracts, for instance, with a cleaning company for the cleaning of the common parts of the building; they may include a contract with a gardener for looking after the garden.
The basic principle should be that contracts of this kind should be novated. That means that they should continue with the substitution of the RTM company for the landlord. I believe that this rule should be adopted on the face of the Bill subject to the right of an RTM company to terminate contracts in cases where, for example, the landlord has given a contract for services to be provided by a friend at excessive cost.
I now turn to Chapter 2 of Part 2, which extends the right of collective enfranchisement. We welcome this provision. It extends the right to join in collective enfranchisement to a number of leaseholders' who did not have it previously. The noble Earl, Lord Caithness, put forward a number of criticisms which have some justification behind them; but broadly, this is a principle that we support.
There is, however, one defect which is of fundamental importance. The Bill does not require the automatic transfer of membership of an RTE company on the assignment of a lease. That seems to me to be essential if the purpose of an RTE company is to be achieved; namely, to give leaseholders the right to participate in ownership. We see an RTE company as in effect an embryo commonhold association. If the leaseholder can sell his lease but retain his interest in an RTE company, we are simply recreating the problem that the legislation was designed to remedy. We are, in other words, creating a new set of absentee landlords.
I come finally to the issue that raises the only real conflict of principle between ourselves and the Government. I refer to the inclusion of marriage value in the computation of the price to be paid to the landlord on enfranchisement under Chapter 2 or Chapter 4 and on the extension of a lease under Chapter 3.
897 The basic price to be paid is what the freeholder loses. That means the market value of the reversion being acquired by the leaseholder or an RTE company or the reduction in the market value of the reversion as a result of the grant of an extended lease under Chapter 3.
We have no quibble with that principle. We do not press for the extension of the artificially reduced value that was originally provided for by the Leasehold Reform Act 1967. That could well be contrary to the Human Rights Act—although the Duke of Westminster's case indicated that at the time it was thought not to be contrary. But the market value paid to the freeholder is increased on the footing that the leaseholder is a special purchaser and would be willing to pay more than someone buying a freehold as an investor.
We believe that that concept is unfair. The leaseholder is in a weak bargaining position in this notional market: unless he or she buys the freehold or obtains an extended lease, he or she will face inconvenience, disturbance and the distress of having to move home. We believe that it is wrong in principle that the freeholder should be allowed to take advantage of this weakness in the bargaining position of the leaseholder.
Marriage value should, we believe, be eliminated from this equation. The leaseholder should have to pay what the investor would pay for the property, and no more than that. We shall, therefore, fight throughout the proceedings on this Bill for the abolition of the marriage value.
There are some other points that we shall raise at later stages, but they are relatively minor and I shall not discuss them now. The Bill, even as it stands, is an important step forward. It could be a good deal better. We hope that before it reaches its "Fifth Reading" it will at least be a bit better. This has been a good week for property nerds in this House, with debate on the Land Registration Bill on Tuesday and on this Bill today. If I were an examiner, I should give the Land Registration Bill an alpha. This Bill, I am afraid, would qualify for no more than a beta, but let us hope that before it passes into law we can get it at least up to a beta plus.
§ 4.50 p.m.
§ Baroness Thornton
My Lords, although I was unable to participate in the previous Second Reading debate, I was able to attend and hear my noble and learned friend the Lord Chancellor open that debate, as he has done today. The telling of the tale has only improved in its clarity. The noble Lord, Lord Goodhart, and the noble Earl, Lord Caithness, as ever, spoke with enormous experience and expertise which I cannot match.
I do not have to declare an interest as a leaseholder, as other colleagues will be doing, but many years ago I owned a flat in central London, and I remember with some bitterness the unfairness and cost of service charges. I also remember that the changes in 898 ownership and the managing agents of the block created enormous problems for those of us who lived there. I felt strongly about the remarks that the noble Earl, Lord Caithness, made about managing agents which were true in my case. I remember, too, when we decided to sell up and move on, spending a significant sum of money resolving issues of old-fashioned covenants on the property. I welcome, in particular, those parts of the Bill that introduce a new right for leaseholders of flats to manage their own building without having to prove fault or to pay compensation.
This reform has been a long time coming, starting in 1967 with the then government's Leasehold Reform Act. Further legislation in 1985, 1987 and 1993 sought to extend the rights and protection of leaseholders, including the right to buy freeholds and the right to challenge incompetent and neglectful landlords.
However, although on the face of it the protection of leaseholders afforded by the law appears formidable, in practice many of the remedies are expensive and, for an ordinary person like myself, to challenge them is too formidable, too difficult and too complex. Landlords have become adept at blocking loopholes so that leaseholders find themselves in a disadvantageous position. That, and the fact that it is an investment in a home that is steadily losing its value as the lease approaches its end, are some of the reasons why the Bill is so welcome to many people living in leasehold property.
I am aware that some leasehold associations feel that the root and branch reform proposed in earlier consultations has not taken place. But the dress rehearsal that we undertook before the general election has served us well and I congratulate the Government on the additional clauses that address some, though not all, of the concerns that have been raised. In Committee, we shall need to examine the powers of right-to-manage companies, some of which I suspect people will feel are inadequate. We also need to ensure the quality of new management.
The first part of the Bill introduces the new structure of commonhold. I attended most of the Committee stage debates last time round and listened carefully. One of the issues raised by noble Lords was the challenge posed to those who support commonhold in persuading the development industry to embrace an innovation that is not yet proved. It is a catch-22 situation. Investment will not be made until commonhold has proved itself, and it cannot prove itself until its success is apparent. The Government will need to go out and sell commonhold to the development industry and its investors. I was particularly pleased to hear my noble and learned friend the Lord Chancellor acknowledge the problem and I look forward to discussing how to solve it as the Bill progresses.
§ 4.55 p.m.
§ Lord Best
My Lords, I rise with the usual combination of anxiety and awe to present my maiden speech, but perhaps with a little extra trepidation because I think that I am the first to speak from among 899 those appointed by the House of Lords Appointments Commission, which is chaired by the noble Lord, Lord Stevenson of Coddenham. The news media gave us people's Peers a rather rough ride, so I feel a little extra pressure to prove my worth.
I want to speak not only because I have some comments to make about the Bill, but because it gives me the opportunity to say something about the role of charitable research-based foundations, such as the Joseph Rowntree Foundation, of which I am the director. I hope to show that they can play an important role in policy making. We have produced some nine reports in the past decade on issues relating to commonhold and leasehold reform, the first of which we (lid with the Consumers' Association. We looked through the eyes of the leaseholders—the consumers—at the problems that they faced and discovered that more than 50 per cent of the leaseholders surveyed had had severe problems with their absentee landlords. Those problems included excessive service charges, lack of repairs and maintenance, leaking roofs, dry rot and even some harassment by landlords.
We followed that study over the past nine years with a series of reports in which we brought together researchers from the University of Stirling, led by Dr. Douglas Robertson, Professor Ian Cole and others from the University of Sheffield, Hallam and, more recently, we imported from America comparative knowledge and understanding from Professor Katharine Rosenberry of the California Western School of Law in Santiago. In America they are well used to commonhold, as they are in Australia, and we have produced a series of reports under that heading.
I hope that this body of knowledge has been helpful not just in producing some ideas and information for policy makers, but also for being a source and network from which the Government have been able to commission additional research and draw down expert advice, not; least international advice in the policy-making processes.
With that lengthy preamble to justify the role of charitable foundations, perhaps I can now make three comments about the Bill itself. My first is to make the connection between this legislation and the urgent need to persuade more people to live in our towns and cities, particularly in the centres and conurbations in the North and the Midlands, and not just in London.
Some 60 per cent of all new homes in London are built as flats, but for England as a whole, only 17 per cent of all new accommodation is built in the form of flats. We are averse to the idea of living in flats, which propels us to buy freehold houses in the suburbs and beyond, into the countryside. If we are to reverse these trends, we must remove the disincentives and inhibitions of people to live in flats in urban centres.
The Bill goes a long way towards remedying the differences between buying a freehold house and buying a leasehold flat. Until now it has not been wise to buy a leasehold. It has a depreciating value over time and subjects leaseholders to the potential of bad 900 landlordism and high service charges. I welcome the Bill for the contribution that I hope it will make to the agenda for urban renaissance, which the noble Lord, Lord Rogers, and others are keen to promote.
My second reason for welcoming the Bill is that it goes beyond simply freeing people from the potential tyranny of absentee landlords. It will provide the framework within which the people who want to manage their premises together can do that difficult job. We know from research that people who have collectively bought the freehold of their apartments and who now manage the common parts themselves are sometimes disillusioned by the process. Their neighbours have not turned out to be the managers that they had hoped for and new disputes can break out.
The legislation, particularly the regulations, and the manual of guidance which I hope will accompany it, will enable people to get along together. We cannot legislate for people to love their neighbours but we can provide legislation which makes it easier for people in a block of flats to co-operate and work. together. I believe that the measure will provide the basis for clarity on matters such as how much one sets aside for future repairs and how one handles the collective parts of the building. That will be important to good neighbourliness.
My third point is rather more technical. It concerns the new tendency for planning consent to be given for new developments with the condition that some of the new homes are not for owner occupation but constitute affordable housing for rent. Planners are increasingly and properly insisting upon mixed tenure developments in which social, rented. housing — perhaps housing for key workers—is included among housing for owner occupation. That is infinitely to be preferred to segregating and separating social housing and building polarised estates where people are labelled poor or losers. However, that presents some challenges for the commonhold and right-to-manage legislation as we shall in future increasingly have blocks of flats and tight, dense developments of owner-occupied housing which has within its midst traditional tenants, not long leaseholders. Their views on managing and looking after the common parts which they will share will need to be taken into account in ways that are not yet possible as the legislation is drafted. I hope that that point will be considered as the Bill progresses.
I thank noble Lords on all sides of the House for the many kindnesses which have already been shown to me. I also thank noble Lords for their patience in listening to my comments on the Bill and for their tolerance in allowing me to set those points in the context of the role of charitable foundations in debates of this kind. I hope to draw on that again in the future.
§ 5.2 p.m.
§ Baroness Crawley
My Lords, it is my privilege to follow the maiden speech of the noble Lord, Lord Best. We have enjoyed a wonderfully riveting and profound maiden speech from the noble Lord and a contribution 901 full of grace, insight, humanity and passion which reflected his great experience. The speech was delivered without a note in sight. He very much made the case for people's Peers.
As the noble Lord said, he is director of the Joseph Rowntree Foundation, one of our great, leading charitable organisations which supports renowned policy development, particularly in the areas of poverty alleviation and urban regeneration. Before joining the Rowntree Foundation the noble Lord, Lord Best, was director of the National Federation of Housing Associations, which is why his contribution this afternoon was so skilful and comprehensive in its scope and clarity. We look forward to hearing from the noble Lord on many future occasions in your Lordships' House.
I now turn to my own poor morsel of a contribution. Not being a campaign veteran of the first introduction of the Bill earlier this year, and not being a housing expert by any stretch of the imagination, I shall not detain your Lordships long. I simply want to make three points. First, I very much welcome this important Bill with its introduction of commonhold, allowing property owners the right to own their own property absolutely and also to be able to manage common parts through a commonhold association. As many noble Lords have said, this model of co-ownership, which means no leases and no landlord, is long overdue and calls on the land ownership systems which, as the noble Lord, Lord Best, has just said, are the norm in the USA, Australia and New Zealand. When debating the Bill in the spring of this year many noble Lords commented on the importance of adopting best practice from those and many continental countries. The Bill also tackles the vexed problem of leasehold reform to make it easier for leaseholders to buy the freehold of their homes and to give them effective redress against landlord abuse.
Secondly, I hope that the Bill, when it completes its passage through your Lordships' House, will reflect a proportionate response to the clamour in the country for justice in leasehold reform. Some 2 million leaseholders in England could benefit from new legislation. The current system of residential leasehold is fundamentally flawed, giving disproportionate powers and privileges to landowners. As my noble and learned friend the Lord Chancellor said in his opening remarks at the first Bill's Second Reading in this House on 29th January,many leasehold tenants have a wide range of grievances. These include high service charges, absentee landlords who allow the common parts of a block of flats to fall into serious disrepair and landlords who may exploit their position when it is alleged that a tenant has broken the terms of the lease".—[Official Report, 29/1/01: col. 454.]I very much hope that the new right to manage, the removal of the residence test and the low rent test, along with the simplification of the qualifying rules for exercising collective enfranchisement and other remedies in the Bill will go a long way to alleviate the strong sense of injustice which leaseholders currently feel.
902 Thirdly, looking back at the substantial amount of work that my noble and learned friend the Lord Chancellor and other noble Lords have already carried out on the Bill, I hope that despite calls—particularly from the leaseholder lobby—that these proposals do not go far enough, we shall be able to find enough common ground on which to agree in order to reach a fair and balanced solution for all interested parties.
§ 5.7 p.m.
§ Lord Monson
My Lords, I hesitated before putting my name down to speak today but finally decided to do so for two reasons. The first is that I took part in the Committee stage of the abortive Bill in the previous Parliament and am likely to do so again this time round.
Being extremely mindful of the injunction of the noble and learned Lord the Leader of the House on Monday that we must lean over backwards to declare our interests, and by inference our non-interests, I ought therefore to set out my stall. The trouble with having to set out one's stall is that it minimises the chances of being falsely accused by one or other organ of the press of acting purely out of mercenary considerations, thereby minimising the chances of being awarded massive libel damages, but there it is! Accordingly, I declare a complete non-interest in that neither I nor any member of my immediate family is either a ground landlord or a lessee.
However, when the process of leasehold reform started back in 1967 I gradually became emotionally absorbed in it, for a number of reasons. In about 1968 a good friend of mine living in the South West of England let a disused, unmodernised farm cottage approximately 200 yards from his own house on a 40-year building lease at a totally nominal rent of about £1 a year to a well-to-do childless couple, the intention being that his as yet unborn grandchildren should inherit the improved cottage in 40 years' time. However, the lessee, a clever lawyer—I cast no aspersion on clever lawyers with whom the House is absolutely packed today—took advantage of the 1967 Act, on which the ink was scarcely dry and the full implications of which had not yet sunk in in rural Britain, compulsorily to acquire the freehold for an utterly derisory sum, thereby robbing my friend and future generations of his family. That alone fully justified the observation of Lord Brooke of Cumnor on 23rd October 1967 who stated:I venture to prophesy that this will go down in history as one of the worst Bills ever presented to Parliament".—[Official Report, 23/10/67; col. 1391.]He later said that it opened the door to "legalised stealing". Significantly, even the then Labour Government—in those days they still called themselves socialists—had not planned for or anticipated such an outcome. Speaking from the Government Front Bench on 26th June 1967, Lord Shackleton said:Interference with contract ought to be kept to a minimum, and plainly there are some people who do not need protection in any form, and who, if there were no limits, would obtain very large windfalls out of proportion to the particular hardship of their need".—[Official Report, 26/6/67: col. 18]903 Alas, it did not work out that way, as we all know, and many extremely rich people have benefited from leasehold reform. To some extent politicians of all parties are to blame. I think that electoral considerations played a part since there are many more leaseholders than landlords.
I concede that my in-laws, who were a great deal less well off than the clever lawyer in my first example, were able to acquire the freehold of their London house, albeit for a much larger capital sum and from a group rather than an individual. Of course, I was utterly delighted for them personally, although I could not help hoping that no future charitable beneficiary would lose out in consequence.
The third event which moulded my thinking on the subject was the treatment of an old family friend of my father's generation—a most distinguished and extremely senior officer in the Royal Air Force. His final retirement years in his flat on the Chelsea-Kensington borders were made a total misery by the unscrupulous, indeed wicked, behaviour of his overseas-based ground landlords. The noble Baroness, Lady Crawley, gave instances of that kind. I have always been 100 per cent behind any legislative effort to prevent exploitation of lessees over service charges and maintenance. I have never had any problem there. It is confiscation which sticks in the gullet. I am not convinced that the present Bill, although better than many of its predecessors, is totally devoid of that element—for example, in the matter of marriage value. Here I totally disagree with the noble Lord, Lord Goodhart.
The second reason for my intervention is to defend the principle of leasehold. The Labour Government of the late 1960s did not argue that leasehold was inherently evil. On the contrary, they conceded that it had merits, not least in the matters of maintenance of historic squares and orderly redevelopment. They were concerned with the rectification, as they saw it, of some specific abuses and regional problems, in South Wales and elsewhere—a perfectly commendable objective. But nowadays it is fashionable, and by no means only on the Left, to attack the whole principle as immoral. But why? As Henry Brooke pointed out in 1967–1 quoted him previously—the leasehold system enabled him and his parents to live in a better house in a better location than would have been possible had only freehold houses been available. Why should not a middle-aged, childless couple invest such money as they have in the short leasehold of a luxurious flat or house in Belgravia, Chelsea, Kensington, Knightsbridge or Hampstead rather than being confined to buying a freehold of a house for the same amount of money in Ealing, Edmonton, Forest Gate or Croydon? To deny people the right to opt for a wasting asset, if they so choose, is pure paternalism.
This is not an academic argument. It is highly relevant to the Bill. If we can convince ourselves that leasehold is inherently wrong and immoral, then the question of fair compensation can safely take a back seat or even be chucked out of the window altogether.
904 But if it is not inherently wrong, as all major parties used to agree, then we must surely oppose any element of confiscation.
Finally, while commonhold is a great idea in theory, it is perhaps not the total panacea that some imagine. Fifteen years ago some of my family had the experience of being leaseholders in a block where the management, most unusually in those days and probably now, was wholly devolved to the leaseholders, as will be the case under the common hold system. Nearly all the leaseholders were fairly young, intelligent people with university degrees. One would have imagined that everything would have gone swimmingly. But not a bit of it. No one turned up for meetings; no one would take responsibility; no one would take decisions; they could not agree on the colour the front door should be painted; or whether bicycles should be left in the hall or chained to railings. It was a complete mess.
In an extremely impressive and beautifully delivered maiden speech, the noble Lord, Lord Best, reminded us of such situations. I do not believe that that was, or will be, an isolated instance, notwithstanding the prospect of professional management companies. It may well be—I do not deny it—that commonhold is better than the alternative. However, I fear that in practice there will be quite a few problems.
§ 5.16 p.m.
§ Baroness Gardner of Parkes
My Lords, I spoke at the previous Second Reading and I do not intend to repeat what I said. I state again my declaration of interest. I own leasehold property which I intend to use when I can no longer manage the stairs in my freehold house.
I am a strong supporter of commonhold. My experience in Australia has shown me that it works well. The noble Baroness, Lady Thornton, pointed out the difficulty of encouraging people to develop commonhold property. I believe that some form of incentive is necessary. In the past I have tabled amendments which would force people to build commonhold but I accept the Lord Chancellor's comments that that is not appropriate. Once commonhold is established people will see how good it is and it will take off.
I hope that we shall debate the Bill in this Chamber. We achieved quite a lot during debate in the Moses Room. However, I make a plea that we have further stages of the Bill in this Chamber.
I received today a fax from the Leasehold Enfranchisement Association. It states:Dear Lady Gardner, We are very concerned that the Government has completely failed to take up any of your suggestions—I am not sure which suggestions but I shall find out later—and seems determined to go ahead with its badly constructed bill on Leasehold Reform with only its own amendments.We hope that you will not allow the Government to push the bill past the Lords in this manner".905 I feel very flattered that it thinks I can stop them! But that is the bad news. The good news is that I believe that there are many improvements in the Bill. I refer in particular to the adjustments of leases. Clause 156(3) of Part 2 makes variations possible. It refers to,such other matters as may be prescribed by regulations made by the Secretary of State".I hope that that means that where a lease makes no provision for the setting up of a reserve fund or sinking fund it may be possible to apply to have leases varied in order to do so. It is a major problem when a building is allowed to fall into disrepair and there is no method by which everyone can be asked to produce a small amount. It is a difficult situation. One does not want large amounts of money taken from people unnecessarily but one does need a reserve fund.
I was concerned to note that in Chapter 1 of the Land Registration Bill, Clauses 9 and 10 on classes of title cover only registration of freehold or leasehold land. As we are creating commonhold, why is there no provision in the Land Registration Bill to register commonhold? Some years ago we debated a gas Act which referred to the "registered disabled". At the same time another Bill before the House abolished the term. This seems a parallel situation. In one Bill we create commonhold; in another we ignore it. Why is that? Should it be included in the Land Registration Bill?
The noble and learned Lord the Lord Chancellor mentioned that there was a provision to prevent people having to pay too high an amount before the leasehold valuation tribunal. That will be one of my main areas of concern in Committee and at subsequent stages. I was very involved in the 1993 Act. In fact, it was my hapless question on what it would cost people that elicited the answer, "Every penny of the cost of the tribunal down to the milk for the office cat". That raised such a furore in the House that, after a lengthy debate, it was eventually agreed that, no matter how long the case went on, even if the landlord was determined to drag it out to make it too expensive for the leaseholder to continue, the maximum payable by the leaseholder would be £500.
That has worked well, but the snag comes when the landlord who is resisting the enfranchisement or the longer lease appeals to the Lands Tribunal, where the conditions that we wish to avoid can apply. The landlord can make the case so long and so costly that the leaseholder cannot afford to continue and has to give up. It is very important that the guarding of costs in leasehold valuation tribunals should be extended in the case of enfranchisements to cover the Lands Tribunal as well.
I have already commented elsewhere about the Australian example of mixed-use buildings. In those instances, commonhold operates in two ways. The business premises are run under a separate commonhold from the residential part. That solution is well worth considering, because one of the big problems is the end of life of the commonhold property. The termination provisions now in the Bill 906 are a great improvement. I am pleased that there is provision for termination with 80 per cent agreeing. There can always be a small number of very difficult people who are determined not to have the general interest in mind.
I noted what the noble Lord, Lord Goodhart, said about opposing marriage value completely. I do not oppose it completely, but the distinction between an 80-year lease and others is too extreme and sharp. There should be more of a sliding scale. The leases that I have are 50 years or shorter, so I am not putting the idea forward from that point of view. However, someone who was just a year or two under the 80-year limit and lost any benefit of reduction in marriage value would feel disadvantaged.
The noble Lord, Lord Best, made a very interesting and informative speech, but I take issue with his view that people should not buy freehold houses with gardens. For those with small children, there is nothing as good as a freehold house with a garden, big or small. Outside London, people can afford such houses in a way that they cannot in London. The number of people living in flats in London has increased not because we think that it is the most desirable way to live, but because it has been forced on us by London costs. I understand the noble Lord's point that it would be desirable to have flats for people who are single or those who prefer to have a city-type dwelling in places other than London. When they are built, I hope that they will be built as commonhold, because I believe that that would work best.
I welcome the fact that the Bill has been brought back and improved.
§ 5.23 p.m.
§ Lord Jacobs
My Lords, I was unable to participate in the previous Second Reading, so I begin by declaring an interest. I am a leaseholder of a flat in central London. The lease can be extended under the rights given by the 1994 legislation passed by the Conservatives. At that time, I sought to persuade the then Government to rectify some serious deficiencies in the Bill. I even went so far as to take out a full-page advertisement in The Times with an open letter to Sir George Young, the then housing Minister. Unsurprisingly, my representations were unsuccessful, but three of my four proposals have been included in this Bill, so presumably I was on target. Therefore, one may reasonably ask why I am so utterly despondent about the Bill, which corrects most of those issues that were not properly dealt with last time.
There are about 2 million leaseholders in this country. As the noble and learned Lord the Lord Chancellor said on the last Second Reading of the Bill:The position of those who own long leasehold residential property in England and Wales leaves much to be desired. … they own a wasting asset that declines in value with years and may eventually become unsaleable",—[Official Report, 29/1/01: col. 454.]Just one other country in the world—Hawaii—had a leasehold system. Hawaii has now ended that system. So here we are in this great democratic country with a Labour Government determined to advance the cause 907 of leaseholders. From the Government's public statements, there can be no doubt about that. In their November 1998 consultation paper, they stated:The leasehold tenure is almost unique to England and Wales"—I think that it is now unique—Ii has its roots in the feudal system and gives great powers and privileges to landowners. It is totally unsuited to the society of the twentieth—yet alone the twenty-first—century".They went on to say:The Government believes the leasehold system is fundamentally flawed. It is committed to introducing a new form of tenure for flats—commonhold—which in future will enable the individual flat-owners in a block to own and manage the whole building collectively from the outset. We see commonhold as the best way to tackle the problems faced by many existing residential leaseholders".Finally, they said:The Government considers that leasehold is a fundamentally unsatisfactory tenure. The reform legislation of the last thirty years has had only limited impact. The time has now come for a comprehensive reform of leasehold law".With those resounding words, is it any surprise that leaseholders and leaseholder representative organisations were excited about the intended legislation, until they saw the draft Bill?
I have quoted those comments fully because I want to show your Lordships that the Government had serious intentions to advance the cause of existing leaseholders, yet today existing leaseholders and their organisations are in despair. I believe that between the time when those statements were made and the time when the Bill appeared, some dramatic changes of policy took place in the DETR. It could have been a decision by Ministers or on the advice of an official. All parties concerned have denied that there is any change in policy, but the Bill, within its essential terms, fails to advance the cause of existing leaseholders. I emphasise "existing", because there are 2 million leaseholders who are ill served by the Bill.
Astonishingly, the last Conservative Government's legislation was a great advance for leaseholders, because it enabled many people with houses to acquire their freeholds and many flat-owners to enfranchise or to obtain a 90-year lease extension. Those were fundamental and advantageous changes for all leaseholders throughout the country. On the negative side, the terms on which leaseholds could be acquired were in many cases horrendously onerous and in some cases legally complicated.
There was no doubt among key groups representing the interests of leaseholders that Labour would greatly improve the ease and cost of enfranchising. Having worked our way through the Bill in some detail before the general election, we now know beyond a shadow of doubt that it will do very little for existing leaseholders. The first great hope was that existing leaseholders could convert in some way to commonhold. However, when we were debating the Bill, the noble Lord, Lord Bach, said that he did not anticipate that more than a handful of leaseholders would be able to convert to commonhold and that this form of tenure was intended for future developers. I admire the noble 908 Lord's accuracy and frankness, but how does one square that with the need to help 2 million leaseholders? He went further and insisted that the present leasehold system should continue to be available for new developers. Many of us heard that with incredulity.
How, under the present system, can leaseholders' ability to extend their leases or acquire their freeholds be made much easier and more affordable, thereby ensuring that in the fullness of time the leasehold system would disappear from this country? If Hawaii can do it, so can we. At the moment, leaseholders believe that they have a better chance of improving their position under the Conservatives than under the present Government—although they may have to wait a long time.
The second critical issue, in addition to the introduction of commonhold, is the question of marriage value. I have always believed that the best solution is to abolish marriage value. Many organisations have argued that there is a strong case for abolition.
However, there are lesser steps which could greatly ease the lot of leaseholders. Perhaps I may illustrate just a few. First, the Government have excluded marriage value for leases over 80 years. Therefore, in my opinion and in that of the noble Baroness, Lady Gardner of Parkes, it would be logical and reasonable to have a sliding scale for landlords' share of marriage value. In relation to very short leases, it would reach 50 per cent, but for longer leases that 50 per cent would be reduced by stages to 40, 30, 20 or perhaps 10 per cent. It is illogical to have a zero marriage value at 80 years and 50 per cent at 79 years.
Then there is the possibility of allowing tenants who have lived in their homes for many years to have a lesser share of marriage value, perhaps declining to nothing, if they have occupied their homes for, say, 20 years. People who have been leaseholders for many years—certainly in a block of flats—know how much money they have paid not only towards maintenance and upkeep but also on improvements to their homes. It is bitterly painful to have to pay for that all over again.
Finally, there is another possible approach in so far as the real burden of acquiring either an extended lease or a freehold is that the share of marriage value must be paid up front at the time of the acquisition. It is hard enough for tenants to find the sums necessary to acquire their freehold or leasehold extension, excluding marriage value. Indeed, if the landlord were to sell his interest to a third party, he would receive no marriage value, and there is a strong case for saying that the payment of marriage value should be deferred until the property is sold on.
That would penalise successfully those who are selling supposedly in order to make a quick profit. More importantly, it would protect those who are now forced to sell in order to pay for the freehold or leasehold extension. It has not been recognised adequately that many people would like to remain in their own homes but cannot do so because they are 909 caught between their property depreciating in value at a very rapid rate and finding adequate resources, which they may not have, to prevent that situation occurring.
The need to acquire freeholds or to extend leases is driven by the rapid depreciation of properties in the last few years of a lease. One has either to pay whatever is demanded or lose everything. Therefore, in my opinion, there is a real logic in suggesting that the payment of marriage value should be deferred without the accruing or payment of interest but possibly with indexation for inflation.
If the Government were to introduce any or all of those ideas, landlords would not be trampled underfoot and leaseholders would not be laughing all the way to the bank. Before this Government were first elected in 1997, I had meetings and correspondence with the Housing Minister in another place who had been responsible for this Bill. At that time, I wrote saying that I hoped that the Bill would be the last important one on leasehold reform and that it would not be a small step forward, requiring yet another Bill to deal with this thorny issue. Two million leaseholders anticipated confidently a more effective Bill—something that would at least stand comparison with that produced by the Conservative government when they were in power.
There are three simple steps that the Government could take to curb or, indeed, eliminate enthusiasm for the leasehold system by landlords. Only three simple amendments are required. First, all new leases granted for a capital sum should be for a term of 999 years. Secondly, enfranchisement and lease extension legislation should apply to leases granted for a capital sum over 14 years rather than over 20 years as at present. Thirdly, lease extensions would be for 900 years rather than the current 90 years. Those steps, together with the right to manage, commonhold and some easing of the marriage value, could make this a great Bill.
I shall ask the Government to respond to only one question. Will they facilitate meetings with the relevant Ministers here and in another place, together with officials, to re-examine some of these ideas in the time afforded to us by the Recess and before we reach the Committee stage of the Bill?
Finally, I can do no better than to quote the Minister of State for the Department of Environment, Transport and the Regions when she wrote last year that the leasehold system was,totally unsuited to the society of the twentieth—let alone the twenty-first—century".That is what this Government believe, and we on these Benches share that belief. The Government have the power to advance the cause. With determination and effort, the Bill can ensure the gentle demise of the leasehold system without the need for further legislation.
§ 5.34 p.m.
§ Baroness Gibson of Market Rasen
My Lords, I rise to speak briefly not only to welcome the Bill back at this early stage of the Session but also to stress the interest which the previous Bill generated in the country and the expectations that it raised for many. I became very aware of that during the run-up to the general election when I assisted in the office of my Member of Parliament, the right honourable Member for Greenwich and Woolwich, Nick Raynsford, who had responsibility for piloting the previous Bill through the other place prior to the election.
That previous Bill generated a great many telephone calls and letters to Nick Raynsford's office from voters of all parties and from throughout the country. In listening to the debates on that Bill. I learnt a great deal about the public conception of it. In particular, the commonhold element has captured the imagination of many people because they genuinely believe that it tackles many of the problems encountered by leaseholders. I heard about those problems in considerable detail over the election period, and we have heard more details today.
The concept of commonhold upholds the Government's determination that the community matters and that those who live in an area should have both rights and responsibilities for the control and management of the units in which they live. And that has appealed to the public. I found that people like the idea of owning the freehold interest in their units; they like the idea of added control over their own unit, while joining with neighbours to take decisions on the common parts of their establishments, whether they be swimming pools, seating areas or, as has been mentioned, car parks; they like the idea of the commonhold association—an innovation in the housing market; and they see commonhold as an exciting and forward-thinking alternative to leasehold.
At the same time, long-term leaseholders welcome a reform of the existing system. They—especially those who have suffered under the current law and under unscrupulous landlords—welcome the chance to have more control over their property management. They particularly welcome new restrictions on the use of forfeiture, which some landlords have used to force leaseholders to pay exorbitant charges. On that subject, I heard a fascinating account of how leaseholders are suffering at present in some of the most fashionable squares in this city.
Of course, concerns are still voiced over some parts of the Bill—in particular, as has already been said, the question of the 100 per cent conversion rate. I have no doubt that that will continue to be a hot potato in our discussions. In relation to leasehold, noble Lords earlier raised concerns and I shall not repeat them. However, those expressed by the noble Earl, Lord Caithness, who was an assiduous attendee when the previous Bill was debated, should be taken careful note of because they commanded considerable cross-party support in our previous discussions.
911 Finally, from my experience during the election period, I believe that the importance of this Bill has already been recognised by many. I am pleased that it has been re-presented at such an early stage of the work in this House.
§ 5.38 p.m.
§ Baroness Hamwee
My Lords, I have a friend who was the best man at the third marriage of one of his friends. He started his speech at the third reception with the words, "As I was saying". I feel that we are somewhat in that position today. Perhaps, as he did, I shall resist going over the history. I shall not make the usual Second Reading speech but shall continue where we left off.
I declare, as others have done, my interest as a leaseholder. Happily, I have never experienced the difficulties of which we heard in such passionate and telling correspondence from those who were in touch with us during the previous Bill and, of course, its predecessors.
First, I shall, in a mild way, break the rules. I know that there are strictures on too many congratulations being given to maiden speakers. However, I shall break that rule and heartily congratulate the noble Lord, Lord Best. He brings huge expertise. He said that he felt the need to prove his worth. However, he has proved it time and again outside this House and he need have no fears on that score. To return to the terminology that was used during the controversial discussion of the appointment of the so-called people's Peers, I am sure that he will feel very "comfortable" in your Lordships' House.
During the previous Parliament, the anxiety to enact the previous version of this Bill before the end of that Session did not make the government intransigent but they were rather resistant to some amendments. I hope that that will not be the case this time round. Some changes have been made in this Bill. Like my noble friend Lord Goodhart, I have not seen anything other than what was proposed on Report but I have to confess that my attempt at a line by line comparison began to falter fairly early on. This is a fairly thick Bill and its format is slightly different—it is easier to read. That brings me to a point that I have made about legislation on other occasions. There is a place for using modern technology in this context—it would have been useful if emboldened print had been used to show us where changes had been made.
Have the Government received further representations on the Bill? I said that we were continuing from where we had left off, but if they have had such representations, we may be starting from a different position. Do the Government propose any further alterations to the Bill's drafting? It was helpful to see successive drafts to the proposed model form of memorandum and articles of association for commonhold associations and for commonhold community statements. I echo the words of one organisation—it has doubtless been in touch with many noble Lords—which suggested that those documents in particular should be in the plainest English possible.
912 I have taken the view throughout that it is not just important but essential to get the commonhold arrangements right. Commonhold is a new form of tenure and it will not be easy to tweak it if we do not get it right. Getting it right includes making it easy to operate. My noble friend Lord Goodhart referred to that matter and a similar point was made by the noble Lord, Lord Best, in relation to leasehold.
My noble friend also referred to the 100 per cent rule. He said that we tabled amendments during the passage of the previous Bill. He did not intend to but he used the Royal "we"; however, I could not possibly have drafted the skilful amendments that he prepared. I was aware of the stream of notes passing from the Government Front Bench to the Box during my noble friend's speech. In light of that, I have asked him whether I can now call him the noble nerd!
The noble Lord, Lord Best, discussed the challenges of mixed tenure while avoiding ghettoisation. That is a hugely important point. It is just as important to establish how the relevant associations manage properties when, to use the fashionable term, they are "pepperpotted"; that is, when they are sprinkled around among units with different tenures that do not need to be managed by a registered social landlord. He was absolutely right to remind us of the Bill's context, although that is not so much the case with commonhold. In relation to the need for affordable housing, we are now close to a crisis. By "affordable" I mean affordable to people who are on incomes that, in any normal, rational world, would allow housing to be bought and owned.
I had a call a couple of weeks ago from some friends who asked for advice, which I am not sure I was qualified to give. They, like so many others, were having continuing arguments with a landlord. They were members of a residents' association. They made vivid to me how urgent it is to support people in that situation. Their landlord, whom they said had particular "muscle"—he was a well-known, very large property owner in London—had been putting off repairs to the building because he was hoping to sell. Frankly, he was not paying any attention to maintenance. In trying to deal with the situation the residents' association had built up £90,000 in costs. That is simply not acceptable.
The Bill does not involve root and branch reform—the noble Baroness, Lady Thornton, said that it did—but it is very welcome. Marriage value has been referred to. The strength of concern from these Benches was well expressed. I hope that we can explore what my noble friend believes is the answer to the Human Rights Act argument and take the matter forward. We have discussed the regulation of managing agents—we did so during the passage of the previous Bill. I hope that we will also consider that matter.
I encourage those who provide briefings—usually at the last minute before debates in this House—to make them short because that enables us to use them more easily. I take up a point made in a briefing that I 913 received this afternoon from the National Housing Federation. It urged the Government to grant right-to-manage companies,the ability to seek forfeiture to the landlord, on the same basis as a freeholder may seek forfeiture for non-payment. The landlord, as a condition of receiving the forfeited property, would be responsible to make good the service charge arrears and other reasonable costs owing to the company".We may pursue that point later but I make it now because it was specifically raised by what in this context is an important organisation.
My last words today—there are no doubt many contributions to come from these Benches in forthcoming debates—are that the previous Bill did not satisfy those who called loudest for change in relation to leasehold reform. Today is not complete because we do not have those familiar faces in the Public Gallery. I almost wonder whether our proceedings are valid without them!
My noble friend gave the Bill a "B-plus". Using the analogy of a school report, I say, "Good effort so far. We hope that the Government will have the confidence to go further".
§ 5.48 p.m.
§ Lord Kingsland
My Lords, I begin by extending, on behalf of the Opposition, our congratulations to the noble Lord, Lord Best, on his maiden speech. It combined economy, clarity and originality—a rare blend, even in your Lordships' House.
I hope that the noble and learned Lord the Lord Chancellor will incline towards allowing the Committee stage of the Bill to be taken on the Floor of your Lordships' House. While the Moses Room no doubt has great merit, the limit to four hours per session meant that we were ensconced there for no less than five days. Of course, the noble and learned Lord's influence on those who manage the business in your Lordships' House is not always overwhelming; nevertheless, to the extent that the noble and learned Lord can exercise it in that direction, I hope that the noble and learned Lord will.
The noble and learned Lord the Lord Chancellor tantalisingly suggested that the Government might entertain a helpful amendment with the purpose of allowing a conversion to commonhold from leasehold by less than 100 per cent of the lessees. I noticed a tremor of excitement passing throughout your Lordships' House when noble Lords heard those words.
I also understood the noble and learned Lord to say that the initiative should come from Benches other than the Government Benches. I hope that that does not mean that the Government will not be prepared to discuss the terms of a draft amendment proposed by other Benches before such an amendment is tabled. In my submission, it would immeasurably inhance our chances of success if the Government were involved at the earliest possible stage. Indeed, if we achieve that aim, it will be a remarkable advance on what happened previously.
914 I understand the reasons why the noble and learned Lord is unable to agree to a prohibition on other forms of tenure after this Bill becomes law. In future, I should prefer all residential flats to be based on the commonhold system. However, I detect little sign of the Government being prepared to accede to that.
The noble and learned Lord the Lord Chancellor said that commonhold should compete in the market with other forms of tenure. If commonhold is to compete successfully, perhaps I may humbly suggest to the noble and learned Lord that it must have attributes that are more attractive than those of leasehold. One of my worries in that respect relates to those provisions in the Bill that concern the ability of one unit holder to enforce common obligations against another unit holder.
What we have heard so far from the Government does not suggest to me that real effectiveness will be introduced into the new legislation which will enable law-abiding commonholders to enforce against those who are not prepared to meet their obligations. I trust that the Government will carefully reconsider that aspect of the Bill during the Committee stage.
I also hope that the Government will be prepared, in Committee, to table the draft regulations on the commonhold community statement and on the memorandum and articles of association of the commonhold association as schedules to the Bill. That will enable us to table amendments to the contents of those two extremely important documents. Should the Government not be inclined to do so, it is certainly our intention to table the draft regulations as amendments to the Bill, thus seeking by those means to allow the House to look carefully at those important provisions.
I have two further observations to make about commonhold. First, from his days in practice, the noble and learned Lord will be aware that flying freeholds are not permitted in English common law. Likewise, I note that flying commonholds are not to be allowed in the proposed statute. I hope that the noble and learned Lord will think again in that respect, because there are many attractions in having the commonhold tenure introduced into buildings where residential ownership is confined to the first and upper floors.
Secondly, I regret that so much of the content of the Bill is to be contained in regulations, not schedules. This is an argument that, I suspect, I shall not win. However, I can at least express my concern, as I did both on Second Reading and throughout the Committee stages of the previous Bill.
I have one general observation to make in respect of the leasehold aspects of the Bill. It is sad that the Government are not taking the opportunity of this Bill to consolidate the law on leasehold. It is now contained in so many different provisions that it is both a trap and a nightmare for lessees who have to protect their rights under the legislation. Once the Bill reaches the statute book, I hope that the noble and learned Lord the Lord Chancellor will give early consideration to consolidating the whole of our leasehold law. It will be a remarkable landmark during his tenure of office if he does so.
915 I turn to the right to manage, upon which I have three or four observations to make. My most pressing concern relates to Clauses 89 and 90, which deal with the contractual arrangements that are made between landlords and those who provided services to the building, and the way in which they are continued, or otherwise, once the RTM is established. In the event that the service provider chooses not to continue the contract, the position under the law is clear.
However, it is much less clear what the law will be in circumstances where the RTM company decides not to continue the contract. Who will bear the burden of that refusal—will it be the RTM? In which case, where will it find the resources? Alternatively, will it be the landlord? If it is the landlord, can that really be a fair solution?
My second observation is one that was emphasised by my noble friend Lord Caithness and, indeed, by one or two other speakers in the debate. In my submission, it is high time that the Government did something about the regulation of managing agents. That, in itself, is highly desirable. But it is also desirable because, unless the Government do something about regulating managing agents, it will be impossible to introduce objective standards for RTMs. It is clearly not fair to RTMs to require them to meet professional standards if the managing agents employed by landlords are not required to do so. In my view, the two are linked. I hope that the noble and learned Lord the Lord Chancellor will consider this issue most carefully.
I am also concerned about the use of RTMs in the context of mixed uses in buildings. As I understand it, the purpose of the RTM is to give the residential lessee more control over his property. Yet, as the law stands, if there is a decision by the lessees to introduce an RTM in a mixed property its scope will extend not only to the residential parts of the property but also to the commercial parts.
Is that really desirable? The management of commercial property is much more sophisticated than that of residential property. It is probable that the residential managers of the RTM would not wish to deal with complex commercial issues. One possible solution would be to introduce an amendment to the Bill which would allow the commercial elements of a building subject to an RTM to lease back the management of those elements to themselves.
I have two final observations on the question of leasehold enfranchisement. At Second Reading and in Committee I was intransigently opposed both to the Government's provisions on marriage value and on the removal of the residential requirement as a qualification for leasehold enfranchisement. I have been thinking again about those matters in the course of the election break.
One of the difficulties about marriage value is that the evidence on the ground of the difference between 90 and 80 years is very different in London as compared with the rest of the country. Perhaps the Government could look at that and think hard about it: first, to see whether or not they agree with me as a 916 matter of fact; and, secondly, if they do, to consider whether or not they should reconsider their own provisions. I am much more hesitant about my outright opposition to the Government's proposals than I was. Nevertheless, a problem exists and I should like the Government to think about it again.
The second area where I feel less confident than I did the last time I was at this Dispatch Box is that of the residential qualification for leasehold enfranchisement. I had assumed that that would be open season for the predatory speculator. But have seen a great deal of evidence to suggest that a number of lessees who, for reasons that are no fault of their own, are not always resident in their leasehold property will be seriously prejudiced if we continue with the residential requirement. From outright opposition I am now also hesitant in that area and would be grateful if the Government could look again at the matter and come back in Committee with a fuller justification of their position.
I apologise to your Lordships for my rather rambling wind-up, but noble Lords will at least be relieved to know that it is now at an end.
§ The Lord Chancellor
My Lords, in opening this debate I omitted to disclose to your Lordships that I recently purchased a leasehold flat in central London. I rectify that omission before my noble and learned friend rises to reply.
§ Lord Kingsland
My Lords, I too omitted also to remind the House, as I did at Second Reading the last time this Bill came round, that I am the holder of a lease from the Honourable Society of the Middle Temple, regrettably a very short one.
§ 6.3 p.m.
§ Lord Falconer of Thoroton
My Lords. my wife and I are long leaseholders of property in London.
I enter this debate with great trepidation. It is a debate that has taken place once before in relation to this Bill. But it is also a debate and a cause that has been going on for a considerable time. People both within this House and outside have been engaged in the issues which form the subject matter of this Bill for a very long time.
I mention particularly the noble Baroness, Lady Gardner of Parkes, who has been involved in debates on this issue for almost a decade. The noble Lord, Lord Jacobs, has plainly been involved in these debates for an extremely long time. In relation to people outside this House, Mira Bar-Hillel, the property correspondent of the Evening Standard, has repeatedly raised issues which have formed the subject matter both of this and earlier Bills.
I say with genuine admiration what a high quality of debate this Second Reading produced—I am sure brought about by the fact that those who have taken part have been involved in and well-informed about this matter for a long time. I much prefer the description of Members of this House who take part in debates given by the noble Earl, Lord Caithness. 917 He described us—with trepidation I repeat the description—as a "cosy group of housing specialists", rather than the "nerds" as the noble Lord, Lord Goodhart, described us.
This Bill is important, not only because of the policy good that it brings, but also because it is changing the rules and the law in relation to property, which will have a significant effect for years to come. It is extremely important that we approach it in a cooperative spirit and that we, as a government, listen. If any changes can be made to improve it, we should approach them with as co-operative a spirit as possible.
I join other noble Lords in saying how delighted I was to be present when the noble Lord, Lord Best, delivered his maiden speech. It was a speech of real quality. I say three things about it. First, he brings real lustre to the Peers nominated by the committee of the noble Lord, Lord Stevenson of Coddenham. Secondly, it was a speech that looked much more broadly at the Bill, rather than simply at the detail. Thirdly, it was delivered with an impressive degree of confidence and clarity that few noble Lords have shown since they came to this House. I take my hat off to the noble Lord.
We in the Government recognise the considerable input that the Joseph Rowntree Foundation has made to the formulation of government policy and Katharine Rosenberry's work has been particularly helpful in framing the commonhold part of this Bill. On the substance of the noble Lord's maiden speech, I agree that we must provide secure and sustainable tenure arrangements for blocks of flats if they are to meet our future housing needs. The Government cannot stop neighbours falling out, but the Bill would provide a framework for democratic property management which should encourage the effective resolution of disputes and a community approach.
The noble Lord, Lord Best, raised a specific point about the provision of affordable housing in the commonhold context. It has always been the Government's intention that such housing provision should be available in commonhold developments and, as he suggests, we will take care to ensure that sustainable forms of governance are developed to take account of that.
I deal first with commonhold. In the course of this debate, commonhold met with broad approval as a matter of principle, though there were specific issues with which I should deal. I mention, first, the points made by my noble friend Lady Thornton and the noble Baroness, Lady Gardner of Parkes. We need to persuade developers, investors and landowners to use commonhold. We, as a government, expect to devote a good deal of energy to selling commonhold in the period between Royal Assent and its coming into force. We are already in touch with developers, academics, lawyers and many others with the intent of enthusing them about commonhold.
The noble Baroness, Lady Gardner of Parkes, said that we need to provide incentives to make people take up commonhold. Again, that is something we should 918 and will look at. If the noble Baroness is prepared to engage with us in that regard, we will find it useful to discuss it with her.
The question of the memorandum and articles of association of commonhold properties and the commonhold association have been updated since the last occasion this Bill was going through Parliament. We should publish it, make it public and make it available to all noble Lords so that there can be detailed debate about those instruments because they are plainly of great importance as regards the organisations that will be set up.
The 100 per cent consent rule was perhaps the specific issue that caused most controversy in relation to commonhold. It is said to be a serious disadvantage to those living in long leasehold blocks who wish to convert to commonhold in due course. It could be dealt with in one of two ways. We could either allow the majority who wanted to convert to commonhold to so convert, and leave the minority who did not on some other basis. Or, subject to whatever majority we chose, the small minority who did not want it could be forced into commonhold. Perhaps I can deal with both of those scenarios.
It is possible to conceive of many schemes which would facilitate conversion with a lower proportion of consents and deal with what we have called "anomalous leaseholders". But each of the schemes has, at their heart, the same problem. Whatever we end up with would not be commonhold; it would be a scheme of unnecessary complexity detracting from some of the chief advantages of the scheme as proposed.
It is also our view that such hybrid schemes—the majority commonhold and some on another basis—are really not necessary. Those who wish to take control of their freeholds and enjoy greater security and freedom from the interference of landlords but who are unable to muster 100 per cent support can take advantage of Part 2 of the Bill. Although Part 2 stops short of delivering all the advantages of commonhold, those who take that course will derive great benefit and be able to live in an environment which can take account of the non-participants without vitiating the essence of the scheme.
The second alternative to the 100 per cent problem is the expropriated leaseholder. If we are to achieve a position in which a threshold of less than 100 per cent is allowable, it seems to us that the only alternative to the anomalous leaseholder situation is expropriation, either by way of extinguishing the existing lease and forcing the commonhold documents on the unwilling tenant or by forcing out the unwilling tenant altogether by way of what would amount to compulsory purchase. As my noble and learned friend the Lord Chancellor said, we will consider any well-founded amendment put forward by noble Lords from any part of the House. However, we would require a good deal of persuasion that the complexities and resulting expense which will inevitably attend both the conversion process and the management of the final organisation will not be out of all proportion to the 919 extra benefits commonhold will bring to those who already have the prospect of enfranchisement open to them.
The noble Lord, Lord Kingsland, spotted that the Lord Chancellor was willing to consider any amendment put forward, but on the basis I have stated. He asked whether we would help in relation to such an amendment. If any noble Lord has such an amendment in mind, we would be more than willing for it to be discussed at official level and, if appropriate, at ministerial level to see whether it goes anywhere. We shall not wait for it to be tabled in Committee and then respond. We shall certainly help but please note the terms in which we say that. We are not encouraging amendments. We are dubious that any amendment would work but we shall consider any amendments put forward.
The noble Lord, Lord Kingsland, also raised the question of how one commonholder enforced rights against another. That is an interesting problem. It is a matter which we should discuss with the noble Lord in advance of Committee stage to see whether we can properly identify his concerns and whether or not special measures are needed to deal with them.
The noble Lord, Lord Goodhart, raised questions about the form of the company which might be used in relation to commonhold. His points were not restricted to the commonhold association; I believe it also applied to the right to manage company and the freehold company that exists in the right to collective enfranchisement. The noble Lord suggested that the use of limited liability partnerships should be considered in relation to blocks with 10 units or less. We are grateful to the noble Lord for his constructive suggestion. However we do not agree at present that a limited liability partnership would be an appropriate alternative vehicle for the three areas of commonhold, right to manage and right to enfranchise. Those partnerships are designed with profit-making in mind. That is far from the intention of the corporate structures provided in the Bill. We therefore consider it preferable to draw upon the substantial body of law and practice which surrounds the use of companies for collective property ownership and management.
Apart from those points, everybody in the House welcomed the introduction of commonhold. The noble Lord, Lord Monson, wondered whether it would work as well as we thought it might. We would be grateful to hear from the noble Lord on any detailed points of concern so that we can work with him to try to reduce as much as possible any problems in the working of commonhold.
The noble Lord, Lord Kingsland, also raised the issue that commonhold may not be a flying freehold. We decided not to allow commonhold to be developed on top of non-commonhold property because, although the commonhold scheme overcomes the difficulties of covenants running with the land within the scheme, it does not purport to overcome the problem outside the limit of the commonhold development. The Government recognise that work needs to he done to deal with difficulties presented by 920 covenants and easements. The Law Commission has in hand a further look at the scheme of land obligations it produced some years ago which tackles that area.
However, we do not believe that the Bill is the place in which to try to iron out all the associated problems. For the time being it is necessary to ensure that commonholds are not developed in circumstances in which they would be virtually unsustainable. In due course, should the law allow it, it may be possible to make the appropriate changes.
The noble Baroness, Lady Gardner of Parkes, raised the question of whether we have included registration of commonhold in the Land Registration Bill. The answer is that it is in Clause 1 of this Bill under the heading "Freehold" because commonhold is a part of freehold.
I believe that that deals with all the substantive points on commonhold. I turn to leasehold reform. The noble Lord, Lord Jacobs, raised the point that this is a disappointing Bill. He hoped that it would go much further. We have accepted that leasehold is a fundamentally unsatisfactory form of residential tenure but we cannot simply get rid of it overnight. Commonhold is clearly the way forward for multi-unit developments. But that would not make it right to impose commonhold on all existing leaseholders, their landlord and others with interests in the property. We cannot ignore a landlord's legitimate interest or force leaseholders to buy out that interest.
Instead, the Bill will provide opportunities for the conversion of leasehold properties to commonhold if all parties consent to that. Where leaseholders do not want that or other parties are opposed, they still benefit from the greatly enhanced rights and protection afforded by the leasehold provisions of the Bill. The noble Lord, Lord Jacobs, was kind enough to say that the Bill dealt with many of the complaints he set out in the full-page advertisement he placed in The Times which he addressed to Sir George Young. Although I am sorry that we have not gone as far as he would want, I hope that he is at least grateful for the fact that we dealt with the point on which he spent all that money in that advertisement a long time ago.
I turn to a number of points raised on Part 2 of the Bill dealing with leasehold. First, I refer to concern over the abolition of the residence test. As I understood it, it was clear that the noble Earl, Lord Caithness, is still worried about that. The noble Lord, Lord Kingsland has moved from being, as he put it, intransigently opposed to it to his thinking being in a state of fluctuation. as to where precisely his thinking had got. The election allowed him a period of many weeks to consider the point and had left him in a state of uncertainty.
We wish to abolish the residence test for lease renewal to make the right available to leaseholders who bought their houses primarily for personal rather than investment reasons but who were, nonetheless, unable to meet the residence test. Examples include a leaseholder whose main home is a house in the country but who has a pied-à-terre in town; a leaseholder who is working abroad and who has bought or retained his 921 house with the intention of living in it on his return, and a leaseholder who is living in the house as his main home but has leased it through a company because his landlord has a policy, specifically designed to block the right to a lease extension, of letting only to companies.
The Government understand the fear that abolishing the residence test would open the door not merely to those deserving categories of leaseholder but also to others intent on short-term speculative gain. For that reason the Bill provides an alternative requirement that the leaseholder must have held the lease for a period of at least two years before he or she can gain the right to renew it.
I turn to mixed use premises, a point raised by a number of noble Lords. It was aired at great length, quite rightly, during the previous deliberations in this House. We recognise the concerns of leaseholders who live in mixed-use buildings who would be unable to enfranchise or exercise the new right to manage. It is not our intention to create a situation where flats and premises where those rights are not available are regarded as second class. We also recognise the concerns of the commercial property industry about the effect of the current proposals on the future of mixed-use developments and urban regeneration schemes.
We are genuinely grateful to those noble Lords who spent some time devising alternative and sometimes very imaginative solutions to the problem. Unfortunately, so far we have been unable to conclude that any proposed alternative is preferable to that which is put forward in the Bill. Most of the suggested alternatives involved dividing ownership of and/or responsibility for managing the residential and commercial parts.
While such a division of responsibility may be theoretically possible, it would give rise to considerable practical difficulty and lead to costly and time-consuming disputes over who was responsible for particular matters. This would be at odds with the Bill's objectives of providing leaseholders with rights which are easy to exercise and which avoid uncertainty. Moreover, in some cases, a division of responsibility may fail to give the leaseholders any worthwhile rights.
We consider that the proposals in the Bill are reasonable and workable. However, we remain open to any alternative suggestions which give worthwhile ownership and management rights to leaseholders and will be workable in practice. I am sure that noble Lords will want to discuss the matter in Committee, but if there are any such suggestions we shall be pleased to hear them before the next stage of the Bill.
Marriage value is also an important issue and was much aired during previous debates. It is the most controversial aspect of the current arrangements for the enfranchisement of flats. Leaseholder groups have long campaigned for marriage value to be excluded from the purchase price. We do not agree that it would be right to remove marriage value from the determination of the enfranchisement price. However, 922 there are certainly defects in the current provisions which need to be corrected. The right to enfranchise is a right of compulsory purchase. In order to exercise it, the leaseholders do not have to demonstrate that the freeholder is at fault in any way. Therefore, it is only fair that he would be paid the same price as he would have received from selling the freehold voluntarily.
When leaseholders buy the freehold of their block they obtain a benefit which no other purchaser would; they can grant themselves new 999-year leases without having to pay a penny for them. The value of the extra benefit is the marriage value. If their existing leases still have, say, 80 or more years left to run, these new leases will be practically worth nothing more than the existing ones. Therefore, any marriage value will be insignificant. But if the unexpired term is relatively short—say, 50 years—the difference will be substantial.
It follows that if in a sale between willing parties where the unexpired term of the leases were not very long, the leaseholders would be prepared to pay additional money for the extra benefit. But they certainly would not offer the whole amount of the marriage value. They would be well aware that they represented the freeholder's only chance of obtaining a higher price. In practice, a sale would be agreed only if the parties agreed to split the difference and, if the parties were equally willing and eager, the split would be 50:50.
The freeholder would end up with a rather higher price than he would have received from another purchaser. However—and I must emphasise the point which deals head on with that raised by the noble Lord, Lord Jacobs—the leaseholder will end up with an asset that is worth more than he paid for it. That is the protection for the leaseholder.
That is the principle behind the valuation provisions of the 1993 Act and the Government believe it to be a sound one. There is a separate procedure under Part III of the Landlord and Tenant Act 1987 whereby leaseholders can acquire the freehold where the landlord is in serious breach of the lease and likely to remain so. In those circumstances, they can do so at a price which excluded marriage value. That is because the landlord is clearly at fault and a penal regime is appropriate.
If marriage value were removed from the valuation arrangements under the 1993 Act, there would no longer be a distinction between the no-fault and default enfranchisement. In the Government's view, that would not be a defensible position. The 1993 Act provisions were based on the principles that I have described, but they were defective in two ways. First, they provided that the freeholder's share could never be less than 50 per cent but could be higher. That was unfair. Why should it be possible for the freeholder but not the leaseholder to argue for a higher share? It also led to argument between the parties, which could be protracted and expensive, about what the shares should be. Secondly, they encourage the parties into further arguments about the amount of marriage value, even when there was going to be practically none.
923 This Bill in trying to deal with those points provides for the freeholder's share of any marriage value to be 50 per cent in all cases. In recent years, leasehold valuation tribunals have awarded more than 50 per cent only in two or three highly unusual situations out of hundreds of decided cases, but that has not prevented landlords from arguing for more.
The Bill also provides that where the unexpired term of each of the leases held by participating members of the company exceeds 80 years no marriage value is payable. It is intended to prevent disputes between the parties over relatively insignificant amounts of money. Our objective in these two changes is to prevent costly arguments which are disproportionate to the sums at issue.
That, in summary, is what our case is on marriage value. A number of other issues were raised but I do not believe that they are of such critical importance as those with which I have dealt. However, perhaps I may deal finally with three matters. First, the noble Lord, Lord Kingsland, asked why we did not reform the whole of leasehold law and put it into the Bill. What an excellent idea! However, it would take ages to do so and the Bill would be gigantic. While we would like to do it, we believe it far more sensible that we make only the changes we can make now and consider a Bill consolidating all the law on leases at some time in the future.
The noble Baroness, Lady Gardner of Parkes, raised concerns about the ability of the Lands Tribunal to award costs and asked whether there should be a limit on that. That is an important issue and my noble and learned friend the Lord Chancellor will be keen to write to the noble Baroness about that as soon as he is able to express a view. He is keen that we should do so in a measured way rather than me responding to it now.
Finally, the noble Baroness, Lady Gardner of Parkes, was pleased to see better termination provisions. We are grateful for her encouragement in that respect.
924 My noble friends Lady Gibson and Lady Crawley emphasised how much difference the Bill makes to people. My noble friend Lady Gibson spoke of the number of telephone calls and inquiries she received while working for Nick Raynsford in Greenwich. That indicates the importance to people of the Bill. It is a most worthwhile Bill and I sensed that the House agrees with that and is keen to work in order to ensure that it is the best possible Bill. I commend it to the House.
§ Baroness Hamwee
My Lords, before the noble and learned Lord sits down, like a number of noble Lords, perhaps I may ask him where the Government intend to hold the Committee stage of the Bill. There is much call for it to be debated by a Committee of the Whole House rather than in the Moses Room.
§ Lord Falconer of Thoroton
My Lords, it is obvious that the time limitation of four hours per session makes it desirable to hold the Committee stage here. Unfortunately, I am not in a position to give any assurance in relation to that because I am not one of the business managers. It is for the business managers to decide, through the usual channels, where the Committee stage should take place. I am quite sure that the business managers will have noted the comments all round the House about the appropriate place in which to hold the Committee stage.
§ On Question, Bill read a second time, and committed to a Committee of the Whole House.