Commonhold and Leasehold Reform Bill [H.L.]

HL Deb 13 November 2001 vol 628 cc463-528

3.25 p.m.

Report received.

Clause 3 [Consent]:

Lord Goodhart moved Amendment No. 1: Page 2, line 18, at beginning insert "Subject to subsection (1A).

The noble Lord said: My Lords, I shall speak also to Amendments Nos. 2 and 3. The purpose of the amendments is to make it possible to convert property that is currently in multiple occupation from leasehold to freehold without the consent of all the holders of the various leases, but on the basis of the agreement of at least 80 per cent of the leaseholders in the property.

This is the fourth time that we have debated the subject. We debated it twice before the general election, when the previous Bill was lost, and this is the second time that it has come back to your Lordships' House under the present Bill.

There is wide agreement in principle that commonhold is to be encouraged and that if the procedure were reasonably simple, it should be possible for existing leasehold properties to be converted into commonhold without necessarily having to get the consent of 100 per cent of the leaseholders. It will be very difficult to get the consent of everyone. In the case of small houses divided up into four or five flats, it may be possible to secure the unanimous agreement of all the parties to conversion, but with larger properties, such as blocks containing 10 units or more, it is unlikely that there will not be at least one person who either positively dissents from the idea of conversion to commonhold or at least is not prepared to agree to it. Conversion to commonhold will require some financial commitment because the leaseholders will necessarily have to put their hands in their pockets to acquire the freehold.

We think that if a clear and substantial majority of leaseholders wish to convert—by that we mean at least 80 per cent of them—it would be desirable for them to be able to do so. We have therefore proposed a scheme to make that possible. Those leaseholders who agree will have to pay between themselves the full cost of acquiring the freehold. In a number of cases that may be a deterrent to making a conversion. The same issue would arise if they desired to proceed with the lesser or preliminary step of collective enfranchisement. If they are willing to put their hands into their pockets and pay for the whole acquisition of the freehold, there is no reason for the law not allowing them to do so.

When debating the corresponding amendments in Committee, the Government argued that they would add to the complexity of the legislation. At the outset of the long history of the Bill, I was inclined to agree. However, attempts to draft the necessary legislation lead me to think that it is by no means as difficult as I first thought.

Our amendments are relatively short. I am sure that they are not yet in a form to achieve the desired result. Consequential amendments may be necessary, together with some improvement to the drafting, which might result in longer legislation—but nothing elaborate. It would be perfectly possible to draft a short text making it possible for people to enfranchise with the agreement of 80 per cent or 90 per cent of the leaseholders.

The Government's second argument was that it was unnecessary to provide for conversion on something less than a 100 per cent basis because leaseholders will have the alternative of collective enfranchisement. That is something of a halfway house. In fact, it is a good deal more than a halfway house. The problem is that collective enfranchisement is where the extra money is involved to purchase the freehold. If 80 per cent of the leaseholders proceed to enfranchise, as they will be entitled to do under the Bill, and are willing to pay the price of enfranchisement themselves, they will have done the vast majority of the work necessary for conversion to commonhold. Conversion from an RTE company to a commonhold association would cost the leaseholders little and would present few, if any, practical problems.

The right to convert could and should apply both to existing enfranchised properties and newly formed RTE companies. There would undoubtedly be a need for a special form of the commonhold community statement to cover cases where the commonhold association held up to 20 per cent of the property as landlords of a lease. We do not see any legal or practical difficulty drafting such a special form of the commonhold community statement.

The Government's third objection was that management would be made more difficult. But virtually the same problems would be faced by an RTE company that purchased the reversion on the basis of less than 100 per cent membership. Some leaseholders would be members of an RTE company, some would not. The situation is virtually indistinguishable from that which would arise in the case of a commonhold association where a small proportion of the units forming part of the commonhold were held as leasehold property, not commonhold.

We acknowledge the problems—which might be sufficient to deter many or even most people who would, in principle, like to convert from proceeding with a conversion of less than 100 per cent. However, if people want to try, why not have a framework that makes it possible for them to do so? The cost to the public purse would be minimal, amounting to no more than the cost of providing a new standard form of the commonhold community statement where some units were held on leases. In those circumstances, there is no reason for not making it possible to convert on the basis of 80 per cent or 90 per cent consent among the leaseholders within the property where the majority wish to convert to commonhold. I beg to move.

3.30 p.m.

Lord Kingsland

My Lords, requiring 100 per cent consent to convert has largely been a question of the Government against the rest of your Lordships. On Second Reading in January, and in Grand Committee the following month, the noble Lords, Lord Goodhart, Lord Richard and Lord Williams of Elvel, my noble friends Lady Hanham and Lord Courtown, and myself all expressed doubt about the 100 per cent requirement. For the Government, the noble Lord, Lord Bach, sought to justify the provision on the ground that, without unanimity, anomalous leaseholders would remain.

Clause 3 is somewhat opaque about the degree to which 100 per cent consent is necessary. Clause 3(1) lays down that requirement but subsection (2)(e) states that regulations may provide, inter alia, for consent to be deemed to have been given in specified circumstances". Clause 3(2)(f) provides for, enabling a court to dispense with a requirement for consent in specified circumstances". Implicit in those provisions is the Government's acceptance that one will not always obtain unanimity. But nowhere does the Bill state that less than 100 per cent consent will suffice, or spell out the consequences of non-consent.

In Committee, on 16th October, the noble Baroness, Lady Scotland of Asthal, accepted that it was not impossible to devise a system under which fewer than 100 per cent of persons interested had to consent to convert to commonhold but added that this would lead to administrative difficulties because of the need to distinguish both between commonhold units and non-commonhold units and between the differential management tasks. The Minister added: To tailor-make the documents and structures that they reflected would not only add to the costs of the conversion process but fly in the face of the thinking behind commonhold".—[Official Report, 16/10/2001; col. 489.] Later, at col. 492, the noble Baroness said that the amendments provided no fewer than four different schemes to displace the 100 per cent rule. The amendments of the noble Lord, Lord Goodhart, and the noble Baroness, Lady Hamwee, the Minister said, did not overcome the serious problems that she had outlined although she conceded that they represented, the kernel of a workable scheme to provide for conversion with less than 100 per cent. consent". One of the other schemes was that proposed by the Opposition Front Bench. Perhaps, understandably, these proposals were not received with great favour by the noble Baroness. Therefore, I shall concentrate my few remaining remarks on what looks likely to be the most promising scheme so far as concerns the noble Baroness; that is, the scheme of the Liberal Democrats.

That scheme has, I concede, the attraction that the non-consenting proprietor of a flat is not irretrievably shut out but can at a later time, until the expiry of his or her lease, exchange the lease for the freehold estate in the flat. The new schedule provides for two new sets of regulations: one to deal with the price and the terms on which the lessee buys into the commonhold; and the other, in rather general terms, to, make consequential provision for giving effect to this Schedule". But that is nothing unusual for the Bill because it is littered with references to regulations.

I hope that your Lordships' House will accept first, that your Lordships wish commonhold to be popular. I do not believe that there is any dissension in your Lordships' House about that. Secondly, I hope that your Lordships will accept that it should not become compulsory. The amendments aim to enable existing blocks of flats to convert to commonhold in the face of a small but appreciable opposition, which, by the law of averages, there is likely to be. If there must be 100 per cent agreement, as the Government wish. Such conversions will be rare and there will be a danger that, after all the effort that has been put into the Bill, commonhold may never catch on.

The Earl of Caithness

My Lords, Amendment No. 4 standing in my name and in that of the noble Lord, Lord Williams of Elvel, is an alternative to that put forward by the noble Lord, Lord Goodhart, and supported by my noble friend Lord Kingsland. Before I speak to that amendment, perhaps I may say how sorry I was to miss the Committee stage of the Bill. I should like to have taken part in it but I was abroad. I believe that it is probably right that I declare my interest as a surveyor and state that some of my friends and acquaintances will be affected in some shape or form by the Bill. Many of the people with whom I work will also be affected by the Bill.

I read with care what the noble Baroness. Lady Scotland, said in Committee. As she explained to me, she set out in some detail the Government's thoughts on commonhold and the reason for their position. I have to tell the noble Baroness how very disappointed I was. She has been so good at grasping opportunities, but on this occasion she was totally negative. She thought of every conceivable excuse not to seek the opportunities that commonhold offered but to decry them. As my noble friend Lord Kingsland has just said, many of us are concerned that commonhold will not catch on if there is no opportunity for it to be available to existing tenants.

Two different types of amendment are before your Lordships. I am very happy with that of the noble Lord, Lord Goodhart. I believe that it is probably better than the amendment in my name and in that of the noble Lord, Lord Williams of Elvel. However, at the end of the day, we are trying to help the Government to get commonhold off the ground. If, from now on, it is confined entirely to new build, it will not be a great success. I believe that the noble Lord, Lord Goodhart, explained carefully the correlation that exists with the RTE companies, where an 80 per cent vote in favour will be required. That leaves out 20 per cent. Surely the same thing can apply to commonhold.

Of course, another important point mentioned by the noble Lord, Lord Goodhart, is that that is the expensive part for the tenants. Once they have reached that stage, surely it is not an impossible step, and certainly not a terribly expensive one considering what they have already done, to go the whole way to commonhold. For that reason, I shall support the amendment of the noble Lord, Lord Goodhart.

3.45 p.m.

The Parliamentary Secretary, Lord Chancellor's Department (Baroness Scotland of Asthal)

My Lords, I say straight away that the noble Lord, Lord Goodhart, was correct when he said that this is, indeed, the fifth time that we have discussed this issue. We were delighted to discuss it twice under the old Bill; we were intrigued by the discussion at Second Reading; we were entranced by the further in-depth trammelling of these issues in Committee; and now here we are at Report. Therefore, it seems that one can never play a good tune too often or too loudly.

We have listened with great care to everything that has been said by all noble Lords, both today and, indeed, at every stage until today. We sympathise with the motivation of noble Lords who are persisting in their attempts to persuade us to ameliorate the effects of the 100 per cent consent rule. We share their regret at the inevitable result of its imposition in terms of the potential difficulty for those who wish to convert. I reassure the noble Earl that it was not negativity that drove us to come to that conclusion but inevitability and logic.

However, as I say, I am afraid that very little in our discussion today is new and capable of convincing us that the need is any less great than it was when I spoke at length on the matter in Committee. I am afraid that I can do no better than to refer your Lordships to the Official Report for 16th October, which has already been referred to by the noble Lord, Lord Kingsland. I am also grateful for noble Lords' forbearance on that occasion. With interruptions, I believe that in responding I took up approximately half an hour of your Lordships' time in the hope that we would explore fully all the issues that were there to be explored.

Perhaps I may explain briefly how we view the matter. We believe that it is necessary to balance the desirability of allowing those in long leasehold circumstances to convert to commonhold easily with the significant difficulties that we envisage in the conversion process and, more importantly perhaps, with the difficulties of running the eventual development. We believe that the balance comes down overwhelmingly in favour of the relative—I emphasise: relative—simplicity of the 100 per cent consent scenario, both in terms of the conversion process and future management.

Of course, I hear what the noble Lord, Lord Goodhart, says in relation to the complexities of the drafting. I am sorry that he now departs from us in terms of accepting those complexities. I reiterate that we never said that it would not be possible or that it could not be done; rather, we believe that it should not be done because of the nature of the commonhold which would be left. Of course, it is true that conversion from RTE to commonhold would be a smaller step. However, I must emphasise that it would still leave a special form of CCS and of commonhold association. With the greatest respect, we say that there is no argument for saying that, because problems will be faced in relation to the RTE, those problems should be imported wholesale into commonhold.

As I said on the previous occasion when we debated this issue, the scheme outlined in the amendments set down by the noble Lord, Lord Goodhart, and the noble Baroness, Lady Hamwee, contains the kernel of a workable proposal to get through the conversion process. Having said that on the previous occasion, I note that the noble Lord, Lord Kingsland, now supports that scheme as he has added his name to the first and third amendments. I am somewhat puzzled that he seems to have spurned the second amendment, although I am sure that he has his reasons for doing so. These amendments do not address the difficult problems and potentially considerable extra costs which will arise in dealing with remaining leaseholders in the commonhold context.

The amendment that was tabled by the noble Earl, Lord Caithness, who I am delighted to see is back in his place, and by my noble friend Lord Williams of Elvel suffers, as it did previously, first, from the fact that it would allow conversion to go ahead without a majority of leaseholders being in favour. Secondly, it would perpetuate the existence of long leases, in that lease extension would continue to be available. Thirdly, it says nothing about the difficulties that I outlined today or when I previously spoke on the matter, somewhat exhaustively, in Committee.

I should say, in line with the usual courtesies, that the Government will table several tidying-up amendments at Third Reading that arise from continued consultation and which will take account of the parallel progress of the Land Registration Bill through your Lordships' House. They will clarify such matters as the liability for extinguished leases and how interests in and dealings with part units will work. That will involve four very minor drafting amendments, for one of which we must thank the noble Lord, Lord Kingsland. We make it clear that, in a compulsory purchase, the commonhold association is not required to consent.

We would have wished to assist if we could. We have considered the matter exhaustively. We have come to the conclusion that the balance relating to the way in which the Government have framed the current regulations is right. Now that we have, for the fifth time, debated this matter—again, quite extensively—I invite the noble Lord to withdraw the amendment.

Lord Goodhart

My Lords, I think that we have in fact debated this matter either four or six times. There have been two debates at Second Reading, during the two Committee stages and, on this part of the Bill, during the two Report stages. I am extremely sorry that those six discussions have entirely failed to shift the Government's position. No issue of principle is involved; it is simply an issue of practicality. We think that the Government are taking an unnecessarily negative view but we do not intend to press the amendment. We may return to the matter for a seventh time at Third Reading but, for the moment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 2 to 4 not moved.]

Schedule 2 [Land which may not be commonhold land]:

Lord Kingsland moved Amendment No. 5: Page 88, line 5, leave out paragraph 1.

The noble Lord said: My Lords, I have spoken to Amendment No. 5 on, I believe, five occasions so far. The noble Lord, Lord McIntosh, who I suspect will reply to this debate—he has done on previous occasions—will be relieved to hear that I am not going to repeat the remarks that I have made so often hitherto. The main objection to the amendment, as I understand it, has been the failure of any government since 1965 to take forward the thinking of the noble and learned Lord, Lord Wilberforce, who is in his place this afternoon and who produced such ingenious solutions to so many intractable problems such a long time ago.

I seem to recall that in one of the Minister's replies to me—I fear that I cannot remember which one—he ventured to suggest, in very broad terms, a timetable for the likely development of the Government's thinking in this area. I think that it is fair to say that the noble Lord accepts, as a matter of principle, that it would be desirable for flying commonholds to be part of our law. It was, he added, only a question of getting around the legal niceties. I shall certainly not press the amendment today. Perhaps, when he responds—I am sure that he will do so telegraphically—he might venture an arrow about when the Government are likely to return to the issue. I beg to move.

Lord Goodhart

My Lords, I rise briefly to support the noble Lord, Lord Kingsland, although I do not propose to support the amendment because, as the law now stands, there are serious difficulties with flying freeholds; namely, the problems that are associated with positive covenants. It is something of a disgrace to our legal system that although the matter has been the subject of technical and academic study for many years, and although answers are perfectly possible—the noble and learned Lord, Lord Wilberforce, produced them many years ago—it has still proved impossible to find parliamentary time to deal with this problem. I therefore echo the hope of the noble Lord, Lord Kingsland, that the Government will see fit to do something about the matter. I also hope that they will enable positive covenants to be made enforceable as between the owners of freehold land within the same building.

Lord McIntosh of Haringey

My Lords, I make two minor corrections to what has been said. First, the issue is wider than that which simply involves flying commonhold or flying freehold; it involves positive covenants. Secondly, I say to the noble Lord, Lord Goodhart, that it is not currently a matter of finding parliamentary time; the matter is before the Law Commission rather than Parliament, and I do not know when the Law Commission will report.

I was asked by the noble Lord, Lord Kingsland, for a timetable. I say with confidence that whatever timetable there is is too long—36 years is far too long a period in which to have resolved this matter, although it is of much greater generality than the issue that arises in particular in this context. Although I do not know when the Law Commission will report, I shall make investigations and see whether I can come back to the matter at Third Reading.

The noble Lord, Lord Kingsland, was telegraphic, and I do not think that I need to repeat the arguments. We do not see the desirability of amending the law on positive covenants on one particular occasion when the matter has much wider ramifications, which must be considered by the Law Commission.

Lord Kingsland

My Lords, I am most grateful to the Minister for his sympathetic reply. It would be intriguing to find out what the Law Commission thinks its timetable is in relation to this matter. If this exchange between the Minister and myself could encourage it to give us a target date, that would be a great benefit, as the noble Lord, Lord Goodhart, said, to the legal system generally. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 8 [Transitional period]:

The Earl of Caithness moved Amendment No. 6: Page 4, line 31, after "Part" insert ""first

The noble Earl said: My Lords, in moving this amendment, I shall speak also to Amendments Nos. 7, 8, 9 and 10.

We once again return to a point that has already been discussed on more than one occasion. However, it is important because there is still confusion among developers about exactly where they will stand under the new system of commonhold. My concern is about the exact nature of the state that will appertain between the sale of the first unit and the completion and sale of the last unit. There already is a transitionary period in the Bill, but the situation in which I am interested will involve a second transitionary period. We need to be absolutely clear about exactly who has voting rights in relation to which units for the commonhold association and about what those responsibilities are. Unless that is clear, there will be much difficulty.

We have all become used recently to a fairly substantially upward housing market, in which most properties—I refer to blocks of flats—have been sold almost before they have been completed. That will not continue for ever. The house market is still strong, but I remember falling house prices and how difficult it was to sell properties in the 1970s, 1980s and early 1990s. That will occur again at some stage. We need to be clear about precisely what will happen in that period. For instance, a developer has 10 flats; he has sold two; six are for sale but there is no market they are not being sold; and he is completing the others. How do the voting rights of the commonhold association work? What are the responsibilities? I beg to move.

4 p.m.

Lord McIntosh of Haringey

My Lords, the Government remain of the view that nothing helpful is achieved by this group of amendments. The amendments introduce a second transitional period between the sale of the first unit and the final handover of the completed development to the commonhold association. They dilute the encouragement that exists at present for the developer to finish developing and get off the site and would unnecessarily complicate the early operation of a newly developed commonhold.

As I have said previously, it is our intention that the commonhold community statement should come into effect on the sale of the first unit. That is my answer to the specific question of the noble Earl about the situation after the end of the transitional period. The rights and responsibilities granted and imposed should take effect from that time. For that reason we cannot support the amendment.

The noble Earl asked about the position on voting rights during the period after the first unit has been sold. I have given the answer as the Bill is drafted. The voting rights will be as set out in the existing draft commonhold community statement and memorandum and articles. The developer has directors' and voting rights which will slowly diminish as more units are sold. I turn the noble Earl's question back to himself and ask: what is the situation under his second transitional period? It is not spelt out under his amendment.

The Earl of Caithness

My Lords, I believe that it is spelt out in the amendments but let us not get into that detail. We seek to satisfy the concerns of people who will provide the units. I am grateful for the Minister's reply. It goes some way to satisfying me.

Let us presume that the developer is building 10 units. He has sold two and has completed the other eight. Presumably the developer is responsible for the charges on those units because those are funds that must come into the commonhold association; and he must be responsible for the expenditure. Therefore he is responsible for eight-tenths of the income to the association and has virtual control over the commonhold association and how funds are distributed. For example, if there is a fire and structural damage, one needs to be clear who will pick up the appropriate proportions of the cost. Can the Minister confirm whether the situation that I describe regarding the 10 units is correct?

Lord McIntosh of Haringey

My Lords, with the leave of the House, yes, broadly. During the transitional period, the developer is entitled to appoint a maximum of two directors. The draft Commonhold Community Statement states: After the end of the transitional period and for so lone as the developer is the unit-holder of more than [one quarter] of the total number of units in the Commonhold, he shall be entitled to appoint a total of [one quarter] (or the nearest whole number exceeding [one quarter]) of the maximum number of directors of the Commonhold Association, and shall be entitled to remove or replace any director so appointed". The noble Earl's question was about financial responsibility. Unless I am corrected, I understand that financial responsibility follows in the same proportions.

The Earl of Caithness

My Lords, I am most grateful to the Minister. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 7 to 10 not moved.]

Clause 11 [Definition]:

The Earl of Caithness moved Amendment No. 11: Page 6, line 12, leave out "may" and insert "must

The noble Earl said: My Lords, in moving the amendment, I speak also to Amendments Nos. 12 to 14. Contrary to the Marshalled List, I speak also to Amendments Nos. 17 and 18 which are with this group rather than separate. It is a subject we have discussed previously.

I seek to ensure that the structural parts which belong to the commonhold association are properly insured for the benefit of the whole of the association. I read with interest what the Government said in reply to the amendment moved in Committee by the noble Lord, Lord Williams of Elvel. They gave the example of a detached house which was part of the commonhold. That was the reason that the amendments moved in Committee were not suitable.

We have sought to take on board the criticism of the Government. It is important for the benefit of the association that there is a positive onus on the association to insure the structural parts and areas used in common. If that is not clear and there is a fire—I used a similar example in my previous amendment—and too much onus on the unit holder, which is how the Bill is drafted, then because the unit holder does not have the right amount of insurance or cannot have the work carried out to the required standard because of the extra costs, the commonhold association suffers detriment. That is the situation I seek to prevent. I beg to move.

Lord McIntosh of Haringey

My Lords, I am intrigued by the way the amendments have been introduced. I had not understood—it must be my fault—that they related to insurance. I had thought that they were about the definition of what is in the commonhold and the commonhold unit. Everything within the curtilage is either part of the unit or in common. Therefore, insurance policies will have to be formulated in such a way that they cover everything which falls into one or other of those categories.

Let us consider the amendments individually. The first amendment would amend Clause 11(3)(b) to make it a requirement that a definition should exclude specified structures, fittings and so on. I do not understand why. I understand permitting it to exclude specified structures but if circumstances suggest that particular fittings such as grilles for warm air heating systems should be in or out of the definition of a unit, why should that not be so? What harm does that do?

The second amendment would require the definition of a unit somehow to take into account the definition in Clause 24(2) of a limited use area. But they are quite specifically parts of the common parts, not of the unit, and the amendment would tend to confuse the two. The third amendment would amend Clause 11(3)(c) and would require the exclusion from the definition of a unit of the structures delineating it. But what then of garden walls and fences? Logically, they would be part of the unit rather than the common parts.

Finally, the fourth amendment would amend Clause 11(3)(d) in such a way as to require it to refer to two or more areas within a unit whether or not there are two more areas to define. The noble Earl said that he was speaking also to Amendments Nos. 17 and 18 and I am happy to respond. Amendment No. 17 is misconceived. It would make the commonhold association responsible for the whole of the built environment in all commonhold developments. As we have pointed out on many occasions, that makes no sense. Why should the commonhold association be responsible for the upkeep of the fabric of a detached house, or of a stand-alone factory unit? I am sure that the amendment was intended to catch only flats, but it does not. Even if it did, it seems to make no sense to try to define in the Bill what shall be the responsibility of the commonhold association in terms of the structure of what we assume is meant to be the block of flats.

Amendment No. 18 raises many more problems. Does the term "main walls" include load-bearing walls within a building? Does it include the services which run within the walls? If the area beneath the plaster is not the unit-holder's responsibility, how will he or she deal with re-wiring. Or is it supposed, as may well be the case, that all such services are the responsibility of the commonhold association? If so, why do they not appear in the list in the amendment? If the floor does not include the timber surface, does that mean that the commonhold association is responsible only for the joists? Does the roof include any roof in proper use as a roof terrace? If so, to what extent has the commonhold association the right to direct the unit-holder as to what he may and may not do to the roof surface? Who will be responsible for the regular maintenance of the terrace? Will the commonhold association have to recompense the unit-holder for a period of lack of quiet enjoyment of his terrace during repairs—to say nothing of the costs of raising any surface that the unit-holder has put down?

I may have over-egged the pudding, but I think that the noble Lord will understand the difficulty of trying to include such definitions in the Bill. The really important part of his argument, which is about insurance, is that everything must be either common parts or part of a unit and that the insurance must be adequate to cover both, because they add up to the whole of the property.

The Earl of Caithness

My Lords, I understand the last point made by the Minister, but under the Bill as drafted it is the commonhold association's responsibility to maintain and insure everything that is not the responsibility of the unit-holder. I was trying to turn that round so that commonhold associations would be clear about what was their responsibility.

The Minister said that the insurance will be either that of the unit-holder or that of the commonhold association. My concern is that commonhold associations will enter into many different types of agreement and that there will be no consistency. As a result, what should be insured by the commonhold association for the integrity of the whole of the unit-holders may be insured by the unit-holder who may not have adequate insurance, may not have paid the premium or may not be fully covered.

Who will check on that? The Minister's final equation was that the insurance cover of the unit-holder and the commonhold will cover 100 per cent. That is exactly the problem: it may not.

Lord McIntosh of Haringey

My Lords, with the leave of the House, paragraph 22 of the commonhold community statement specifies that everything falls under either the unit or the common parts, and that it is an obligation on every unit-holder to carry adequate insurance. It would not help if there were some different division between the unit-holder and the commonhold association.

4.15 p.m.

The Earl of Caithness

My Lords, there is the same onus on lessees now, but I can give the Minister examples in which lessees, although they have a positive covenant in their lease to say that they will insure to an adequate level, have not done so. That is precisely the burden of my argument. I want to turn the provision round, so that at least the commonhold association has the responsibility to maintain and insure the structure of the unit for everyone's benefit.

It is clear that the Minister and I will not agree. We are both trying to protect the unit-holders once a development is complete. The Bill as drafted does not achieve that, but perhaps we can meet between now and Third Reading to talk the matter through.

Lord McIntosh of Haringey

My Lords, with the leave of the House, all that the amendments would do is move the boundary; there would still be a boundary.

The Earl of Caithness

My Lords, so long as the boundary is clear and it is the commonhold association that maintains and insures all the structure I shall be satisfied. I am not satisfied at present. However, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 12 to 14 not moved.]

Clause 17 [Leasehold: residential]:

Lord Goodhart moved Amendment No. 15: Page 8, line 18, leave out subsections (1) and (2) and insert— ( ) No term of years absolute may be created in a residential commonhold unit—

1. (a) for a term exceeding 7 years;
2. (b) in consideration of the payment of a premium or other lump sum;
3. (c) which does not comply with such other considerations as may be prescribed."

The noble Lord said: My Lords, Amendment No. 15 would write into the Bill the requirement that no lease could be created in a residential commonhold unit for a period exceeding seven years, or in consideration of the payment of a premium. The only kind of tenancy that could be created would be a term at a rack-rent for not more than seven years.

I understand that the Government agree with the principle that there should be such restrictions. However, they take the view—principally on grounds of flexibility—that they should be imposed by regulation. I understand the advantage of flexibility, but I should like the Government to state what are their proposals for initial restrictions on the granting of leases on commonhold units in such regulations. If they are satisfactory, I shall not press my amendment. I beg to move.

Lord Kingsland

My Lords, this is another amendment that has been hotly disputed. I do not intend to repeat what I have said on at least five previous occasions. I agree with the noble Lord, Lord Goodhart, that whatever the Government decide is the appropriate term should be written into the Bill; but I disagree that the term should be limited to seven years.

Let us consider the arrangements for trustees, for example, in relation to absolute owners of land—freehold owners—which are far more generous. Fixed terms of seven years are far more restrictive than the terms allowed by Section 41 of the Settled Land Act 1925. Moreover, the trust of land in the Appointment of Trustees Act 1996, passed by a Conservative government, specifically provides that trustees of land shall have all the powers of absolute owners. The Bill does not deal at all with the leasing powers of trustees of land, nor does it spell out the consequences of granting an invalid lease for an innocent purchaser.

In Committee, the noble Lord, Lord McIntosh of Haringey, said, at col. 516 of Hansard of 16th October 2001, that setting out leasing restrictions in regulations allowed more flexibility and "tighter controls".

The trouble, as the noble Lord, Lord Goodhart, said, is that flexibility leads to uncertainty. Few, if any, would "buy to let" if the Government kept the power to clamp down on residential lettings in the future. The restrictions which they have in mind would give the unit holder fewer leasing powers than a tenant for life had under Section 6 of the Settled Land Act 1882.

Though I have not tabled an amendment to this effect, I came to the conclusion, as these debates evolved, that perhaps the best approach for the Government would be to follow the advice of the noble Lord, Lord Goodhart, and put the appropriate term on the face of the Bill; but to add to the seven years—or perhaps another rack-rent term—an alternative of 999 years. In other words, no lease less than 999 years could be created for commonhold holdings in the future; that would in effect be commonhold. Otherwise, only rack-rent leases would be allowed.

That would entitle a commonhold owner, if that owner wished, to rent out for a shortish period of time. At the same time, it would give the commonholder the freedom that freeholders have to lease their properties, but to require that lease to be no less than 999 years. That would remove the main objection to the freedom for commonholders to lease properties in the future; that is, a return to the bad old days of leases somewhere between rack-rent leases and 999 years, which would re-contaminate the system.

Baroness Scotland of Asthal

My Lords, I hope to be able to give the noble Lord, Lord Goodhart, the assurance he seeks. His amendment would put on the face of the Bill the rules about leasing, which we would find more conveniently placed, for flexibility, in the commonhold community statement. Amendment No. 15 replicates exactly the terms that we will put in the commonhold community statement.

An illustration of the difficulties we may face if we take another course is amply demonstrated by Amendment No. 15. The Government will be tabling some tidying-up amendments to Part 1 of the Bill at Third Reading. I mention that now, by way of example, as to why we believe that matters of detail ought to be kept in the regulations.

While developing the policy underlying this Bill, one of the important matters considered was the extent of the interest a leaseholder should have in the property before their consent to conversion should be required. It was decided that a lease granted for 21 or more years was substantial enough. That was not a period chosen at random, but as your Lordship will be aware, is, at present, the period which renders a lease subject to registration at the Land Registry. Though, of course, the period still to run might be less than 21 years at the time of the application to convert and the leaseholder might have bought only the last 10 years of a 21-year lease, it seemed to us to be a reasonable limit. We expressed that limit simply by saying at Clause 3(1)(a) of our Bill that consents should be required from registered proprietors of an estate in the whole or part of the land. That had the virtue of catching freeholders and leaseholders of registered leases without having to go into what would have been unnecessary definitions.

However, as many noble Lords will know, particularly the noble Lord, Lord Goodhart, Chapter 1 of Part 2 of the Land Registration Bill provides that leases be registered if they are for seven or more years.

Fortunately, the various parts of the department of my noble and learned friend the Lord Chancellor speak to each other and so this change was picked up before our Bill arrived on the statute book. One of the amendments to be tabled for Third Reading will sort that matter out.

This is not a matter of detail. It is an essential plank of the development and conversion process. Only those with a substantial interest should be required to give their consent. But circumstances are changing. Fortunately, we were able to keep up with them before we ran the risk of confusion.

We shall be putting the limits for residential leasing in the commonhold community statement and they will be mandatory. But the seven-year maximum lease period was not chosen at random either. As your Lordships know, it was chosen because it is the time limit at which responsibility for repair and insurance to the property passes from the landlord to the tenant. But if, in the future, the market dictates that a different period of maximum lease length would be advantageous, we would want the flexibility to be able to react to that. It would be wrong unduly to tie our hands and make us reliant on finding parliamentary time to amend such things in primary legislation when regulations could be introduced speedily and easily.

The noble Lord, Lord Kingsland, would omit from the Bill any power to regulate the letting of residential leases. We regret to say that we cannot agree with him. Although we have tried to avoid the setting of too many regulations about commonhold, we are convinced that we should avoid the possibility that commonhold units be turned into just so many more long leasehold properties.

Much has been said during our debates on this Bill in your Lordships' House and elsewhere that the Government should have gone further than we have and forbid the development of new leasehold properties; and even to convert all current leaseholds into commonholds. Although, for the reasons we have given, we are not prepared to go that far, we certainly take the view that we should avoid the introduction of the long leaseholder traps into commonhold. That is what Clause 17 sets out to do. Without it, we would be powerless to do so. I therefore invite the noble Lord, Lord Goodhart, to withdraw his amendment.

Lord Goodhart

My Lords, I am grateful to the noble Baroness for that explanation. What she said was sufficient to satisfy us. I should say that on this issue we are fundamentally in disagreement with the noble Lord, Lord Kingsland. Our view is that commonholds should be designed as a form of collective ownership by those who have a real stake in the property. For that reason we should not consider allowing the re-creation of the long leasehold problem through long leases of commonholds. Therefore we would be strongly opposed to any provision that enabled leases to be granted at a premium or for a term of seven years. Certainly we would be strongly opposed to the proposal of 999-year leases being granted. That would mean that the freeholder, as a member of the commonhold association, for all practical purposes would have no interest whatsoever in the property. That would simply re-create all the problems of absentee landlordism and indeed in an aggravated form.

However, as we are satisfied with the Government's response, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 16 not moved.]

Clause 24 [Definition]:

[Amendments Nos. 17 and 18 not moved.]

4.30 p.m.

Clause 38 [Reserve fund]:

Lord Kingsland moved Amendment No. 19: Page 18, line 18, at end insert— (3A) The assets of a fund established and maintained by virtue of this section shall be treated as monies reserved for future expenditure. (3B) Any sums paid into a fund established and maintained by virtue of this section by a unit-holder, and any investments representing those sums, shall (together with any income accruing thereon) be held by the commonhold association on trust either as a single fund, or, if the commonhold association deems appropriate, as two or more separate funds. (3C) The commonhold association shall hold any trust fund—

1. (a) on trust to defray costs incurred in connection with the matters for which the relevant contributions were payable (whether incurred by the commonhold association itself or by another person), and
2. (b) subject to that, on trust for the persons who are the contributing unit-holders for the time-being.

(3D) Subject to subsections (3F) and (3G), the contributing unit-holders shall be treated as entitled by virtue of subsection (3C)(b) to such shares in the residue of any such fund as are proportionate to their respective liabilities to pay a proportion of the levy set under subsection (2). (3E) If the Secretary of State by order so provides, any sums standing to the credit of any trust fund may, instead of being invested in any other manner authorised by law, be invested in such manner as may be specified in the order; and any such order may contain such incidental, supplemental or transitional provisions as the Secretary of State considers appropriate in connection with the order. (3F) On the transfer of a commonhold unit, the unit-holder shall not be entitled to any part of any trust fund, and any part of such trust fund which is attributable to relevant contributions paid in accordance with this section shall accordingly continue to be held on the trusts referred to in subsection (3C). (3G) Any trust fund established under this section shall be exempt from any tax in respect of contributions made to it by the unit holders, whether (apart from this provision) a liability to tax may be imposed on the commonhold association or the contributing unit-holder.

The noble Lord said: My Lords, in moving Amendment No. 19 I shall speak also to Amendment No. 20. I refer first to subsection (3B) in Amendment 19. We think that the establishment of trust funds is appropriate, first, to protect the unit-holders in the event of the association's insolvency and, secondly, to prevent the misuse of funds.

Contrary to the Government's suggestion, these considerations apply to commonholds which may become insolvent—for example, if they find that they have a substantial uninsured liability for nuisance, such as tree root subsidence to neighbouring land. The potential creation of substantial distinct funds is important. In our view unit-holders would not want to build up a large sinking fund if they thought it might later be eroded by expenditure on other items of ordinary day-to-day expenses.

New subsection (3F) simplifies the transfer of commonholds and prevents commonhold associations having the burden of having to repeatedly collect money when units are sold. New subsection (3G) reduces the administrative burden and costs for commonhold and removes what could otherwise be a disincentive to having sinking funds.

I turn to Amendment No. 20 in Clause 40. The Government's position of requiring unanimity will be an effective block on the enlargement of commonhold, thus preventing the benefits of economies of scale. In addition, needing or requiring unanimity could allow a single unit-holder to hold all the others to ransom. I beg to move.

Baroness Scotland of Asthal

My Lords, Amendment No. 19 seeks to introduce into commonhold a form of fundholding developed for leasehold funds by Section 42 of the Landlord and Tenant Act 1987. The principal purpose of Section 42 was to establish a rule that funds held by the landlord or his agent for future works should be held in trust for the lessees.

As I mentioned in Committee, Section 42 was introduced to improve and standardise the manner in which service charges and sinking funds are managed while they remain in the hands of the landlord. There are two benefits of the statutory trust for leasehold service charges to leaseholders. First, money paid by tenants to the landlord or his agents is safe from creditors in the event of his or their bankruptcy or liquidation. Secondly, it ensures that the landlord or his agent is subject to the duties of a trustee and will therefore be liable for breach of trust if the money is misappropriated or not adequately safeguarded or invested.

Those considerations simply do not apply within commonhold. The commonhold association is a company whose members are those who pay the money into the funds. They appoint and dismiss the directors of the company. They approve the objects of expenditure and the setting of budgets and have absolute control over all aspects of the company under company law.

The directors who act on their behalf are bound by their fiduciary duty to act honestly and bona fide in the interests of the company, and are to act for the proper purposes as set out in the company's constitution and in accordance with any statutory duty. They are also subject to the sanctions available both under the Companies Act and the general criminal law. They must produce accounts and answer for their contents. The funds under Clause 38 are funds of the commonhold association to be established by the directors of the association in accordance with the commonhold community statement for the purposes specified by the Bill.

If a commonhold association decides, with regard to its particular circumstances and following appropriate legal advice, that it wishes to hold some or all of its funds on trust for any reason, then it may do so. We are not preventing that step being taken. However, as I explained, the purposes for which Section 42 was included in the 1987 Act simply do not apply in commonhold. It would be wholly appropriate for parts of that section to be replicated in the Commonhold and Leasehold Reform Bill.

In the event that a sinking fund were to be liable to meet a debt which is properly referable to it, it can be expected to pay, but otherwise it is protected until the CA is finally wound up. Clause 38(4) provides for the protection and Clause 55 releases the reserve funds at termination.

I turn to Amendment No. 20, tabled by the noble Lord, Lord Kingsland. The amendment would have the effect that a vote on whether to add land to a commonhold would be passed with 75 per cent of the members who vote on such a resolution voting in favour. That currently requires a unanimous vote; that is, all members who vote on the resolution must vote in favour.

We believe that certain significant functions of the commonhold association should be recognised as such by requiring those who compose a resolution to persuade all unit-holders who are voting on an issue that it is the right thing to do in the circumstances. In this case not only is there likely to be capital expenditure from the funds of the commonhold association or a need to borrow, but the associated cost of servicing any loan and ongoing costs of managing and maintaining the new land. Unit-holders may be asked for extra commonhold assessments to cover the cost of new facilities on the added land. In those circumstances, it seems to us that unanimity on our terms—namely, allowing a small number of concerned unit-holders to exercise an effective veto—is not an unreasonable hurdle for those making the proposal to get over. I ask the noble Lord to consider withdrawing his amendment.

Lord Kingsland

My Lords, I thank the noble Baroness for her reply. The difference of view here is an assessment about how commonhold associations are likely to behave in the future. Perhaps, because I am of greater age than the noble Baroness, I am somewhat more cynical about the conduct that is likely to manifest itself. However, I do not consider these to be appropriate matters on which to divide your Lordships' House. In those circumstances I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 40 [Enlargement]:

[Amendment No. 20 not moved.]

Clause 69 [The right to manage]:

The Minister of State, Department for Transport, Local Government and the Regions (Lord Falconer of Thoroton) moved Amendment No. 21: Page 32, line 27, leave out from first "company" to end of line and insert "which, in accordance with this Chapter, may acquire and exercise those rights (referred to in this Chapter as a RTM company)

The noble and learned Lord said: My Lords, in moving Amendment No. 21 I shall speak also to Amendments Nos. 25, 60, 68 and 69. The noble Lord, Lord Kingsland, has achieved what was not achieved throughout the whole of the House of Lords reform Bill when it passed through this House in a previous Session. As a result of this point being raised by the noble Lord, Lord, Kingsland, parliamentary counsel have finally been persuaded to change the wording grammatically. Instead of merely the words, "a RTM company", without reference to a longer definition, the Bill now indicates that there is a longer definition within the legislation thereby avoiding the grammatical problem identified by the noble Lord, Lord Kingsland.

The pack of cards has now collapsed, and we move on to "a RTE company", where the same approach is taken. I congratulate the noble Lord, Lord Kingsland, on persuading parliamentary counsel by his speech; none of the rest of us has ever succeeded. I beg to move.

Lord Kingsland

My Lords, I am grateful to the noble and learned Lord for bringing me that truly exciting news. I had begun to despair that parliamentary counsel would ever see that important problem of lexicography my way. I trust that the noble and learned Lord will now recommend to his leader that an amendment to the House of Lords Act 1999 is tabled to effect that change—and, perhaps, other changes as well.

Baroness Hamwee

My Lords, I welcome the amendment and congratulate the noble Lord. However, I hope that parliamentary counsel will not feel that they have satisfied all their obligations to consider amendments tabled by the Opposition Benches. That may be important, but it is perhaps not the most substantial of the amendments. While leaseholders may continue to question whether this Bill does all that they would like, I believe that they may be even more perplexed if they discover that this is the only amendment seen by counsel. I would not like to impugn the noble Lord in that regard.

On Question, amendment agreed to.

Clause 70 [Premises to which chapter applies]:

Lord Kingsland moved Amendment No. 22: Page 33, line 8, at end insert ", and (d) no part of the premises are let on a tenancy to which Part 2 of the Landlord and Tenant Act 1954 (c. 56) (business tenancies) applies, provided always that planning consent has been granted for such business use or that deemed planning consent for such use exists.

The noble Lord said: My Lords, when this matter was last in Committee, the noble and learned Lord, Lord Falconer, said that his department had given it earnest consideration—and for that I am most grateful. Regrettably, despite no doubt many sleepless nights, the Government have still failed to produce a solution to this vexed question.

The problem with which the amendment is concerned is that of mixed developments where there are shops or offices on the ground floor with residential premises upstairs. I believe that there is general agreement that it is inappropriate for residents to have management of the commercial premises. Indeed, the noble and learned Lord said at Committee stage, I stress that under the Bill there would be no question of the RTM company becoming involved in the commercial relationship between the landlord and his business tenants".—[Official Report, 16/10/01; col. 540.] I respectfully agree. A commercial tenant expects a professional landlord, not an RTM company run by residents. The difficulty is that the Bill, as framed, necessarily involves the RTM company making decisions which impact on the relationship between the landlord and the commercial tenants. Just about every major decision on the maintenance of the building, for example, will be a decision for the RTM company, not for the landlord.

As I understand it, the Government place great reliance on Clause 94(6)(a) to achieve their aim of separating out the commercial part of the premises. But I suggest that this clause will result in enormous demarcation disputes. When this matter was in Committee, I gave the example of approving the frontage of a shop and decisions on the hanging of signs outside. I asked whether matters of that sort would be for the RTM company or for the landlord. I listened in vain for any answer from the noble and learned Lord as to which side of the line such an issue would fall.

A particular problem to which the noble and learned Lord has drawn our attention, as did the noble Lord, Lord Whitty, when the matter was before your Lordships House prior to the election, was the risk of landlords changing the use of a small part of a block into commercial premises with the aim of escaping the right to manage legislation. Indeed, the noble Lord, Lord Whitty, was particularly concerned about that risk. He said that a broom cupboard suddenly becomes an office and an attic becomes a factory.

The noble and learned Lord, Lord Falconer, when the matter was in Committee this time, was perhaps more sanguine. He merely pointed to the dangers of a block being 99 per cent residential and one per cent commercial. In my submission the answer to these points is two-fold. First, the amendment I propose limits the exemption of commercial premises to those where planning permission has been granted or where there is an established user certificate. That avoids the concern of the noble Lord, Lord Whitty, to preserve broom cupboards as storage areas for brooms.

Secondly, the number of blocks where the commercial element is one per cent must be minuscule. Accurate statistics are somewhat hard to come by, but the number of properties which are excluded from the right to manage by the 25 per cent commercial hurdle is estimated to be about 10 per cent of all residential blocks. Excluding all these blocks is thus unlikely to be a practical problem.

We on this side of the House would like to see a workable solution to the problem of mixed developments, which have a vital role to play in urban regeneration. We need to encourage traditional corner shops. Yet if developers know that they run the risk of almost immediately having the right to manage taken away from the landlords, they will shy away from building developments with flats over shops. Until a workable solution has been found, surely the safest course is to exclude mixed premises from the right to manage. I beg to move.

4.45 p.m.

The Earl of Caithness

My Lords, I support my noble friend Lord Kingsland on this amendment. The right to manage mixed use property is a matter I have raised on a number of occasions during consideration of the Bill. It is not an area which many owners or developers want to become involved with even at the best of times. It is much simpler to have one commercial or residential unit. A mixed use development always has problems. It is therefore important that we get it right and do not deter the future provision of these very useful multi-use buildings. For that reason I support my noble friend.

Lord Falconer of Thoroton

My Lords, the noble Lord, Lord Kingsland, has spoken only to Amendment No. 22 and not to his Amendment No. 23 as well. I take his Amendment No. 24 to be consequential to Amendment No. 22. Amendment No. 23 is in the same group.

Amendment No. 22 is broadly the same as one debated on several occasions. As the noble Lord, Lord Kingsland, set out, its effect would be to exclude from the right to manage any mixed use property regardless of how small is the non-residential portion of the property.

As made clear by my noble friend Lord Whitty, and by myself in Committee, we have two reasons for being firmly opposed to this amendment. First, we consider it to be wrong as a matter of principle. The right to manage is designed to allow leaseholders who hold a majority of the equity in their block to take over the management of that block.

As explained previously, the 25 per cent threshold set by Schedule 6 paragraph 1 reflects that. Amendment No. 22 does not. It would allow the landlord to retain a monopoly over the management of the block even where a commercial unit accounts for no more than one per cent of the overall floor space. We consider that wrong and wholly contrary to the spirit of the right to manage. That point has nothing to do with the potential for either confusion as to where the line is to be drawn or abuse; it is simply concerned with the principle that the right to manage should be designed to allow leaseholders who hold the majority of the equity in their block to take over its management. That is what the principle reflects.

Our second objection is that the amendment opens up a major loophole which would allow unscrupulous landlords to put their properties outside the right to manage. We acknowledge that the noble Lord has listened to our concerns on this matter and that he has tried to accommodate them in bringing forward this revised version of the amendment. However, we believe that what is now proposed still gives rise to significant problems. I know that the noble Lord, Lord Kingsland, has made a close study of Section 23 of the Landlord and Tenant Act 1954 in framing his amendment. He will therefore know that the section defines what is a business tenancy for the purposes of the Act, and therefore for this amendment, and that the definition is rather vague. As the noble Lord will already know the definition, and because it is quite long, I shall not read the whole of it today. However, I shall remind the noble Lord of one aspect of it.

As he knows, the section covers not only units which have been let solely for business purposes but also premises which are used for business and other purposes. That includes units which are let primarily for residential purposes but which are also used without a breach of the terms of the lease for professional activities. A good example would be a childminder who has bought a flat as a home on a long lease but also uses it as a place in which to look after children. What is—I ask rhetorically—the noble Lord's intentions in such a case? Should it be caught by his amendment. In short, should the fact that one flat in the block is owned and used by a childminder mean that the whole block should be put outside the right to manage? We believe that the proposal would have that effect.

Furthermore, we believe that the amendment would encourage landlords to seek to let units on the basis that they could be used for both residential and professional purposes or to look for uses which it could be argued fall within the scope of Part II of the Landlord and Tenant Act 1954. We do not agree that the reliance on planning consent is particularly helpful. Rather, we believe that the whole approach will open up a grey area and grounds for dispute. Therefore, we do not accept the proposal made in Amendment No. 22 and ask the noble Lord to withdraw it.

Perhaps I may deal with the point relating to signs on shop fascias. The noble Lord rightly said that I had failed to deal with it in Committee. The short but unhelpful answer is that it will depend on whether the matter is covered by the commercial lease. If so, it would be for the commercial landlord. If not, it would be for the RTM company. That is our initial reaction and perhaps we need to reflect a little more on it, but it seems ultimately to depend on the purpose of the commercial lease.

In those circumstances, I ask the noble Lord to withdraw his amendment.

Lord Kingsland

My Lords, it is clear from what the noble and learned Lord has said, not only today but in Committee, that he believes that the solutions I sought to the problem have proved unworkable. Perhaps I may ask him a further question. Does he believe that there is a problem? It is clear that a central feature of town and country planning policy is the promotion of mixed development. It must follow that it is highly desirable to co-ordinate the law so that it assists mixed developments to be built around the country. Does the noble and learned Lord believe that the proposals in the Bill will inhibit mixed developments in the future? If he does, does he have a better solution than the one I have proposed?

Lord Falconer of Thoroton

My Lords, no, I do not believe that it would inhibit mixed developments. The noble Lord, Lord Kingsland, is right to say that, looking at developments as a whole, we would in planning terms want to encourage mixed development. We believe that it is an important policy aim.

We do not believe that the legislation would remotely discourage mixed development. It is an issue with which we have all wrestled during the course of the Bill. The department, the noble Lord and we believe that it is the best solution that can be devised.

Lord Kingsland

My Lords, I thank the noble and learned Lord for that reply. I am surprised that his department has concluded that the proposals will not inhibit mixed development. It is an area on which I have been most substantially and intensively lobbied by various interests. All of them take the view that the proposals will indeed inhibit mixed developments; but we shall see what happens. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 23 not moved.]

Schedule 6 [Premises excluded from right to manage]:

[Amendment No. 24 not moved.]

Clause 71 [RTM companies]:

Lord Falconer of Thoroton moved Amendment No. 25: Page 33, line 26, leave out "for the purposes of this Chapter

On Question, amendment agreed to.

The Deputy Speaker (The Viscount of Oxfuird)

My Lords, in calling Amendment No. 26, I must advise the House that "(2)(c) above" in the proposed new subsection (2B) as it appears on the Marshalled List should read "(2A) above".

Lord Kingsland moved Amendment No. 26: Page 33, line 31, at end insert— (2A) The sum to which each member of an RTM company undertakes to contribute to the company's assets if it should be wound up whilst he is a member, or within one year after he ceases to be a member, for payment of the company's debts and liabilities contracted before he ceased to be a member, and of the costs, charges and expenses of winding up and for the adjustment of the rights of the contributories among themselves shall be the minimum sum, as defined in subsection (2B) below. (2B)) The minimum sum mentioned in subsection (2)(A) above shall be the following amount, namely the greater of—

1. (a) the total service charge and rent payable by tenants in respect of the premises in the two years prior to the acquisition date, or
2. (b) twice the average service charge and rent payable in respect of the premises in the five years prior to the acquisition date,

in each case divided by the number of members of the RTM company.

The noble Lord said: My Lords, the purpose of the amendment is to ensure that RTM companies have sufficient working capital to meet the day-to-day problems faced by a management company. The Government propose that RTM companies should be companies limited by guarantee with each member of the company liable to contribute £1 to the company in the event of insolvency. In other words, RTM companies have effectively no start-up capital at all.

The problem to which I have adverted on previous occasions is that, like any small business, an RTM company needs some capital. If, for example, repair works exceed their estimate, the RTM company will need to be able to pay the builder. If a recalcitrant lessee refuses to pay his service charge, the RTM company will need to bring legal proceedings for recovery of the service charge. Without any capital, an RTM company will be inhibited by these everyday problems of property management.

In Committee, the noble and learned Lord, Lord Falconer, said that he could well appreciate concerns that the leaseholders who take over the management of the property should have the necessary funds behind them to do the job properly. That, I thought, was a promising observation. The noble and learned Lord continued by saying that the Government agreed and strongly encouraged them to do so. "Better and better", I thought! But the noble and learned Lord then brought me back to earth by saying that it was a matter for guidance and not for the face of the Bill.

The problem for this side of the House is to identify how guidance can actually assist in ensuring that RTM companies have sufficient capital to operate. The only way in which working capital can be assured is for members of the company to be under some legal obligation. The classic form of legal obligation would be for the members each to have a shareholding obliging them to put up a certain amount of capital. The Government, however, have set their face against RTM companies being companies limited by shares and insist that RTM companies must be companies limited by guarantee.

The reason, the Government say, is so that RTM companies can simultaneously be RTE companies. This amendment seeks to avoid that difficulty—if difficulty it really is—by making RTM companies those limited by guarantee. The other advantage of the amendment I propose is that the tenants will not, actually, have to put their hands in their pockets when they set up RTM companies. The obligation entered by a member of the company limited by guarantee is an obligation to pay in the event that the company becomes insolvent.

When the matter was originally debated, the noble Lord, Lord Whitty, was very concerned at lessees being priced out of the RTM market. This amendment avoids that risk. What the noble Lord, Lord Whitty, never addressed was the real problem of how to ensure adequate working capital for RTM companies. Neither has the noble and learned Lord, Lord Falconer, indicated what guidance may be forthcoming.

Both the noble Lord, Lord Whitty, and the noble and learned Lord, Lord Falconer, seem to want to appear in the somewhat unaccustomed role of good fairies who can wave their wands and ensure that all is sweetness and light, with RTM companies able to manage buildings without any need for capital reserves. While no doubt that will find them favourably placed when the auditions for the next "Harry Potter" film are held, for the rest of us, who have no hotline to the ministry of magic, I commend the amendment. I beg to move.

5 p.m.

Lord Monson

My Lords, the noble Lord, Lord Kingsland, has not spoken to Amendment No. 29, which is grouped with Amendment No. 26. Am I right to assume that Amendment No. 29 has been mistakenly grouped with Amendment No. 26, with which it appears to have no affinity, and should be in the next group which comprises Amendments Nos. 27, 28 and 65?

Lord Kingsland

My Lords, I am very grateful to the noble Lord. I had intended to speak later to that amendment and failed to spot that it was grouped as it is. Perhaps the noble and learned Lord will allow me to speak to it in the next grouping.

Lord Falconer of Thoroton

My Lords, of course. The point that the noble Lord raises in Amendment No. 26 is that people who wish to become members of an RTM company must agree to give a guarantee to the company that is equivalent to two years' worth of service charges. As ever, quite fairly the noble Lord referred to the argument advanced by my noble friend Lord Whitty. The answer is that it would price very large numbers of people who would want to join such a company—and, therefore, discourage RTMs—out of the market. We believe that that factor is sufficient to indicate that this is a bad proposal.

Perhaps we may look at the actual sums that would face those who wished to join RTM companies. We understand that the Association of Residential Managing Agents carried out a survey of its members three years ago to find out what might be considered to be a typical annual service charge. That survey found that a reasonable estimate for outside London was £800 a year and for inside London about £1,200 a year. While those are estimates, it means that the guarantee which would have to be provided by an individual before he could become a member of an RTM company would be approximately £1,600 to £2,400. Furthermore, if the noble Lord's amendment was accepted he would be asked to agree that this liability should be left to hang over him, with no indication of when, or even if, it would be called upon and how it would fit into the cycle of paying the mortgage and bills, feeding the family and so on.

Frankly, we believe that the prospect of such a liability would put all but the hardiest and wealthiest off the prospect of exercising the right to manage. We fully appreciate that the proposal of the noble Lord, Lord Kingsland, is not intended to be a disincentive, but that is what we believe it would be. We acknowledge that there is a need to ensure that the RTM company is properly funded, which is the foundation of the noble Lord's point, but we do not agree that it is right to address that in the way proposed.

The right to manage is granted on the basis that the leaseholders already hold the majority share in the property and, therefore, should be able to control how their assets are managed. As such we are allowing people to manage their own homes. We believe that that should be done in the same way as any other person is allowed to manage his own home, be it leasehold or freehold. We trust leaseholders as home owners to take sensible and informed decisions about how the block should be managed. Guidance will make clear to them that that will involve finding the money to look after their homes, and that may include the need for some kind of start-up capital for the RTM company. We are even prepared to look at that issue as part of the work on the company constitution, albeit without any commitment as to what may come out of it. But we cannot agree to the introduction of what is effectively a requirement on leaseholders to pay or undertake a liability to manage their own homes.

I hope that in the light of what I have said the noble Lord, Lord Kingsland, is prepared to withdraw his amendment.

Lord Kingsland

My Lords, I thank the Minister for his comprehensive reply. I feel a little like I did when responding to the debate on the previous amendment. I believe I am right in saying that the noble and learned Lord recognises that there is a problem here. I discern from his reply that he believes at least a partial solution to the problem may be found at a later stage in the making of the regulations. If I am right about that, the Minister is saying, yes, I have identified a problem but the solution that I propose is unacceptable.

I do not propose to take this amendment to a vote; but I hope that when the Minister's department comes to draft the regulations which touch on this matter it will give serious consideration to what lies behind my decision to table the amendment in the first place; namely, that sometimes RTM companies will have substantial financial responsibilities. One of the consequences of setting up such a company could be very substantial financial outgoings in future. Bearing that in mind, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 72 [RTM companies: membership and regulations]:

Lord Goodhart moved Amendment No. 27: Page 34, line 5, leave out paragraph (b).

The noble Lord said: My Lords, in moving Amendment No. 27 I shall speak also to Amendment No. 65 which is consequential. There is a difference of principle between ourselves and the Government. We believe that leaseholders and a landlord may have conflicting interests, particularly at times when leases are reaching the end of their lives. In that situation the landlord will be concerned to maintain the capital value of the property, whereas the leaseholders will be concerned relatively to reduce their liability for maintenance of the building which they may not continue to enjoy.

We believe that these conflicting interests should be represented by having the leaseholders and landlord deal with each other at arm's length. After all, an RTM company will usually be formed because of dissatisfaction with the landlord. Under the existing legislation it must be shown that the landlord has misbehaved. Under this Bill it will not be necessary to prove any misconduct on the part of the landlord, but in practice that is likely to be the trigger. One of the objectives of the Bill is to spare leaseholders the necessity of proving misconduct which can be difficult and expensive. If they are unhappy with the management by the landlord they can take over the management themselves without having formally to prove misconduct. But it remains likely that a landlord who is looking after the premises properly and requires the payment of reasonable service charges will be left to run the building. After all, that is a time-consuming obligation and no doubt most leaseholders are perfectly happy to leave it to the landlord.

We believe that an RTM company should be a collective body for the leaseholders. The landlord, if he is not a member of the RTM company, will still have rights against the company if, for example, it fails to ensure proper maintenance of the building: even if the landlord is a member of the RTM company that will still be the case. The RTM company would then be at arm's length with the landlord. But we believe that formally it is better to have the landlord at arm's length with the RTM company, because if the landlord is a member of the RTM he will be able to interfere in the running of the company. A landlord who is a member of an RTM company and wants to be obstructive can easily take technical points on the internal management of the company—for example, the shortness of the notice of a meeting, the absence of a quorum, and so on—which he would not be in a position to take if he was not a member of the RTM company.

We accept that a landlord who is also a leaseholder of a lease under the property must be a member of the RTM company, but except in those circumstances the landlord should not have a right to be a member of the RTM company. That is likely to make the RTM company less efficient as a vehicle for management of the property on behalf of the lessees, which we believe is what it should be. That applies not only to the internal management of the company. It is possible that a particularly obstructive landlord might threaten to take proceedings for defamation about what was said in a meeting of the company. We believe that the company should not be inhibited by that kind of risk. I beg to move.

Lord Kingsland

My Lords, I rise to speak to Amendments No. 28 and 29. Amendment No. 29 was not included in this group, but the noble and learned Lord agreed that it could be.

The question of the involvement of a landlord in the continuing management of the block is one where, when the matter was previously debated, your Lordships' House divided in three ways. We consider that a landlord who wants to exercise the right should have one seat on the board of directors. The Liberal Democrats take the view that a landlord should have no involvement in the management or in the RTM company. The Government suggest that the landlord should be a member of the RTM company but should not have an automatic right to a place on the board.

We consider that it cannot be right to exclude the landlord altogether. The landlord, after all, has some interest in the block. Where leases have only a short time to run, a landlord's interest in the building may be greater than that of the lessee. That interest should be expressed by giving the landlord some formal role in the management of the block.

The Government's position recognises the landlord's interest but seeks to meet it in an unsatisfactory manner. The Bill, as presently formulated, gives the landlord membership of the RTM company but gives him no further rights. Membership of the RTM company gives the member a right to attend the annual general meeting of the company and any extraordinary general meetings which may be held. It gives a right to receive the accounts. They would be available from Companies House in any event. It also gives him the duty to contribute the sum of £1 to the RTM company on its insolvency.

We do not consider that those provisions adequately recognise the landlord's interest in ensuring the proper maintenance of the block of which he owns the reversion. When the matter was in Committee the main philosophical difference discussed was an issue as to residence requirement. We suggested then that the right to manage was one which should be given to residents and not to non-residents. The Government's response was that it was illogical to give non-resident landlords the right to take part in the management of a block. We have now dropped our support for a residence requirement for tenants who wish to exercise the right to manage. Accordingly, this illogicality—if such it was—drops away.

The only issue then is whether mere membership of the RIM company gives the landlord sufficient status. It seems to us that it does not. Landlords who want one should be entitled to a place on the board of directors. Many, particularly where the reversion will not fall in for many years, will not want to take up that right. Your Lordships will note that a directorship is unpaid unless a service contract is entered into between the company and the director. Thus a landlord would have no immediate financial incentive to take up a directorship.

Baroness Hamwee

My Lords, we cannot support Amendment No. 29, to which the noble Lord. Lord Kingsland, has just spoken, for the reasons given by my noble friend with regard to shareholders. Indeed, it would compound the position. That concerns us. As my noble friend said, there is a relationship between the landlord and the RTM company which is quite separate from that of co-shareholders in a company and that among a board of directors and between directors and shareholders.

We expressed our concern that as shareholders at meetings would be able to use procedural matters to more than procedural advantage, that would be available, perhaps in spades, to an unco-operative, unhelpful landlord by using his position as director. Can the Minister confirm that a landlord who, as an individual—I am not quite sure how the amendment works where the landlord is not an individual, but that is perhaps being picky—is helpful and constructive and can make the RTM company work well, will be eligible to be elected as a director by the shareholders?

5.15 p.m.

Lord Falconer of Thoroton

My Lords, under the present arrangements, yes, he could be. It would be a matter for members to decide who they want as a director. If the members want the freeholder, assuming he is an individual, to be a director, it would be open to them to elect him. The noble Lord, Lord Kingsland, did not deal with Amendment No. 28. Amendment No. 27, tabled by the noble Lord, Lord Goodhart, takes away the right of landlords to be members of the RTM company. Amendment No. 65, which is in the same group, does likewise for a company which is both an RTM and an RTE company.

We have listened carefully to the arguments put forward by the noble Lord, Lord Goodhart, today and in both previous Committee stages. For the reasons that we gave on both those occasions, unfortunately, we remain unpersuaded by his arguments. The right to manage is intended to redress the imbalances caused by the leasehold system. We do not want to create one imbalance while seeking to remedy another. That is precisely what the amendment of the noble Lord, Lord Goodhart, would do.

The arrangements for membership of the RTM company are based on the principle that everyone who has a significant stake in a property should be able to have a say in its collective management. That means that a landlord with a minority stake in the property will no longer be able to exercise a monopoly control over its management. However, it also means that we cannot disregard that minority stake. To do so would be to move from an unjustified monopoly on the part of the landlord to an equally unjustified monopoly on the part of the leaseholders.

The noble Lord, Lord Goodhart, argued in Committee that the landlord is likely to be a disruptive member of the RTM company. He repeated that argument today. He frequently said that the circumstances in which the right to manage would be exercised would be where there was difficulty or problems with the landlord. We believe that that presumption is both an unfair generalisation and inappropriate in this context. This is, as the noble Lord knows, a "no fault" right. There is nothing which requires the acquisition of the right to be in any way tied to the previous or projected future conduct of the landlord. To suggest, as is implicit in this amendment, that the landlord cannot ever be trusted is effectively to pronounce him guilty from the start, and guilty without any opportunity to be proved otherwise. We recognise that any member of the RTM company may want to try to be obstructive. That needs to be taken account of in the overall RTM framework. It is for that reason that we intend to make voting rights in the company properly proportional to interest in the property, as embodied in the draft constitution which noble Lords have already seen. That will stop any obstructive minority from being able to block the working of the company. We cannot accept the amendment and therefore we ask the noble Lord to withdraw it.

Amendment No. 29 was spoken to by the noble Lord, Lord Kingsland. It allows the freeholder to appoint at least one of the directors of the RTM company. The noble Lord referred to the circumstances in which the freeholder might have a substantial share in the property. He said that that was the way that those interests can be safeguarded. He will, of course, be aware that for the right to manage to be acquirable for a property, the freeholder of the property will necessarily have a minority interest in the property. We are therefore somewhat confused as to why that minority interest should enjoy special treatment through being able to appoint a director. Why, for example, are the individual leaseholders not also able to appoint a director each in the interests of safeguarding their own individual interests? What about intermediate landlords? Surely if the noble Lord wishes to ensure that everyone's interests are properly looked after, he should extend the amendment to allow every person who has an interest in an RTM property to appoint at least one director. As I am sure the noble Lord recognises, that would be unworkable, but at least it would be fair and equitable under this proposed approach.

We acknowledge, of course, that the freeholder will be only one RTM company member against many. If he or she holds a minority view, he or she will lose a vote. The same will, of course, apply to an individual leaseholder who holds a minority view. That is democratic property management. As I have said, we can see no reason why a freeholder with a minority view is deserving of preferential treatment when compared to a leaseholder with a minority view.

That said, it is important that everyone—including the freeholder—has proper rights to safeguard their interests. As has been explained on a number of occasions, the Bill already provides for that. All affected parties can challenge mismanagement and can seek to have the RTM company removed as manager. Amendment No. 55, which we shall come onto later, supplements that.

We therefore do not agree that Amendment No. 29 is either justified or necessary. We hope that the noble Lord will not press the amendment.

Lord Goodhart

My Lords, I regret that, even at this late stage, the Government are not willing to accept the view we have put forward that the landlord has no place on an RTM company, and that the RTM company should be a body which collectively represents the lessees and acts at arm's length with the landlord. However, I do not intend to divide the House. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 28 and 29 not moved.]

Clause 74 [Long leases]:

Lord Goodhart moved Amendment No. 30: Page 35, line 5, leave out "21" and insert "7

The noble Lord said: My Lords, in moving Amendment No. 30,I shall speak also to Amendments Nos. 31 to 33.

This group of amendments deals with the situation where the property is subject to a series of leases and under leases. The head lease may, for example, be held for a term of 99 years; that may be subject to a sublease for a term of 21 years, which in turn is subject to a further sub-lease for a term of 10 years. As between those three leaseholders, the question is who should be the member of the RTM company. We believe that the member should be someone who is reasonably close to being in actual occupation of the property.

We accept that it would be inappropriate for the member of an RTM company to be someone who was there under a rack-rent, short-term lease because, for instance, he or she would have no continuity and it is likely that there would be continuing and frequent changes in the membership of the RTM company. It is also doubtful whether someone who was there on a rack-rent, short-term lease would be able to exercise proper judgment on issues such as the long-term maintenance of the structure of the building.

However, the member of the RTM company should be reasonably close to occupation; he or she should be at the bottom of the chain, and therefore the most likely to be in actual occupation, unless there is a short-term lease below that. The Government state that the dividing line should be 21 years; that anyone with a lease for 21 years or less should not be a member of the RTM company; that the member of the RTM company should be whoever holds a lease for more than 21 years; and, if there is a chain of leases and subleases, it should be the person lowest down the chain who has been granted a lease for a period of more than 21 years.

We believe that the appropriate period should not be more than 21 years but more than seven years. The Government said in response to this amendment previously—it is a perfectly fair comment—that the question of where the dividing line should be drawn is not one to which you can provide an exact and obviously correct answer; that there is a grey area. But the Government argue that a 21-year period is particularly appropriate because that is the point at which—I assume it to be correct—in general, the value of the reversion begins to exceed the value of the freehold.

We do not believe that that is in itself a serious justification for choosing a 21-year period. We believe that the proper person should be the one at the bottom of the chain, provided that he or she holds a lease for more than seven years, on the ground that anyone holding a lease for seven years or less is unlikely to be concerned particularly with the long-term good of the building. We believe that seven years rather than 21 years is the appropriate cross-over point.

We are reinforced in this argument by what the noble Baroness, Lady Scotland, said in dealing with the commonhold part of the Bill. She said that the Government had decided that the appropriate maximum length of a lease permitted on commonhold property would be seven years. That ties in with the provision in the proposed new Land Registration Act which, when it comes into force, will make seven years the cut-off point between leases which are registrable and leases which are not.

A lease for more than seven years gives a significant interest in a property. As the amendment suggests, this should be recognised by making a long lease for the purposes of the RTM section of the legislation a lease for more than seven years. I beg to move.

Lord McIntosh of Haringey

My Lords, we have rehearsed this argument on a number of occasions—which is perfectly legitimate; I am not complaining—and the noble Lord, Lord Goodhart, is aware that we do not support the amendment. We believe that it is correct to make this right available essentially to those categories of leaseholders who have acquired a substantial long-term stake in the property, and 21 years has been accepted to be the correct threshold for those purposes. It is accepted, for example, in the Leasehold Reform Act 1967 and in the Leasehold Reform, Housing and Urban Development Act 1993; it is the definition of a long lease. The noble Lord, Lord Goodhart, described that period as the point at which the value of the reversion begins to exceed the value of the freehold.

These amendments seek to open up the right to manage to those with leases granted for more than seven years. That is what the noble Lord, Lord Goodhart, called—I listened carefully to his speech—a significant interest in premises.

I understand the noble Lord's point, but I have to disagree. Someone who holds a seven-year lease on a flat will hold a minority stake in the property as a whole. He will certainly hold a lesser stake in the property than the landlord. Our view is that someone with a seven-year lease will not have a direct or, to use the noble Lord's word, significant interest in the property but a minor and rather short-lived one.

The main aim behind the right to manage is to redress the balance where a landlord holds a monopoly over the management of a property but only has a minority share of the equity. The amendment moved by the noble Lord, Lord Goodhart, would turn this argument on its head. The right would, instead, allow leaseholders who hold a minority share in the property to take over the management from the landlord who holds a majority share of the equity. We cannot agree that that would be right. It might even be contrary to the European Convention on Human Rights.

It is not relevant to say, as the noble Lord, Lord Goodhart, did, that under the Land Registration Act seven years is the period for registration on the basis that, for some purposes, that has been so for some time and it is a matter of practicality that the Land Registry now thinks that it can make it the period of registration for all purposes. It is hoped in future to reduce the period to two or three years. I do not know whether that would influence the noble Lord's judgment. It does not matter when registration occurs. It is not even relevant to talk about what happens in the commonhold part of the Bill, because in commonhold there is no landlord whose rights must be judged against the rights of the leaseholders. The important fact is that a lease of less than 21 years is still a minority interest in the property, and it would not be right for that to be recognised in this part of the Bill.

5.30 p.m.

Lord Goodhart

My Lords, I regret that we and the Government are still at odds on this issue. It seems to us that it is desirable in principle that, as far as possible, management should be in the hands of those who live in a property. We recognise that it is inappropriate in the case of rack-rents or short-term leases, but we believe that seven years is the appropriate dividing line. However, it is clearly not possible to change the Government's mind. Once again, I do not intend to press the matter. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 75 [Long leases: further provisions]:

[Amendments Nos. 31 to 33 not moved.]

Clause 76 [Notice inviting participation]:

Lord Kingsland moved Amendment No. 34: Page 36, line 41, at end insert— (3A) Regulations shall prescribe that a notice to participate shall include, or be accompanied by, a prescribed statement setting out the principal responsibilities and obligations which the company will assume as the manager of the premises and setting out in particular the relevant provisions of the service charge residential management code made by the Royal Institution of Chartered Surveyors or such other code as may be approved by the Secretary of State under the terms of section 87 of the Leasehold Reform, Housing and Urban Development Act 1993 (c. 28).

The noble Lord said: My Lords, this modest amendment is designed to ensure that the tenants who want to form RTM companies know what their obligations as managers of blocks are. The Government's response to the proposal in Committee was mixed. The noble Lord, Lord McIntosh, said: We want the leaseholders to be aware of what they are taking on, but we do not want to overburden them with requirements that have to be met before they can acquire the right. We certainly do not want to put in place subjective requirements which will open up scope for dispute".—[Official Report, 16/10/01; cols. 576–577.] Thus the Government seem to accept that it is a good idea for tenants to be told what best practice in managing blocks is, but they are concerned that there should not be any scope for dispute about whether the requirement for the service of suitable information has been met.

We hope that this re-formulated amendment meets the Government's objections. The regulations that the amendment envisages will provide for an information leaflet to be enclosed with a notice inviting participation. By providing for regulations to be made prescribing the contents of such an information leaflet, the scope for any dispute about subjective requirements is obviated. So long as the leaflet is served, that is the end of the matter. The tenants know what they are letting themselves in for and the requirements of the provision are met.

I cannot leave this topic without referring briefly to my one success in Committee in persuading the Government to adopt an amendment. This was an anti-technicality provision. Under the Government's original proposals a failure to serve even one flat with a notice to participate in proper form would have vitiated the entire exercise. I suggested that this was not sensible and, much to my astonishment, the noble Lord, Lord McIntosh, agreed. The Government will, no doubt, ensure that the anti-technicality provisions will extend to cover an accidental failure to serve the notice that is provided for. I beg to move.

Lord McIntosh of Haringey

My Lords, this amendment is an old favourite as well. I thought that we had reached a reasonable degree of agreement about this matter. As I explained in Committee, we agree with the thrust behind the amendment but we do not agree with its form. We see merit in ensuring that those who are invited to take on the right to manage are properly made aware of what that will involve. We intend to look carefully at how that might be done in regulations, using the power granted under Clause 76(3) of the Bill. I can give the noble Lord the firmest of assurances that we will do that.

However, we do not want to write a provision on to the face of the Bill. We certainly do not want to do so in terms of this amendment. As we have said previously, with all due respect to the Royal Institution of Chartered Surveyors, its code of practice is a red herring for these purposes. The management responsibilities of an RTM company do not derive from that or from any other approved code of practice, but rather from this Bill and from the leases of the property.

The approved codes of practice will, of course, have an important role to play. The RTM company will be expected to follow the provisions of the code, and failure to do so will be one of the grounds on which it will be possible to seek the replacement of a company under Part II of the Landlord and Tenant Act 1987. In that respect, the RTM company will be no different to landlords who govern outside the Bill.

Given that role, we see no objection to the invitation to participate drawing attention to the general expectation that the RTM company should follow the relevant code. However, we see no advantage in repeating individual provisions of the code in the invitation; nor do we find the concept of "relevant provisions" helpful. Surely the RTM company, and indeed any manager, should comply with the code as a whole, in which case all the provisions would be relevant and the whole code would need reproducing.

We continue to agree with the noble Lord, Lord Kingsland, that the invitation to participate has a role to play in highlighting what it will mean to acquire the right to manage. But we do not wish to tie ourselves to a form of words at this stage. We prefer to seek views on what the correct form of words might be—in both content and clarity—as part of the wider consultation to which we have committed ourselves on RTM regulations. We then intend to use our regulation-making powers to put an appropriate requirement in place.

The noble Lord, Lord Kingsland, referred to his amendment at Committee stage. That was then Amendment No. 122, which proposed that a failure to serve notice of invitation should not in itself invalidate a claim notice. It is for that reason, as the noble Lord recognised, that we have brought forward Amendment No. 35. I hope that the noble Lord will not seek to press his amendment.

Lord Kingsland

My Lords, I shall not seek to press the amendment. I beg leave to withdraw it.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey moved Amendment No. 35: Page 37, line 16, at end insert— ( ) A notice of invitation to participate is not invalidated by any inaccuracy in any of the particulars required by or by virtue of this section.

The noble Lord said: My Lords, this is the amendment to which I have just referred, which was inspired by the noble Lord, Lord Kingsland. I am glad to have the noble Lord's attention.

The House will recall that the noble Lord's Amendment No. 122 in Committee proposed that a failure to serve notice of invitation to participate correctly should not in itself invalidate a claim notice, provided that enough people were members of the RTM company at the time the claim notice was served to make that notice valid. As I said in Committee, we think that this is an excellent idea. That is why we have brought forward Amendment No. 35.

The amendment provides that a notice of invitation to participate in the right to manage is not invalidated by any inaccuracy in the information that must be included in that notice. Clause 80(1) makes similar provision for the RTM claim notice. It will mean that a claim notice cannot be thrown out because the company has made an error in its earlier invitation to participate.

I should have said at the beginning that I shall speak also to Amendment No. 67, which makes the same provision for the invitation to participate for collective enfranchisement.

We are grateful to the noble Lord, Lord Kingsland, for inspiring the amendments. He will no doubt want to know what happened to the original Amendment No. 122. When we sat down to prepare our own amendment, it became apparent that what we were seeking to do could have an unfortunate side-effect if taken by itself. Let us assume that an RTM company is established which, from the outset, has sufficient qualifying tenants as members to be able to serve a valid claim notice. If a claim notice was not invalidated by a failure properly to serve the invitation to participate, such a company could not be penalised for making its claim without serving any invitations to participate. I am sure that the noble Lord agrees that that would be undesirable.

We have already discussed in Committee the role of the invitation in alerting leaseholders to what the acquisition of the right to manage will entail. We have undertaken to make appropriate use of our powers to prescribe the further contents of the invitation to participate to address that. In the light of that, it is essential that we do not open up a loophole that could allow an RTM company to get away with serving no invitations. I beg to move.

Baroness Hamwee

My Lords, I wanted the noble Lord, Lord Kingsland, to have his moment of glory before I rather churlishly intervened with a question, but he has urged me to ask my question. I appreciate that the same point arises on Clauses 79 and 80, to which the Minister has just drawn our attention.

I do not oppose the provision, which is a fairly standard one, but its extent is not entirely clear to me. Will the Minister confirm that a misleading inaccuracy would not be covered by the provision? I have in mind inaccuracies in such details as the address of the premises or, in the later clauses, an estimate of the price that is referred to among the particulars. If those details are wildly wrong, would that so go to the heart of the issue as to invalidate the notice of invitation to participate?

I am also unclear about whether Clause 76(5) falls within the provision, or whether it just extends to Clause 76(2). I apologise for not having given notice of those questions.

Lord Williams of Elvel

My Lords, in spite of the inspiration of the noble Lord, Lord Kingsland, I join the noble Baroness, Lady Hamwee, in having some questions about the amendment. The noble Baroness has cited some ways in which the notice of invitation to participate might be misleading, to which I might add errors in specifying the place at which the articles of association may be inspected so that no one could get to see them. If the notice was wholly inaccurate in many respects, surely it could not be a proper notice of participation.

Lord Kingsland

My Lords, I am much obliged to the Minister for his magnanimous comments about my contribution to the draft that the Government have decided to include in the Bill. I hope that that concession will characterise the second half of our proceedings.

5.45 p.m.

Baroness Gardner of Parkes

My Lords, I think that it is in order for me to ask a question. Does Amendment No. 67 cover a different issue? It seems to come in the section about leasehold collective enfranchisement rather than the right to manage. Am I correct in thinking that? If so, I should like to comment on Amendment No. 67.

Lord McIntosh of Haringey

Yes.

Baroness Gardner of Parkes

My Lords, in that case I have a question. If someone wishes to enfranchise collectively—not even in the case of a single house—is there no obligation on the person from whom they are enfranchising to tell them whether the properties are under a management scheme or any type of restrictive covenant? What information on their future obligations is provided to people who are about to enfranchise a house or a flat collectively?

I ask that because the point has been raised by people who tell me that only after going through the whole enfranchisement procedure and receiving their freehold documents have they been given a list of restrictions to be imposed on them. That seems unfair. Someone who is to be subject to a special management scheme, particularly from the former freeholders of the property, should be told in advance. That might relate to Amendment No. 67 and we could discuss it again when we reach that amendment.

Lord McIntosh of Haringey

My Lords, I shall respond to the noble Baroness, Lady Hamwee, the noble Lord, Lord Williams of Elvel, and the noble Baroness, Lady Gardner. The first point raised by the noble Baroness, Lady Hamwee, was about misleading information. I am advised by my noble and learned friend Lord Falconer that fraud unravels all. In other words, if the information is deliberately misleading, it cannot stand under any circumstances. The question then arises as to whether it is inadvertently misleading. Clearly, to some extent any wrong information under the clause could be inadvertently misleading. The question is whether it is sufficiently misleading as to cause difficulty.

The amendment is restricted to the items in the notice that are included in Clause 76, but that includes the items in subsection (5). The amendment refers to "this section". There must be a point at which an inaccuracy becomes so misleading as to invalidate the notice, but similar phraseology has been used in legislation on many occasions and I have no doubt that in the end the courts will resolve whether an inaccuracy is misleading enough, inadvertently, to cause damage to the notice. I shall write to noble Lords about that before the next stage and to the noble Baroness, Lady Gardner, who has raised an interesting point about Clause 120.

On Question, amendment agreed to.

Clause 77 [Right to obtain information]:

Lord Bassam of Brighton moved Amendment No. 36: Page 37, line 22, leave out "in connection with the making of a claim" and insert "for ascertaining the particulars required by or by virtue of section 79 to be included in a claim notice for claiming".

The noble Lord said: My Lords, I shall speak also to Amendment No. 37. The noble Lord, Lord Kingsland, has truly been a bountiful source of inspiration this afternoon. Once again, these amendments have been inspired by his arguments in Committee.

As the noble Lord and others no doubt recall, Clause 77 gives RTM companies rights to obtain information that they need for the purposes of claiming the right to manage. The noble Lord, Lord Kingsland, argued that the right, as it stands, is drawn too broadly. We reflected on that sensible argument and are persuaded that there is merit in clarifying the application of the clause. Amendment No. 36 makes it clear that the power granted by the clause may be used only to obtain information that the RTM company is required to include in the claim notice by virtue of Clause 79. That is similar to Amendment No. 113, which stood in the name of the noble Lord, Lord Kingsland, at the Committee stage. Amendment No. 37 is consequential as the clause will now follow the requirements imposed by Clause 79. It makes more sense for this clause to stand after Clause 79, to make the revised provisions easier to follow. I beg to move.

Lord Kingsland

My Lords, I thank the noble Lord for the compliment he paid this side of the House and I reflect, admiringly, on his wisdom.

On Question, amendment agreed to.

Lord Bassam of Brighton moved Amendment No. 37: Transpose Clause 77 to after Clause 80.

On Question, amendment agreed to.

Clause 79 [Contents of claim notice]:

Lord Kingsland moved Amendment No. 38: Page 38, line 35, at end insert— ( ) It must include an offer of cover to provide for the RTM company directors' and officers' liability insurance, fidelity guarantee and professional indemnity insurance.

The noble Lord said: My Lords, the problem of handover troubled your Lordships repeatedly in Committee, on Report and at Third Reading during the previous passage of the Bill. Any landlord of a block is likely to have in place a number of contractual arrangements, from something as simple to employing a residential caretaker to retaining a building firm to undertake major structural works.

In Committee, before the general election, the noble Lord, Lord Whitty, indicated that he would seek greater clarification of transitional arrangements for the handover of contracts. The Bill has not taken matters any further than the measure that was presented to the House before the general election. Some provision needs to be made. The noble and learned Lord, Lord Falconer, said that normal contract law would apply. It is anything but clear what normal contract law will produce. The Government rejected a proposal from my noble friend Lord Caithness, which we supported, that there should be a form of statutory frustration in such contracts when the lessees exercise the right to manage.

Under normal contract law, a contract will be frustrated only if an event occurs that the parties could not reasonably have foreseen. However, certainly after contracts entered into after the Bill becomes law, that will never he the case. Any landlord and any contractor with a landlord will be aware of the possibility of the tenants exercising their right to manage.

Lord Goodhart

My Lords, I am sorry to interrupt the noble Lord but he appears to be moving Amendment No. 44.

Lord Kingsland

My Lords, that is not so—for reasons that will become evident. I ask the noble Lord to be patient.

One solution might be a form of a statutory novation of any contract between contractors and landlords, so that the RTM company would automatically take over the contractual obligations from the landlord. The Government have set their face against such a provision. There are serious practical difficulties with such a novation—not least, that building contractors may be unwilling to have a new, possibly inexperienced and undercapitalised employer, foisted upon them.

Since RTMs will have no share capital, builders may be unwilling to allow the contract to be moved and simply walk off site. Moreover, the RTM company will be coming completely fresh to any project in progress. Admittedly there are provisions in the Bill for information to be transferred between the landlord and the RTM company; but anyone who has been involved in building works knows that it is almost impossible to take them over mid-flow.

As the Government are not willing to entertain detailed provisions for how and when existing contracts should be transferred or otherwise dealt with, the only practical solution is to allow reasonable time for existing contracts to be run off and for sensible handover arrangements to be made. Six months would ordinarily be a suitable period. One month is inadequate. Nonetheless, there may be cases where a shorter period would be appropriate, such as when urgent works are needed and it is sensible that the RTM company undertakes them rather than the landlord. The amendment gives the company the option to request an earlier handover date, with the Leasehold Valuation Tribunal left to decide in a dispute.

I appreciate that tribunals are currently overworked and that steps would need to be taken to ensure that they decide handover dates quickly. Nonetheless, steps are currently being taken to appoint additional chairmen. In any event, it would not be difficult to devise a fast-track system to determine the issue. I beg to move.

Lord Falconer of Thoroton

My Lords, I venture to suggest that speech had nothing to do with Amendment No. 38, which is about liability insurance, but with Amendments Nos. 39, 40 and 41—and It has a connection with Amendment No. 44. The noble Lord was talking about handover arrangements, including what happens to a contract, and was saying that more time than one month is required—not just in connection with the specifics of Amendment No. 39 but also with the transfer of contracts. The same point was made by the noble Lord in Committee, where his alternative to transferring contracts was to make the time allowed six months.

Lord Kingsland

My Lords, I am much obliged to the Minister.

Lord Falconer of Thoroton

On that basis, I shall speak not to Amendment No. 38, because in effect the noble Lord was addressing Amendments Nos. 39, 40 and 41.

I hope that the noble Lord will be pleased to know that we are sympathetic. When he spoke to the comparable amendments in Committee, he referred to the arrangements for handing over management responsibilities and contracts in particular He advanced similar arguments today. We have reflected on the noble Lord's remarks and are persuaded that there is a need for some movement.

The Bill provides in a number of places for the acquisition of the right to manage to take place a minimum of one month after the date on which it becomes apparent that the right will definitely be acquired. A longer period could apply if the RTM company wishes but it is not unreasonable to assume that one month will apply in many cases.

The gap between determination and acquisition serves a number of purposes. One is to allow for a period of negotiation over contracts following the service of the notices provided for in Clauses 89 and 90. Other amendments propose alternative approaches to contracts, so I will not dwell on that issue.

The noble Lord, Lord Kingsland, suggested that one month is not long enough for the purposes of sorting out contracts and invited me to, reflect on introducing a longer period of notice than that suggested in the Bill so that at least parties will have an opportunity to consider a whole range of options".—[Official Report, 22/10/01; col. 847.] We have duly followed that advice. On reflection, we found that the noble Lord—the inspiration for much of today's proceedings—was right. One month is undoubtedly not long enough. By the time notices are sent, received and responded to, the first week of the month would probably have been lost.

We are not initially attracted to a period as long as six months, which could create problems of its own. We propose to take the issue to those who deal with such matters in the outside world, to seek their views on how long might be needed. That will allow us to bring forward an appropriate amendment in another place.

We shall be happy to involve the noble Lord, Lord Kingsland, and, indeed, any other noble Lord in our discussions on this issue. We shall certainly let noble Lords who do not wish to be involved in the discussions know the outcome. Therefore, we accept the principle which lies behind the noble Lord's amendment and shall look very carefully at how we might amend the Bill in another place in order to address this important matter. I hope that, in the light of the undertaking to bring forward an amendment in another place, the noble Lord will be content not to press his amendment at this time.

Lord Kingsland

My Lords, the noble and learned Lord will not be surprised to hear that I am most grateful to him for his response. I shall certainly take the opportunity, as and when he gives it to me, to talk to him again about the details of the amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 39 to 41 not moved.]

Clause 82 [Counter-notices]:

6 p.m.

Lord Bassam of Brighton moved Amendment No. 42: Page 40, line 30, leave out from "given" to "in" in line 32 and insert "agrees, or the persons by whom the counter-notices were given agree,".

The noble Lord said: My Lords, in moving Amendment No. 42, I wish to speak also to the long list of other amendments which appear in this group.

This group should properly be known as the "Law Society group of amendments". Peers will recall that in Committee the noble Lord, Lord Goodhart, tabled several amendments on behalf of the Law Society. We agreed to consider a number of them and also offered to meet to discuss some further Law Society amendments which it had not been possible to table in time for the relevant Committee day. That meeting duly took place. Sadly, neither we nor the noble Lord, Lord Goodhart, were able to be present. However, I understand from officials that both sides found the discussions highly productive.

This group contains the Law Society-inspired amendments which relate to the right to manage. I should also acknowledge that some amendments in the group were inspired by earlier queries raised by one member of the Law Society's delegation, Philip Freedman of Mishcon de Reya. We are grateful both to him and to all Law Society members who have taken an interest in the Bill.

I shall speak as briefly as possible to each amendment. Amendment No. 43 is required to ensure that a claim for the right to manage is not struck out accidentally because a landlord withdraws his objections to the acquisition of the right to manage after an application to the leasehold valuation tribunal is made on the issue. If that were to happen, logically we should expect the RTM company to withdraw its application to the LVT as there would no longer be a need for adjudication on the matter. At present, the withdrawal of the LVT application would cause the whole RTM claim to be deemed to be withdrawn. That is not what we would want in those circumstances. Amendment No. 43 puts that matter right, and Amendment No. 42 is consequential to it.

Amendments Nos. 46 to 52 all ensure that a request for information, documents and so on under Clause 91 must be made by giving a notice to the relevant person. By virtue of Clause 109(1), such a notice, and, indeed, any other notice given under this Chapter of the Bill, must be made in writing.

Amendment No. 54 clarifies that the landlord must be given 30 days' notice where the RTM company proposes to grant approval for structural alterations. As the noble Lord, Lord Goodhart, pointed out in Committee, it is not at all clear that that is already covered by the general reference to improvements in Clause 96(4)(a). We had always envisaged that alterations would be covered by that provision and, therefore, we are happy to make properly clear that that is the case.

Amendment No. 55 allows a leasehold valuation tribunal to make an order for the cessation of the right to manage. As, I believe, my noble friend Lord McIntosh explained in Committee, it is already possible to seek the replacement of an RTM company under Part II of the Landlord and Tenant Act 1987. Paragraph 8 of Schedule 7 makes such variations as are required for that right to be properly applicable where an RTM company is the manager of the premises in question.

This amendment makes a further variation to Part II of the 1987 Act so that an LVT can be asked not only to make an order appointing a new manager to replace the RTM company but also to make an order which causes the right to manage to cease. Where such an order is made, the cessation will cause the management to revert to the landlord. Applications for a cessation order would be on the same grounds as for one appointing a manager, and the LVT would enjoy the same discretion to consider whether it was just and convenient to make such an order in the circumstances.

Amendments Nos. 58 and 59 are consequential to the introduction of the cessation order. They ensure that the making of an order is one of the circumstances in which the right to manage ceases to be exercisable. Finally, Amendments Nos. 56 and 57 correct minor drafting errors in Schedule 7 to the Bill.

Before I move on, I want to speak to two related matters which were also raised in Committee. First, the noble Baroness, Lady Hamwee, queried the derivation of the term "alterations of use" in Clause 96(4)(a). As she rightly said, nowadays we would more generally refer to "changes of use". However, we have sought to be consistent with the provisions on approvals in Section 19 of the Landlord and Tenant Act 1927, not least because they are applied to the RTM company by paragraph 1 of Schedule 7. It is Section 19(3) of that Act from which the term in question is derived.

Secondly, the noble Lord, Lord Goodhart, speaking, I believe, on behalf of the Law Society, queried whether there was an interconnection between paragraph 3(4) of Schedule 7 and Clause 101 of the Bill. It was suggested that arguably paragraph 3(4) would release a landlord from some of the liability imposed by virtue of Clause 101. At that time we agreed that that was not what was intended and we undertook to take away the matter for consideration.

We have now taken advice on the issue and are satisfied that the problem that was suggested does not occur. Clause 101 confers a statutory obligation on the landlord. That is not fettered or limited by the operation of Section 11 of the Landlord and Tenant Act 1985, as varied by Schedule 7 to this Bill. For such a limitation to be effected, the Bill would have to make a specific provision in that regard. It does not, and the undesired effect suggested by the Law Society does not arise. Therefore, in our view there is no need for an amendment. However, we felt that it was important to put on the public record an explanation as to why that might be the case.

In closing, I thank all those who have helped to inspire these amendments and say how much we value their contribution. I beg to move.

Lord Goodhart

My Lords, as a member of the Bar, I cannot speak on behalf of the Law Society. However, speaking for myself—and I am sure that the Law Society would concur—we are grateful that the noble Lord and the department concerned have given favourable consideration to at least a significant number of the amendments proposed by the Law Society. Therefore, I welcome the proposed amendments in this group standing in the name of the Lord Chancellor.

On Question, amendment agreed to.

Clause 85 [Deemed withdrawal]:

Lord Bassam of Brighton moved Amendment No. 43: Page 42, line 21, at end insert— ( ) Subsection (1) does not apply if the person by whom the counter-notice was given has, or the persons by whom the counter-notices were given have, (before the time when the withdrawal would be taken to occur) agreed in writing that the RTM company was on the relevant date entitled to acquire the right to manage the premises.".

The noble Lord said: My Lords, I beg to move.

On Question, amendment agreed to.

Clause 90 [Duties to give notice of contracts]:

Lord Kingsland moved Amendment No. 44: Page 46, line 8, at end insert— (8) Unless the contractor party and the RTM company otherwise agree in writing within a period of 28 days after service of a contract notice, the management contract shall continue in full force and effect from the acquisition date as if it had been made between the contractor party and the RTM company and not with the manager party, save that the RTM company shall have no liability under it for breaches on the part of the manager party occurring prior to the acquisition date.".

The noble Lord said: My Lords, I rise to move Amendment No. 44 but shall not say anything about it because the matters to which it relates have already been covered as a result of the noble and learned Lord's response. However, it is important that the noble Lord, Lord Goodhart, has an opportunity to speak to his Amendment No. 45.

Lord Goodhart

My Lords, I am not sure whether or not the noble Lord moved Amendment No. 44.

Lord Kingsland

My Lords, I did not speak to Amendment No. 44, but I beg to move.

Lord Goodhart

My Lords, now that it is clear that that amendment has been moved, I speak to my Amendment No. 45 without, of course, moving it. The proposal within it is substantially to the same effect as Amendment No. 44 moved by the noble Lord, Lord Kingsland.

He took the view that his alternative suggestion—that the one-month notice period between the RTM becoming entitled to take over management and its actually doing so should be increased—was satisfactory. I see that it is in some sense an improvement. However, our proposal, which is basically for a statutory novation of existing contracts, is preferable. That is partly because there may be several contracts that are unjustifiably destroyed or frustrated because they run for longer than three months, or whatever the period that the Government eventually choose.

Our proposal is also preferable because it is undesirable for there to be any significant delay between the RTM company becoming entitled to exercise its powers and its actually doing so. Once the RTM company becomes entitled to exercise the powers of management, the relevant time should be kept at a minimum, subject to the RTM company's power to extend it if it is, for example, having difficulty finding a suitable managing agent. As soon as the RTM company is ready to go, it should be allowed to do so.

The proposal that contracts should be frustrated is seriously damaging to the RTM company and in many cases to contractors. We can envisage various possible scenarios. I am grateful to a correspondent company for raising in a letter to me the examples that I am about to give. The first example is that of a lift maintenance contract. Such a contract is required under safety legislation to be enforced at all times. The RTM company may be unaware of the need to ensure that the lift maintenance contract is in force; it may accidentally fail to renew it because it is concerned with other problems. It therefore seems to us that that is a clear example in which it would be desirable for an existing contract to be preserved for the benefit of the RTM company.

Another example is that of a contract gardener who was not previously an employee of the landlord but, because he looks after two or three blocks—he does so in the course of his business—he may look after the gardens of the particular block that the RTM company is taking over. Suppose that the gardener has a contract that lasts for a year at a time. He will lose a significant part of his rights, without any right to compensation, if the RTM company decides not to offer to renew his contract. It might decide instead to use the voluntary work of tenants, not to maintain the garden or to employ another contractor to do the work. Again, we think that that would be inappropriate. In such a case, the RTM company should be bound by the existing contract.

I turn to perhaps the most significant example. Substantial works, which may take several months, may have to be done on the property. They may involve a major operation such as re-roofing the building. Depending on the timing, there is a significant possibility that the contract would be determined half-way through the roofing work. In such circumstances, the roofing contractor might be in a position to insist on a renegotiation of the contract, which would give him substantially greater payment than he was entitled to under the original contract.

We believe that it is plain that there should be a statutory novation of existing contracts relating to the management of the property. There should be limited exceptions to that. They are set out in paragraph (3) of the amendment as being circumstances in which the RTM company should be entitled to cancel the contract. They would arise out of what was essentially misconduct by the landlord, who may have entered into contract with a company that was, for example, associated with him or his friends. That might require payment that was in excess of the proper market price, it might require work to be done that was not genuinely needed for the benefit of the property or it might involve a contract with a person who was unfit to provide the work or services that were contracted for.

In those cases, the RTM company should have the right to cancel the contract. Failing those circumstances, we believe that the arrangement is in the interests of both the RTM company and the contractor—admittedly, however, in some cases it may be in the interests of one rather than the other. The roofing contractor would no doubt be rather pleased if he was in a position to insist on substantially higher payment. It is right and proper that contracts should continue, except in the special circumstances that are outlined in paragraph (3) of the amendment.

6.15 p.m.

Lord Falconer of Thoroton

My Lords, I shall speak, if I may, only to the unmoved amendment of the noble Lord, Lord Goodhart, on the basis that, in view of what I said in relation to the previous group of amendments, the noble Lord, Lord Kingsland, said that he had not spoken to Amendment No. 44.

We have grave concerns about Amendment No. 45 for several reasons. First, it would not give contractors the right to decide whether they would or would not wish to work for an RTM company. We have grave concerns about that. I acknowledge that the noble Lord is seeking to be helpful to the RTM company by ensuring that it is supported by some contracts from the start. That is obviously commendable. However, we believe that binding the contractor into working for the RTM company against his will will cause more harm than good. We are extremely concerned that some contractors, particularly those who are linked to the landlord, would deliberately fail to provide a proper service. They could even be actively disruptive. I do not think that leaseholders would thank us for that.

The amendment of the noble Lord, Lord Goodhart, is specifically designed to avoid the problems that are associated with sweetheart contracts. Under that approach, all contracts would carry over, but the RTM company, as the noble Lord said, would then have rights to terminate individual contracts on specified grounds.

Even if one got to that point, we still have considerable concerns about the noble Lord's suggestion. While we accept that Amendment No. 45 is reasonably fair to the RTM company, we believe that it is fundamentally unfair to the contractors. To our mind, the grounds for the termination of contracts—those in paragraph (3) of the amendment—are somewhat vague and subjective. We believe that it would be open to an RTM company to terminate almost all transferred contracts. There is certainly nothing in the amendment that would stop them.

I turn to the examples that were suggested to the noble Lord by a correspondent company and in particular to that involving the lift maintenance contract. It is not clear under the amendment what would stop the RTM company, if it wanted, from cancelling that contract—that also applies to the contracts in the other examples. As I understand it, the amendment in effect says, "You can determine if, in the opinion of the directors of the RTM company, the charges were excessive, the services were inappropriate or the supplier of the services was not fit or proper to provide those services". That is not a matter of objective assessment; it involves the opinion of the directors. It is hard to imagine them not being able to say, in relation to practically any contract, "I think that that is too expensive; let us try and do better", or, "We, the RTM company, think that those services are not appropriate; let us get them from somebody else". We believe that it would be open in those circumstances to terminate practically all transferred contracts.

It could of course be argued that the RTM company may act reasonably in order to avoid being taken to court by the contractor. But what is to stop unscrupulous contractors such as those who have been set up under earlier contracts threatening to take the RTM company to court anyway, even if the termination was justified?

On the one hand, therefore, we could have arbitrary termination with no recourse for the contractor. On the other, we could have the RTM company unprepared to terminate any contracts because of the risks, no matter how unhappy it is with the contract. We do not think that either outcome is desirable.

We appreciate the concern underlying the amendment but we do not think that the amendment achieves the right outcome. We therefore continue much to prefer the approach taken in the Bill. This will allow the RTM company and the contractors to work matters out by negotiation. No one is forced to work for anyone else against his will. We accept that in some cases that may mean that the RTM company loses the benefit of existing contracts. That is no different from the situation an RTE company would be in when it starts to manage after enfranchisement. And we believe that it is infinitely preferable to trampling over the rights of either party.

However, as was said when I spoke to Amendment No. 39 we believe that a longer time period is needed than is provided for currently. We need to give all parties, in particular the RTM company, a decent amount of time to prepare for management and to make sure that the right contracts are in place from the outset. As I said earlier, we see on reflection that one month is not long enough for that. We have undertaken, therefore, to consider and bring forward an appropriate amendment on that issue in another place. As we do that we shall take into account the concerns expressed by noble Lords today and on earlier occasions. But we cannot agree to the amendment of the noble Lord, Lord Goodhart. We hope that he will not press it.

Lord Kingsland

My Lords, for obvious reasons, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 45 not moved.]

Clause 91 [Duty to provide information]:

Lord Falconer of Thoroton moved Amendments Nos. 46 to 52: Page 46, line 10, after "company," insert "the company may give notice to Page 46, line 16, leave out "must" and insert "requiring him to Page 46, line 17, leave out "him to provide Page 46, line 20, leave out "RTM company" and insert "notice Page 46, line 28, leave out "person may not be required" and insert "notice may not require a person Page 46, line 31, after "required" insert "by a notice Page 46, leave out line 33 and insert "notice is given

On Question, amendments agreed to.

Clause 96 [Functions relating to approvals]:

The Earl of Caithness moved Amendment No. 53: Page 48, line 39, at end insert— ( ) The RTM company must not grant an approval in relation to the making of alterations, improvements or change of use which will diminish the reversionary value of the landlord's interest.

The noble Earl said: My Lords, Clauses 96 and 97 govern the ability of an RTM company to grant approvals. As noble Lords will be aware, the landlord is given 30 days' notice in some circumstances and 14 days in other circumstances.

The purpose of the amendment is simple. I hope that the noble and learned Lord will agree to it. It would limit the power of the RTM company to grant an approval to something of detriment which will diminish the reversionary value of the landlord's interest. I am sure that the Government want that. I beg to move.

Lord Williams of Elvel

My Lords, I put my name to the amendment because I believe that the Government should pay considerable attention to the issue.

I give an example. Let us suppose that a leaseholder decides to knock down half his flat. He applies for planning permission; he applies perhaps for listed building permission and obtains it. He then goes to the RTM company—he would at present go to the landlord—and says, "I now want a licence". In its wisdom the RTM company decides that it is a good idea. Alternatively, let us suppose that the leaseholder decides to turn his basement into a lap-dancing club. He obtains permission for a change of use and gets planning permission. He goes to the RTM company which says, "Yes, this is not a bad idea".

Both proposals would probably damage the reversionary interest of the landlord. The point which the noble Earl's amendment addresses should be addressed by the Government.

Lord Monson

My Lords, it is a good and worthwhile amendment. The only improvement would be the inclusion of the word "significant" before "diminished". If a proposed alteration, improvement or change of use were to lead to a diminution in reversionary value by a mere one quarter of 1 per cent one would not be justified in interfering; but any significant diminution would be wrong. I hope that the Government will accept the amendment in principle.

If the Government wish to insert "significant", or an equivalent word, that can always be done at Third Reading or in another place. I look forward to hearing the Minister's response.

Lord Falconer of Thoroton

My Lords, we agree with the noble Earl, Lord Caithness, that it is important that the landlord's interests are safeguarded against the granting of inappropriate approvals. That is the current position. However, we believe that the Bill already addresses this satisfactorily.

As noble Lords will know, Clause 96 provides that where the right to manage is acquired, the RTM company takes on primary responsibility for all approvals which are required under the leases. However, where the RTM company proposes to grant a consent, Clause 96(4) provides that it must first give written notice of that intention to the relevant landlord. The landlord then has the opportunity to decide whether to agree or object to the granting of that consent and to notify the RTM company accordingly.

Where a landlord decides that he wishes to object, the RTM company may grant the approval only if one of two conditions are met. First, the landlord must agree to withdraw the objection. Alternatively, an application must be made to a leasehold valuation tribunal for its agreement that the approval should be granted.

We believe that these arrangements already make admirable provision for the safeguarding of the landlord's legitimate interests. A landlord who believes that his reversionary interest would be damaged by the granting of an approval is able, first, to ensure that the RTM company does not disregard that and grant the approval itself and, secondly, to seek to persuade a leasehold valuation tribunal that the approval should not be granted. In the latter case, one of the arguments that the landlord would be able to place before the tribunal would be that the approval would unduly harm his reversionary interest although, of course, the question of whether the approval should be granted would have to be decided in accordance with the terms of the lease, as the noble Earl would accept.

We do not think that the amendment adds anything to those arrangements. Our first concern is that the question of what will or will not diminish the reversionary value of the landlord's interest is both vague and subjective. It could be argued that any consent for improvements or alterations might, in some way, diminish the immediate value of the landlord's reversion. Does that mean that the RTM company should never grant an approval for these matters? Indeed, does the amendment mean that the company should not grant an approval even if the landlord agrees that approval should be granted?

We are not clear, furthermore, what should happen where the RTM company decides that it wishes to grant an approval on the basis that it does not believe that the reversionary interest would be affected and then the landlord alleges otherwise. Who would adjudicate in such disputes? And why would that be better then the present arrangement of allowing all disputed approvals to go to the LVTs? We believe, therefore, that the arrangements in the Bill already address the issue raised in the amendment; and that they do so in the most sensible and practical way. In effect, they prevent any approval being granted unless the landlord or the LVT agrees. I believe that we do that in a sensible and practical way. On that basis, I hope that the noble Earl will not press the amendment.

The Earl of Caithness

My Lords, I am grateful for the support I received from the noble Lord, Lord Williams of Elvel, and the noble Lord, Lord Monson. I listened carefully to the Minister's reply. I was reassured to some extent. I would not say that the position of the landlord was admirably protected—I think that those were the words used by the noble and learned Lord—otherwise I would not have tabled the amendment. However, I should like to consult between now and another stage because it is an important matter to get right. It is better to get it right in this House than in another place. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.30 p.m.

Lord Falconer of Thoroton moved Amendment No. 54: Page 48, line 43, after "or' insert "structural alterations or

On Question, amendment agreed to.

Schedule 7 [Right to manage: statutory provisions]:

Lord Falconer of Thoroton moved Amendments Nos. 55 to 57: Page 100, line 12, at end insert— ( ) The power in section 24 to make an order appointing a manager to carry out functions includes a power (in the circumstances specified in subsection (2) of that section) to make an order that the right to manage the premises is to cease to be exercisable by the RTM company; and such an order may include provision with respect to incidental and ancillary matters (including, in particular, provision about contracts to which the RTM company is a party and the prosecution of claims in respect of causes of action, whether tortious or contractual, accruing before or after the right to manage ceases to be exercisable). Page 100, line 21, after "42B" insert "of the 1987 Act Page 101, line 23, leave out "registered" and insert "recognised

On Question, amendments agreed to.

Clause 103 [Cessation of management]:

Lord Falconer of Thoroton moved Amendments Nos. 58 and 59: Page 52, line 29, leave out "is Page 52, line 30, at end insert ", begins so to act or an order under that Part of that Act that the right to manage the premises is to cease to be exercisable by the RTM company takes effect.

On Question, amendments agreed to.

Clause 111 [Index of defined expressions]:

Lord Falconer of Thoroton moved Amendment No. 60: Page 57, line 5, column 2, leave out "Section" and insert "Sections 69(1) and

On Question, amendment agreed to.

Clause 113 [Non-residential premises]:

Lord Kingsland moved Amendment No. 61: Leave out Clause 113.

The noble Lord said: My Lords, because the amendment was grouped in Committee with an amendment that the noble Lord, Lord Williams of Elvel, did not move, I shall speak briefly to it. I have, on the three times occasions during the passage of the previous Bill, said everything that I wanted to say on the matter. So my words, here, are by way of reminder.

My objections to the clause are threefold. First, there is evidence that investors and developers would resist proposals to develop mixed schemes if there were a risk of enfranchisement of the premises in question as a result of the new threshold of 25 per cent for nonresidential use. Those concerns are readily understandable. Investors will not invest if their investment is insecure because of an ensuing risk of enfranchisement. Those preoccupations will have an adverse effect on the prospect of mixed property schemes and will, in turn, adversely affect future urban regeneration proposals.

My second concern is related closely to my first. The clause may have retrospective effect in relation to mixed-use premises where the non-residential use is between 10 per cent and 25 per cent. Investors in and developers of such existing mixed-use premises would face the risk of enfranchisement under the clause, even though, when they made their investment, no such risk existed.

Thirdly, residential enfranchisers are unlikely to want to become commercial property managers. Moreover, they are in the main wholly unsuited so to become. If enfranchisement were permitted where there was more than 10 per cent non-residential use, the effects could be disastrous for the business occupiers, and for the marketability of the property as a whole—which may significantly depend on the value of the business that forms a major part of it. I beg to move.

The Earl of Caithness

My Lords, I again rise briefly to support my noble friend. Your Lordships will have heard what I had to say on the matter many times, so I shall not repeat it.

Baroness Gardner of Parkes

My Lords, I am concerned whether the amendment would affect the current position. At present, there is a deliberate system under which freeholders of mews houses put the garage onto a separate lease from the rest of the property to make it unenfranchisable. That frustrates our purpose: we would want such people to be able to enfranchise their property. What effect would the amendment have on that?

Lord McIntosh of Haringey

My Lords, the short answer is that the amendment would leave the situation as it is at present. The problems identified by the noble Baroness, Lady Gardner of Parkes, would continue.

I recognise that this is a difficult and contentious issue, and a problem to which there is no ideal solution for all purposes. The noble Lord, Lord Kingsland, has consistently opposed the proposal to increase the present limit of non-residential use from 10 per cent to 25 per cent. However, as I think that he would acknowledge, others who have taken part in our debates have thought that we have not gone far enough to help leaseholders in mixed-use premises. Clearly, people have been exercising their minds, and we are grateful to them for that.

We have considered all the solutions put forward and concluded that there is no alternative to the provision in Clause 113, which will raise the threshold from 10 per cent to 25 per cent. It is a fact of history that the old 10 per cent threshold prevented too many leaseholders from enfranchising. A 25 per cent threshold will make it easier for them, but it will protect the landlord where the commercial unit is the majority interest in the building. However, where the leaseholders hold the majority interest, it is only right that they should be able collectively to buy out the landlord.

Leaseholders enfranchise to address either the problem of their diminishing leases or the problem of the landlord's monopoly over the management of the block, or both. Any enlightened developer, in planning a new scheme, would give careful thought to ensuring that residents were comfortable in their homes. We hope that many, if not all, new mixed-use schemes will be carried out on a commonhold basis.

The noble Lord, Lord Kingsland, asked about existing schemes and the retrospective effect of the clause. I remind him that the Leasehold Reform, Housing and Urban Development Act 1993, which is causing the problem, was introduced by a Conservative administration and included mixed-use premises without exception. In his terms, that had retrospective effect. Why was that right in 1993 and not now? I think that the noble Earl, Lord Caithness, was involved in that Act. The noble Earl shakes his head. However, a number of people hold responsibility for that Act.

There is no perfect solution; the provision in Clause 113 is the best that we can find.

Lord Kingsland

My Lords, the fact that the Conservative government were wrong in 1993 does not excuse the present Government from being wrong in 2001. I accept that this has been a vexed and much disputed issue throughout our proceedings. I shall think hard whether to reintroduce the amendment at Third Reading—and, perhaps, whether to press it to a Division. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 115 [Premises with resident landlord]:

Lord Kingsland moved Amendment No. 62: Page 58, line 7, after "units" insert "or following the conversion for 10 or more years before the date hereof

The noble Lord said: My Lords, leaseholders are currently prevented from enfranchising a property that has been converted into four or fewer units, and where the freeholder has lived in one of the flats as his or her main home for the past 12 months. The Government's view has been that that has placed individuals who acquire the freeholds of such properties in a privileged position compared to non-resident landlords of converted properties.

At the same time—this is reflected in the Bill as drafted—the Government have taken the view that resident landlords who have a genuine interest in a property should continue to be protected. However, the Government have limited that class of persons to those who have themselves converted the property. Such people have effectively sub-divided their own home while continuing to live in it; and the Government consider it unfair for them to lose ownership of the freehold as a result.

My amendment would establish a position between the existing position and the position that the Government propose to substitute for it. Where there are a small number of flats in a conversion and the landlord occupies one of those flats, he is likely to ensure that the building containing his home is maintained in a far better way than a disparate number of lessees, who may not be living in the flat as a home, and may be putting it out to management by agents at far greater cost.

I accept that determining the number of years for which the landlord should have lived in the flat before acquiring the protection that I suggest is not easy. I have suggested 10 years. If a landlord has lived in a small block of flats for 10 years, he is likely to be more like a householder than a business manager. In those circumstances, he merits the protection of the Bill. I beg to move.

Lord McIntosh of Haringey

My Lords, the problem here is not whether it is 10, 11 or even nine years; the problem is that there is a potentiality—indeed a reality—for abuse which would continue if this amendment were accepted in any form. We have received many complaints about resident landlords who abuse their privileged position. Indeed, during the consultation process we received a number of representations that the exemption for the right of enfranchisement for resident landlords should be abolished entirely.

The conclusion to which we came was that the exemption should be restricted to people who sub-divide their own home into flats and continue to live there. That is what Clause 115 seeks to do. Many resident landlords acquire the freehold at the same time as they purchase their flat or subsequently. We see no reason why they should be put in a privileged position.

Amendment No. 62 would retain the privileged position for those who have the good fortune to have held it for a period of 10 years. I cannot see any justification for accepting that. It is not as though they were going to be forced out of their homes. They have the option of either requiring the enfranchising group to buy out their whole interest or take a 999-year lease back on their old flat at nil ground rent. There is no difficulty about the protection of landlords here; we have to be concerned with encouraging enfranchisement.

Lord Kingsland

My Lords, the Minister said that a number of individuals complained to him.

Lord McIntosh of Haringey

My Lords, during the consultation process we received complaints.

Lord Kingsland

My Lords, I apologise for mishearing the Minister. Equally, during the time that I have been responsible for this Bill on behalf of the Opposition, I have received a number of complaints from individuals who find themselves in the opposite position; that is, individuals who have purchased leaseholds together with the freeholds and remained there for a long time. They feel that they would be adversely affected by the changes in the law the Government propose.

I shall reflect on what the Minister said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.45 p.m.

Clause 117 [Abolition of residence condition]:

The Earl of Caithness moved Amendment No. 63: Leave out Clause 117.

The noble Earl said: My Lords, in moving Amendment No. 63, I shall speak also to Amendments Nos. 76, 77, 79, 88 and 89.

With these amendments we return to the question of the residency test. I hope the noble Lord, Lord McIntosh of Haringey, will listen to the principle behind the amendments very much in the way that his noble and learned friend Lord Falconer did when responding to Amendment No. 39 which was proposed by my noble friend Lord Kingsland. It is the principles behind the amendments rather than the amendments themselves that are of import.

As the Minister will recall, I raised this matter at Second Reading and would have spoken to it at length in Committee had I been present. This is an important matter. The Government are in grave danger of falling into the trap mentioned by the noble and learned Lord, Lord Falconer, in relation to Amendment No. 27, when he said that he did not want to destroy one imbalance while creating another. That is what is happening with the Bill. It is what I also call the "law of unintended consequences"—the devil that haunts every government. I remember suffering from it. The noble Lord, Lord McIntosh, used to raise points and say that such-and-such would happen. I did not believe him at the time—sometimes he was right and sometimes he was wrong. I can now say the same to him on this issue.

The Bill as drafted takes away the residency test. A consequence of that is that anyone buying a lease of a flat or house as an investment, such as using a buy-to-let mortgage, for example, will qualify for enfranchisement. That means that the Bill gives one investor a right compulsorily to purchase over another investor's investment and a means to enforce the right against the latter's will. That is a substantial change from the current position of a residency test, which is a one-to-one between the lessee and the freeholder.

I know and sympathise with those situations where companies have been involved, because a company cannot enfranchise and certain landlords have only let to companies. That has encouraged a proliferation of companies, not only because that is the only way in which a lease could be obtained; but it has also been used as tax havens and for investment purposes by people who have no wish to live in the property.

Under the heading of "companies" therefore we have the "deserving" cases and what I would call the "non-deserving" cases. I am sure it is not beyond the wit of the Government to devise a scheme whereby a person who is genuinely resident—living in the property but having to live there under the auspices of a company because that is the only way he or she could obtain the property in the first place—should be entitled to enfranchise, and separate that situation away from the pure investor who holds the property as an overseas tax break or for some other investment purpose. That is not the kind of person one seeks to encourage to use the enfranchisement provisions.

That leads me on to the more serious consequences. Let us imagine the situation of a traditional house in London which would qualify under the 1967 Act for enfranchisement. That house is let to a head lessee who has sublet the flats—let us say there are six of them— on a co-terminus basis, so there is no reversionary interest to speak of to the head lessee. The Bill has granted that head lessee the right compulsorily to purchase the freehold. But he is not living there; he is using the house as an investment. We are therefore transposing one landlord for another. The intermediary head lessee now becomes the landlord.

It is worse than that. When the head lessee acquires the right to enfranchise, the landlord does not receive any marriage value. The marriage value is automatically taken at the extension of a lease or when there is a sale to a tenant. So it is the current head lessee—who may not be a desirable person at the best of times—who is the beneficiary.

We have produced some figures on this point. What is happening is that the current freeholder's interest is being cut in half—by 50 per cent—and the head lessee's interest is increasing by over 1,000 per cent. So we are taking away something from the traditional freeholder and giving it to the head lessee. That is grossly inequitable. What is worse, if the Government were compulsorily acquiring the freehold, they would have to do it on considerably more generous terms than the head lessee has to do it. Therefore, we are in a position where to solve one cause of discontent one would create an area of huge discontent.

Who are the owners of such traditional houses in London? It is true that some are the old landlords who have owned parts of London for a long time and who might or might not be liked by the Labour Party. However, there are also charities which own blocks of such houses. As a result of the Bill, one charity I know will have £30 million wiped off its balance sheet. A widow who inherited the property and did not understand the management might not bring in a management agent but a head lessee. That person would be deprived of what they should have. Pensions and other income for the Church of England come from such traditional investments: the Church would be deprived of its asset.

We have a serious problem here. Perhaps I may repeat to the noble Lord, Lord McIntosh, that the amendments I have tabled do not necessarily address my specific concerns. However, they have given me the opportunity to voice them. These are real concerns which, if not remedied, will result in a case in the European Court. The Government are creating a massive injustice. I believe that that is unintentional. The Bill has taken a long time to reach this stage. One of the unintended consequences, of which I am glad, is that this matter has now been brought to light. I beg to move.

Lord Williams of Elvel

My Lords, my name is attached to some of the amendments in this group. That is a result of lack of vigilance on my part and possibly of a muddle between myself and the noble Earl. I would not like it to be thought that I am against the abolition of the residence test. I am in favour of the Government's view on that issue. Therefore, in some respects, the noble Earl and I will have to part company.

Nevertheless, having removed my name from his amendments, I believe that the noble Earl makes two serious points. This matter needs study by the Government. I hope that my noble friend will not simply brush the issue aside and say, "No, the Government have taken this view and that is the end of it". As the noble Earl mentioned, the unintended consequences could be rather dramatic.

Lord Goodhart

My Lords, my position is similar to that of the noble Lord, Lord Williams of Elvel. As regards the residence test, we were approached by the British Property Federation which made a persuasive case. The federation argued strongly that the residence qualification should be retained. I admit that I came close to being persuaded. However, ultimately I decided that its case fell just short—I consulted my noble friends—primarily because anybody who holds a property which is subject to a long lease which has a residence qualification will be aware that that property is vulnerable to enfranchisement or an extended lease by a purchaser of the lease who then proceeds to reside there. There may be a limited "hope" value as a result of the possibility that someone buying the lease may never occupy the property. However, frankly, that will not add significantly to the value of the property. Therefore, anybody who holds the reversion to a lease which is capable of extension or enfranchisement will be aware that the property which is held is vulnerable and the reversion is worth no more than its market value.

Ultimately, it did not seem to me that the disadvantages of the residence qualification to the freeholder were sufficient to overrule the advantages, indicated by the Government in previous debates in favour of removing the residence test and simply substituting in certain circumstances a requirement of two years' ownership of the lease.

However, I have also seen documents on the subject of the division of the marriage value between a freeholder and a long leaseholder when the long lease is subject to leases which are capable of enfranchisement or extension. There is a real and serious problem here. We are opposed to the principle of marriage value altogether. However, we believe that if there is to be a marriage value, the way in which the Bill in its present form divides that marriage value in the circumstances mentioned by the noble Earl. Lord Caithness, between the freeholder and the long leaseholder is highly unsatisfactory and will simply transfer a substantial amount of money from the freeholder to the long leaseholder. On that aspect I am happy to support the noble Earl, Lord Caithness.

Baroness Gardner of Parkes

My Lords, like other speakers who followed the noble Earl, Lord Caithness, I have mixed views. I did not intend to speak on this matter. However, I was approached by the Leasehold Reform Professional Committee, which is in favour of the residence test being abolished. I said that I could not speak on that matter because I would benefit from it if it happened. I believe I have told your Lordships' House before that I purchased a flat for my old age, which I do not occupy. The committee asked me whether I would declare that matter and speak on the amendment.

The noble Earl, Lord Caithness, raised a number of important points. I was concerned by his comment that the only way that people are able to get a lease and get into a flat is to buy the lease in a company name. I am aware of the fact that certain property owners will not now sell or give a lease to anyone unless it is bought in a company name. That is a specific process by which they intend to prevent the person having any right to enfranchise. Such property owners are forcing people to take the property in company names only. Therefore, it is important to them that this change should not be made.

The noble Earl mentioned that charities own properties, which is true. Not long after the 1993 Act was passed, the Smith Charities decided to dispose of all their properties. Although the law required them to offer the properties to their tenants, they did not do so. Notice was served, which was short notice. Tenants were not given the right amount of notice, and it was done when everyone was away on holiday. Fortunately, the tenants were alert enough to take action and, in many cases, obtained the right to buy the properties. Certainly, charities act just like any other major landlord in that way.

The noble Earl also mentioned major estates in the capital and elsewhere. Here again we must be careful. As I shall mention later when we discuss the leasehold valuation tribunal, if the major estates are prepared to enfranchise one's freehold but then one is stuck with an estate management scheme which is so onerous that one is worse off than before one was a freeholder, that is not, in the real spirit, selling a freehold.

A valid point was made by the noble Earl and we must ensure that something is done about it. I refer to the situation he described in which a head lessee would replace a landlord. That seems to me wrong and not at all in the spirit of what was decided or what is intended. The abolition of a residence test is meant to help people. For example, in the block in which my flat is situated it may be that because there are other people in a similar situation to me we cannot enfranchise because there are too many of us who do not live there. I know for a fact that some people who are posted or who live abroad let their flats. People wish to see the abolition of the residence test. The noble Lord, Lord Williams of Elvel, made that clear, as did the noble Lord, Lord Goodhart. I do not believe that anyone wishes a situation to be created whereby a head lessee acquires the rights of the existing landlord. The example was quoted of four flats in a block and the person entitled to be enfranchised being the head lessee. That is not what I believed was going to happen. I understood that on the abolition of the residence test each of the four people in the block of flats would have a right to a share of the freehold. It would be a total distortion of the Government's intention if what I fear should happen.

The noble Earl, Lord Caithness, has brought out a number of important points. It is good to abolish the residence test from the point of view of helping people to enfranchise their freehold, but the Government must look at what can be done to avoid the other consequences which have been described as being very possible.

7 p.m.

Lord Monson

My Lords, the noble Earl, Lord Caithness, has described a state of affairs whereby charitable beneficiaries will effectively be robbed for the benefit of extremely clever and rich people. Surely, that must be unacceptable to noble Lords in all quarters of the House.

Lord Kingsland

My Lords, I supported the residency test until the Committee stage a few weeks ago. I gave my reasons during the previous proceedings as to why I would not table those amendments again at Report stage. However, I share, entirely, the concerns expressed by the noble Earl, Lord Caithness, and other noble Lords, as regards the powers which are seen to accrue to the head lessee in the Bill as now drafted. I shall be extremely interested to hear what the Minister has to say.

Lord McIntosh of Haringey

My Lords, there are two issues here which are related but not the same. The first is the residence test and the second is about head lessees. The noble Earl, Lord Caithness, asked me to deal with the residency point as a matter of principle rather than criticising the wording of the amendments. I am not doing that. As far as I can see they would achieve their intention. But the noble Earl referred to causes of discontent about the residency test and that is the point.

It is not an issue of principle, but it has been a cause of considerable discontent. Those tests have been open to abuse and confusion over many years. We firmly believe that it is right to base eligibility on whether or not the leaseholder has a significant stake in the property. We are confirmed in that view by the fact that the noble Earl is on his own now. The noble Lords, Lord Williams of Elvel, Lord Goodhart and Lord Kingsland and the noble Baroness, Lady Gardner of Parkes, have peeled off. There are no other supporters for that view.

However, the noble Earl raised a point on which he has a great deal of support; namely, the issue of head lessees. We are aware of the concerns which he expressed at Second Reading and now that the head lessee of a house converted into flats may be able to enfranchise under the 1967 Act and then receive a substantial profit if the under-lessees of the flat collectively are enfranchised under the 1993 Act. We are not certain that that is the effect of the Bill. We are currently considering the position. It is not our intention that head lessees should be put into that position. If we are convinced that that is the effect of the Bill, we shall certainly consider introducing amendments to prevent the problem. That would have to be done in another place rather than at Third Reading in view of the complexity of the argument. We certainly recognise that genuine concerns have been expressed on the matter.

The Earl of Caithness

My Lords, I am very grateful for that reply. There is genuine concern on this matter which needs urgent attention. I am very grateful that the Government are considering it. If there is a chance of consultation with the Minister I shall be very happy to join in. I thank those noble Lords who supported me on the principles I raised, including the noble Lords, Lord Williams of Elevel, Lord Goodhart, Lord Monson and my noble friends Lady Gardner of Parkes and Lord Kingsland.

The noble Lord, Lord McIntosh of Haringey, said that I was totally against the abolition of the residency test. I am not. If the noble Lord reads with care what I said, he will see that I did try to come forward with a solution to the company's problem. That was also addressed by my noble friend Lady Gardner of Parkes. There has been abuse. I was trying to help the genuine resident. What I am not trying to do is to help the intermediary property companies some of which none of us would want to see owning blocks in our cities. I am extremely grateful for what the noble Lord, Lord McIntosh, said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 119 [RTE companies]:

Lord Goodhart moved Amendment No. 64: Page 59, line 14, at end insert— (4) A company which is a RTM company may not become a RTE company except by a resolution passed with the affirmative vote or written consent of all its members. (5) In this Part, "RTM company" has the same meaning as in Chapter I of Part 3 of the Commonhold and Leasehold Reform Act 2001.

The noble Lord said: My Lords, this amendment deals with the problem of what happens to an RTM company when some of the leaseholders in the property decide to proceed to enfranchisement. There may be members of the RTM company involved in the management who do not wish to proceed to enfranchise because they are unable or unwilling to commit themselves to spending what could possibly be quite a substantial sum of money to buy out the freehold.

Under the Government's original proposals it was possible for an RTM company to convert to an RTE company, but one could not have both in the same property. That meant inevitably that if a minority of members of the RTM company did not wish to proceed to enfranchisement, the only way forward was for them to be removed from the company and therefore lose their involvement in management. We believe that is unfair.

The Government moved part of the way to deal with the problem by saying that an RTM and an RTE company could co-exist in the same property. That would make it at least possible for those who wish to enfranchise to set up a separate company and proceed to enfranchise. But where there was a clear majority of the members of the RTM company, it would still be possible for them, as the Bill now stands, to proceed to convert into an RTE company.

We believe that that would put anyone who did not wish to enfranchise into a position where they would either have to find the money, which they might be unable to do, or give up their membership of the RTM company and their involvement in management. We believe that is unfair. What we propose in this amendment is that the RTM company should not be able to convert to an RTE company without the unanimous consent of all its members. That would mean that if someone wanted to stay and be involved in management, but not to enfranchise, they could block the converging of the existing company. But there would be nothing to stop those wishing to enfranchise to proceed to do so by way of setting up a separate RTE company. The purpose of the amendment is to ensure that the rights of those who want to continue to be involved in management but do not want to proceed to enfranchisement are preserved, whatever the views of the other members of the company. I beg to move.

Lord Falconer of Thoroton

My Lords, we appreciate the concerns about members of an RTM company who do not participate in a subsequent enfranchisement. The Bill provides that any such leaseholders will cease to be members of the company on completion of the enfranchisement. The reason for that is that after enfranchisement conflicts of interest might well arise between those leaseholders who respectively did and did not participate in the enfranchisement. For example, there might be differences of view between them as to how the proceeds of sales of leases should be used or distributed. If the non-participants were still members of the company, the company directors would find themselves in a very difficult position as a result of their accountability to the entire membership.

As the noble Lord, Lord Goodhart, pointed out, since the original Bill was introduced we have removed the bar on there being separate RTM and RTE companies for the same premises. This will mean that where RTM has been exercised and a proportion of the members wish to proceed to enfranchisement, they would now be able to set up a separate RTE company for the purpose and non-participants would be able to continue to participate in the management of the building.

It is correct that a non-participating minority would not be able to force the participating members to take that approach, although in many cases doing so would clearly promote harmonious relations for the future management of the building. But we are not convinced that forcing the participants to use a separate company would be justified. That would be the practical effect of the amendment. Securing unanimous support for any proposition can be difficult. Given that the landlord is entitled to membership of the RTM company, unanimous support may prove to be impossible. The noble Lord, in nodding, indicates his earlier amendment. I recognise the noble Lord's view that a landlord should not be a member of an RTM company, but, as he knows, for the reasons we have given we are unable to accept that.

One of the reasons we have proposed the use of prescribed companies is to make it easy for leaseholders to progress from the right to manage to enfranchisement. Furthermore, if a majority are forced against their wishes to set up a separate company, there would be nothing to prevent them winding up the RTM company once enfranchisement had taken place.

Non-participating leaseholders would still have the benefit of general rights under leasehold law, including the right to be consulted on major works and the right to challenge unreasonable service charges. These rights are being strengthened by other provisions in the Bill.

I hope that in the light of what I have said the noble Lord will feel able to withdraw his amendment.

Lord Goodhart

My Lords, I have not been persuaded but I do not intend to press the amendment further today. I beg leave to withdraw it.

Amendment, by leave, withdrawn.

[Amendment No. 65 not moved.]

7.15 p.m.

Lord Goodhart moved Amendment No. 66: Page 60, line 17, at end insert—

"4BA RELEVANT CONVEYANCE TO RTE COMPANIES (1) In this section—

1. (a) "relevant tenancy" means the tenancy of a flat contained in premises which were the subject of a relevant conveyance (as defined in section 4B) to a RTE company; and
2. (b) "relevant tenant" means a person who at the time of the relevant conveyance was a participating member by virtue of holding a relevant tenancy and includes any successor in title of that person.

(2) After the executions of the relevant conveyance to the RTE company, on the assignment of a relevant tenancy by a relevant tenant—

1. (a) the assignor (unless he is also a relevant tenant under a relevant tenancy of another flat in the same premises) ceases to be a member of the RTE company; and
2. (b) the assignee (unless he is already a member of the RTE company) shall become a member of the RTE company."

The noble Lord said: My Lords, the amendment is intended to ensure that where there has been an enfranchisement by lessees, where a lessee who is a member of the RTE company signs the lease, the assignee will become a member of the RTE company. Membership of the company, and therefore ownership of the property, will not become separated from the right to hold a lease on the property. It is essential that once there has been an enfranchisement, it and the leases of those who are participating in it should remain permanently linked together. If not, we shall ultimately have a body of absentee landlords with an interest in the freehold but no leasehold interest in the property. That would be undesirable.

I understand that the Government may be prepared to deal with the matter in a different way. Instead of putting such a provision on the face of the Bill it would be included in the model memorandum and articles of an RTE company. The Government will take the point, which is legitimate, that in such circumstances one cannot force someone to become a member of a company, although it is inevitable that he will want to do so.

If that is the Government's intention, I should be willing to accept it as a way of achieving my objective; that is, to ensure, one way or another, the permanent linkage between ownership of the freehold through an RTE company and the holding of a lease in the property in question. I beg to move.

Lord Falconer of Thoroton

My Lords, the amendment would provide that where a lease was assigned by a member of an RTE company, the assignee would automatically become a member of the company. I recall the concern expressed by the noble Lord, Lord Goodhart, in Committee about the ability of assignees to become members of an RTE company. My noble friend Lord Bassam then explained why we could not provide for membership of the company to transfer automatically to assignees. I subsequently wrote to the noble Lord clarifying the position.

Company law does not provide for the automatic transfer of membership of a company limited by guarantee. Section 22 of the Companies Act 1985 sets two conditions which have to be satisfied to constitute a person as a member of such a company. First, the person must agree to become a member and, secondly, the member's name should be entered on the register. Both those conditions must be met and are cumulative. Unless both conditions are satisfied, the person in question will not have acquired the status of a member. The Government would be very reluctant to override that key principle in this particular case.

As I explained, although Part 1 of the Bill, and regulations to be made under it, make provisions which are intended to ensure that all purchasers of commonhold units must agree to become members of the commonhold association, the situation with RTE companies is rather different. Unlike the commonhold association, where the Bill envisages ongoing regulation, we are proposing to regulate RTE companies only during the enfranchisement process.

We consider that the operation of the company after enfranchisement should be a matter for the enfranchised leaseholders to agree among themselves. We do, however, agree that the RTE company should be able to admit new members after completion. This would include assignees of participating members or leaseholders who did not participate in the original enfranchisement. We accept that the draft of the memorandum and articles, which we provided to your Lordships, did not provide for that and we shall include appropriate changes in revised drafts which we expect to produce shortly.

As we have said previously, in practice, where a participating member assigns his lease, the premium would reflect the benefits of membership. It is unlikely that the prospective assignee would agree to the purchase without being satisfied that membership of the RTE company was an integral part of the package. This happens now with both the existing nominee purchaser arrangements under the 1993 Act and in other circumstances where there is a leaseholders' management company and we are not aware of any problems.

Furthermore, it would not be in the leaseholders' interests to exclude assignees from the RTE company where assignors had previously been members. Evidence of such behaviour could discourage prospective purchasers so that the leaseholders concerned might have difficulties selling their flats in the future.

I hope that that explanation gives the noble Lord the assurances he sought and that he feels able to withdraw his amendment.

Lord Goodhart

My Lords, I am not sure that it goes quite as far as I wish. Effectively, I should like to see a prohibition on the assignment of the lease by a member of an RTE company, except on the basis that the assignee is entitled to take membership in the company if he or she wishes to do so. I recognise, however, that commercially it is likely that in the great majority of cases something of that kind will take place, and certainly this is progress towards that objective. In the circumstances, I beg leave to withdraw my amendment.

Amendments by leave, withdrawn.

Clause 120 [Invitation to participate]:

Lord Falconer of Thoroton moved Amendment No. 67: Page 61, line 40, at end insert— (6) A notice of invitation to participate shall not be invalidated by any inaccuracy in any of the particulars required by or by virtue of this section.

On Question, amendment agreed to.

Schedule 8 [Enfranchisement by company: amendments]:

Lord Falconer of Thoroton moved Amendments Nos. 68 and 69: Page 102, line 20, leave out "RTE company" and insert -company (referred to in this Chapter as a RTE company) Page 108, line 24, leave out "section" and insert "sections 1(1) and

On Question, amendments agreed to.

Clause 123 [Valuation date]:

Lord Kingsland moved Amendment No. 70: Page 62, line 9, leave out from "payable)," to end of line 10 and insert "in paragraph 1(1), for the definition of "the valuation date" substitute— "the valuation date" means the date of service of the reversioner's counter-notice."

The noble Lord said: My Lords, I spoke to Amendment No. 70 some two weeks ago, and what I said then is to be found at cols. 865 to 866 of the Official Report of Monday 22nd October 2001. I am sure that that is fresh in the memory of the Minister, and I have nothing to add to what I said. I beg to move.

Lord Falconer of Thoroton

My Lords, the noble Lord, as he rightly acknowledged, raised these issues in Committee and in debate on the previous Bill. While I admire his persistence, I am sure he will not be surprised to learn that the speech that he has just delivered fails to persuade us. In those circumstances, both we and the noble Lord remain in the same position as then. I ask the noble Lord, therefore, to withdraw his amendment.

Lord Kingsland

My Lords, I am sad but not surprised by the response of the noble and learned Lord. This issue has been between the Opposition and the Government for some time, and, in the circumstances, I should like to test the opinion of the House.

7.23 p.m.

On Question, Whether the said amendment (No. 70) shall be agreed to?

Their Lordships divided: Contents, 52; Not-Contents, 123.

Division No. 1
CONTENTS
Astor, V.	Kingsland, L.
Astor of Hever, L.	Lindsay, E.
Attlee, E.	Lyell, L.
Blackwell, L.	Marlesford, L.
Brooke of Sutton Mandeville, L.	Noakes, B.
Buscombe, B.
Byford, B.	Northesk, E.
Caithness, E.	Oxfuird, V.
Carlisle of Bucklow, L.	Park of Monmouth, B.
Carnegy of Lour, B.	Perry of Southwark, B.
Colwyn, L.	Powell of Bayswater, L.
Cope of Berkeley, L. [Teller]	Renton, L.
Dean of Harptree, L.	St John of Fawsley, L.
Dixon-Smith, L.	Seccombe, B. [Teller]
Elliott of Morpeth, L.	Selsdon, L.
Elton, L.	Sharples, B.
Fookes, B.	Shaw of Northstead, L.
Gardner of Parkes, B.	Shrewsbury, E.
Glentoran, L.
Gray of Contin, L.	Skelmersdale, L.
Hayhoe, L.	Stewartby, L.
Henley, L.	Stodart of Leaston, L.
Howe of Aberavon, L.	Strathclyde, L.
Jopling, L.	Thatcher, B.
King of Bridgwater, L.	Thomas of Gwydir, L.

Vivian, L.	Wade of Chorlton, L.
Waddington, L.	Willoughby de Broke, L.

NOT-CONTENTS
Acton, L.	Kirkhill, L.
Alton of Liverpool, L.	Layard, L.
Andrews, B.	Livsey of Talgarth, L.
Archer of Sandwell, L.	Lockwood, B.
Barker, B.	Lofthouse of Pontefract, L.
Bassam of Brighton, L.	McCarthy, L.
Bernstein of Craigweil, L.	Macdonald of Tradeston, L.
Bradshaw, L.	McIntosh of Haringey, L.
Bragg, L.	[Teller]
Brennan, L.	MacKenzie of Culkein, L.
Brookman, L.	Mackenzie of Framwellgate, L.
Brooks of Tremorfa, L.	Mackie of Benshie, L.
Burlison, L.	Mason of Barnsley, L.
Campbell-Savours, L.	Massey of Darwen, B.
Carlile of Berriew, L.	Merlyn-Rees, L.
Carter, L. [Teller]	Milner of Leeds, L.
Clark of Windermere, L.	Morris of Aberavon, L.
Clarke of Hampstead, L.	Newby, L.
Clinton-Davis, L.	Nicol, B.
Corbett of Castle Vale, L.	Orme, L.
Crawley, B.	Parekh, L.
Davies of Oldham, L.	Patel of Blackburn, L.
Derby, Bp.	Pendry, L.
Desai, L.	Peston, L.
Dholakia, L.	Phillips of Sudbury, L.
Dixon, L.	Pitkeathley, B.
Dormand of Easington, L.	Prys-Davies, L.
Dubs, L.	Puttnam, L.
Elder, L.	Radice, L.
Falconer of Thoroton, L.	Ramsay of Cartvale, B.
Farrington of Ribbleton, B.	Rea, L.
Faulkner of Worcester, L.	Rendell of Babergh, B.
Filkin, L.	Rennard, L.
Fyfe of Fairfield, L.	Renwick of Clifton, L.
Gibson of Market Rasen, B.	Rooker, L.
Goldsmith, L.	Roper, L.
Goodhart, L.	Russell, E.
Gordon of Strathblane, L.	Sawyer, L.
Gould of Potternewton, B.	Scotland of Asthal, B.
Grabiner, L.	Shutt of Greetland, L.
Grocott, L.	Simon, V.
Hamwee, B.	Skidelsky,L.
Hardy of Wath, L.	Smith of Leigh, L.
Harris of Haringey, L.	Symons of Vernham Dean, B.
Harris of Richmond, B.	Taylor of Blackburn, L.
Harrison, L.	Temple-Morris, L.
Haskel, L.	Thomson of Monifieth, L.
Hayman, B.	Thornton, B.
Hogg of Cumbernauld, L.	Tomlinson, L.
Hollis of Heigham, B.	Turner of Camden, B.
Howells of St. Davids, B.	Varley, L.
Hoyle, L.	Walker of Doncaster, L.
Hughes of Woodside, L.	Wallace of Saltaire, L.
Irvine of Lairg, L. (Lord	Warner, L.
Chancellor)	Warwick of Undercliffe, B.
Jacobs, L.	Whitaker, B.
Janner of Braunstone, L.	Whitty, L.
Jeger, B.	Wilkins,B.
Jenkins of Putney, L.	Williams of Crosby, B.
Jones, L.	Williams of Elvel, L.
Judd, L.	Williams of Mostyn, L. (Lord
Kilclooney, L.	Privy Seal)
King of West Bromwich, L.	Woolmer of Leeds, L.

Resolved in the negative, and amendment disagreed to accordingly.

Lord McIntosh of Haringey

My Lords, I beg to move that consideration on Report be now adjourned. In moving the Motion I suggest that the Report stage begin again not before 8.33 p.m.

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