Commonhold and Leasehold Reform Bill [H.L.]

HL Deb 16 October 2001 vol 627 cc482-547

3.25 p.m.

The Lord Chancellor (Lord Irvine of Lairg)

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

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

On Question, Motion agreed to.

House in Committee accordingly.

[THE CHAIRMAN OF COMMITTEES in the Chair.]

Clauses 1 and 2 agreed to.

Schedule 1 agreed to.

Clause 3 [Consent]

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

The noble Lord said: It falls to me to conduct the usual brief waffle while Members remove themselves in preference to listening to this most important debate which is of wide public interest. This is the third time we have debated amendments to Part 1 of the Bill. Before the general election we had Committee stage and dealt with Part 1 on Report. We now return, for the third time, to deal with the amendments to Part 1.

However, the fact that we have already debated amendments to the Bill at some length means that it is possible to cut back on the number of amendments that are to be debated. Those which have been raised merely for the point of discussion and have been dealt with will not come back again. We, on these Benches, have cut back on the number of amendments that we have tabled to the Bill as compared to those we moved in debate on its predecessor. We raise only those issues which we regard as significant.

It is now possible for me to become more substantive. In moving Amendment No. 1, I shall speak also to Amendments Nos. 8 and 191. The amendments try to deal with the problem which arises when a majority of leaseholders of an existing property wish to convert that property to commonhold but their wishes are being frustrated by a small minority of leaseholders, which for instance, may be no more than one single leaseholder in a block, however large.

At Second Reading, before the Summer Recess, it was suggested that if we were able to propose something of sufficient interest and workability, the Government might consider it. We have proposed what we believe is a workable solution to the problems, at least in part, although we believe that the problems cannot be solved altogether.

We believe that our amendments provide a way of enabling a majority of leaseholders to enfranchise where at least 80 per cent of the leaseholders of units in an existing building support the conversion to commonhold. Therefore, our proposal, if enacted, would mean that there would be a conversion to commonhold where 80 per cent of the leaseholders support that proposal and that 80 per cent already hold the freehold or can obtain it by collective enfranchisement. The key to our proposals is that the position of the existing leaseholders is, by and large, left untouched. That is important, because a majority of leaseholders should not have the right to force a minority to find the money to buy into the freehold themselves or else have to surrender the flat in exchange.

There are three different formulae in our amendments and the other amendments that are grouped with them. One is ours; one is that of the noble Lord, Lord Kingsland; and one is that of the noble Lord, Lord Williams of Elvel, and the noble Earl, Lord Caithness.

We have some difficulty with Amendments Nos. 7, 19 and 33, tabled by the noble Lord, Lord Kingsland. That is because they would result in a leaseholder who, against the wishes of the majority, did not support conversion having his or her lease extinguished; and though he or she would be entitled to compensation, we do not regard that as an acceptable solution.

The Williams/Caithness amendments, if I may call them that, operate in a similar way to ours. I therefore hope that at Report stage we may be able to arrive at a joint formula, because I believe that there is very little difference between us.

However, there is one difference between our amendments and the Williams/Caithness amendments. Our Amendment No. 191 gives a leaseholder a right to buy into the commonhold at any time. In order to encourage the leaseholder to do that, we propose that the leaseholder would lose the alternative right, which he or she now enjoys, to an extended lease. We accept that that form of conversion creates some problems, because about 80 per cent of leaseholders who wish to convert will have to buy 100 per cent of the freehold, if they do not already own it. To some extent, that may make conversion on an 80 per cent majority basis more expensive and less attractive. But we can see no way round that, without requiring the minority leaseholders to convert to commonhold against their will or lose their flats.

Our amendments are relatively simple. We believe that they are workable. I do not suggest that their drafting is perfect. However, they form the basis of a workable and effective draft. In our view, they will do no harm; they will not force anyone out of his or her existing flat; they will not require anyone to pay more money without consent; and they will do good in a number of cases, particularly in the case of relatively small units—perhaps a single house containing five different flats, perhaps a small block containing between five and 10 flats. Where the great majority of leaseholders in those cases wish to convert, it will then be possible for them to do so.

Ours is not a very complicated proposal. I hope that the Government will feel able to accept it in principle. I am sure that they will wish to redraft it. I would not expect them to do so before the Bill finishes its passage through your Lordships' House, but there is no urgency to introduce it in the other place, and a delay before it moves to the other place could allow the Government time to do the necessary drafting. I beg to move.

Lord Williams of Elvel

I am grateful to the noble Lord, Lord Goodhart, for recognising that there is little difference between his amendment and that tabled by me and the noble Earl, Lord Caithness.

Those of us who sat through the five thrilling days of Grand Committee discussions—and I welcome new colleagues on the Front Bench, as well as old colleagues, including the noble Lord, Lord McIntosh—will recognise that there was a general feeling in that Committee, and I hope also in this Committee, that we are trying to encourage commonhold to become something other than a formula for new builds. That is the principle from which we start.

The noble Lord, Lord Goodhart, has quite rightly said that our amendment is very similar to his. I think my noble and learned friend the Lord Chancellor gave us a little chink of light at Second Reading that if we could find a formula that will not infringe the human rights of leaseholders who might remain under commonhold, and yet will allow a decision to go to commonhold on less than 100 per cent of the vote of leaseholders, the Government might be prepared to consider it. I submit that that would be achieved by our amendment.

I echo what the noble Lord, Lord Goodhart, has said. We argued many of these points in Grand Committee during the passage of the previous Bill. I apologise to my noble friends on the Government Front Bench for the fact that a number of my amendments were tabled during the Recess and were a rerun of some that we had discussed in Grand Committee. I shall therefore not speak about them at great length. Nevertheless, this particular argument is not likely to go away.

If the noble Lord, Lord Goodhart, the noble Earl, Lord Caithness, and I can get together on Report—and I apologise for the noble Earl's absence; he is in the United States of America but will be back at Report stage and find what I think my noble and learned friend the Lord Chancellor referred to as an all-party agreement that may satisfy this Committee and the other place, I hope that the Government will consider it. That is the intention of all those who will speak to this group of amendments. I sincerely hope that my noble friend Lady Scotland, whom I welcome to these arcane discussions, will feel able to offer us some reasonable encouragement.

Lord Kingsland

As the noble Lord, Lord Goodhart, indicated, I have four amendments in this group, of a somewhat more technical nature than his, and I crave the indulgence of the Committee to allow me to devote a little time to each of them. I accept that there are incompatibilities between my amendments and the amendment tabled by the noble Lord. I also accept that should he win the day and I lose it, I shall, of course, have to accept that. The fact that my amendments are incompatible with his amendment does not mean to say that I think his has no merit.

I speak first to Amendment No. 7. As printed on 20th December 2000, Clause 3(1) of the Bill required, in addition to the consents of those mentioned in paragraphs (a) to (d), the consent of, the registered proprietor of an interest in the whole or any part of the land". That provision was removed as a result of an amendment tabled by the noble Lord, Lord Goodhart. In Grand Committee, the noble Lord asked: why on earth is it necessary to get the consent of a registered proprietor of an interest over the land if that interest is not affected?".—[Official Report, 20/2/01; col. CWH 4.] He gave the example of a neighbour's easement of drainage over commonhold land.

However, there may be interests in relation to land, the subject of an application to register as commonhold, which should not be ignored, even if they are not protected by registration—such as rights of persons in actual occupation of land, which are overriding interests under Section 70(1)(g) of the Land Registration Act 1925. They may include, for example, the claim of an occupier to a beneficial interest in the land by reason of a contribution to the purchase price; or the right of the wife, prevailed upon perhaps by her improvident husband to convey or charge her interest in the matrimonial home, to set aside the conveyance or charge because of his undue influence.

It seems only right to take steps to see that such cases, which often arise in practice, are not overlooked before an application is made under Clause 2. That would seem to be especially important if Clause 6, which deals with registration in error, becomes law in its present form. Under Clause 6, the power to correct errors in registration is limited to the cases mentioned in subsection (1) and the general power to rectify under Section 82(1) of the Land Registration Act 1925 is excluded by Clause 6(2). At the same time, I entirely accept that one does not wish it to be easy for trivial or spurious claims to block applications. I suggest that the proposed new subsection (1)(e) strikes a reasonable balance between these two considerations.

The second part of the amendment adds a proviso to Clause 3(1) of the Bill. During the Second Reading of the Bill in January, and in Grand Committee on 29th February 2001, the noble Lords, Lord Goodhart, Lord Richard and Lord Williams of Elvel, the noble Baroness, Lady Hanham, and the noble Earl, Lord Courtown, expressed doubts about the requirement for 100 per cent to convert to commonhold. However, the noble Lord, Lord Bach, sought to justify it on the ground that otherwise one would have "anomalous leaseholders remaining".

Clause 3 as drafted is somewhat Delphic about that point. Subsection (1) lays down the 100 per cent requirement and subsection (2) provides that regulations may provide inter alia, (e) for consent to be deemed to have been given in specified circumstances". and, (f) enabling a court to dispense with a requirement for consent in specified circumstances". These provisions are clearly intended—clearly intended—to allow the 100 per cent requirement to be "got round" in certain circumstances. But those circumstances are nowhere specified in the Bill; nor are they dealt with in the Explanatory Notes.

In my submission, one should take account of the criticism of the 100 per cent requirement and in clear terms reduce it in the text of the Bill to, say, 80 per cent. But 80 per cent of what? It is suggested that the total floor or surface area may be an easier-to-use and a fairer yardstick than the number of units or parcels. The latter may vary widely in size and the assortment of estates, interests, claims and rights, mentioned in Clause 3(1), may not coincide with units of accommodation. For example, they could include rights over part of a unit, or part of several units, or the common parts of a building.

I know that the noble Lord, Lord Goodhart, was concerned about the dimension of expropriation. But it is true that, for example, in the world of takeover an acquisition of 90 per cent of a shareholding is sufficient to require the other 10 per cent to yield. Has the noble Lord, Lord Goodhart, reflected carefully on that and come to the conclusion that the parallel is not an exact one in the case of leasehold property?

Lord Goodhart

Does the noble Lord agree that there is a real difference between giving up a small shareholding where 90 per cent concurred in the takeover, which has no substantial effect on the share owner, apart from converting those shares into cash, and on the other hand being forced to give up the right to a leasehold property which may well be that person's home?

Lord Kingsland

I accept that there are differences in character but I am not sure that I accept that there is a fundamental difference, provided that compensation is prompt and full.

I turn to Amendment No. 10 and I can be extremely telegraphic—to use a favourite expression of the noble Lord, Lord McIntosh. These changes supplement those proposed for subsection (1). The proposed subsection (2)(g) is intended to ensure that notice of an application comes to the attention of persons in actual occupation of land who otherwise might not find out about it. Paragraph (h) supplements the proviso to subsection (1). The power to dispense with a consent under the proviso could be exercised under subsection (2)(f).

As regards Amendment No. 19, for reasons similar to those put forward in relation to the extinguishment of charges under Clause 27, the provisions for compensation should be extended to cover any landlord, not just the landlord of an inferior lease, whose lease is extinguished on registration of a freehold estate in commonhold land.

3.45 p.m.

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

Many Members of the Committee who are present today will carry a distinct feeling of déjà vu. As my noble friend Lord Williams noted, with the exception of my noble friend Lord McIntosh, who has already been through the valley of the shadow with Members during Committee and Report stages on the previous Bill, my colleagues and I on the Government Front Bench come to this topic fresh and full of what I hope will be infectious enthusiasm.

We in the government team who have been developing the Bill have come to think of a number of the amendments on the Marshalled List as old friends. I suspect that the answers which the Government give to many of them will fall into a similar category. That is not because we are being obdurate for the sake of obduracy. On the whole, we believe that the Bill as it appears is in good order and we have got it about right. That has been achieved with a great deal of help and work from all Members present through the Grand Committee and we thank them for that hard and industrious work.

It would be foolish to suggest that there is no room at all for improvement and it may be that we will be able to react positively to appropriate amendments on this occasion as we did previously. However, having accepted a number of amendments last time, the scope for further amendment now is rather more limited. The first group of amendments is a particular case in point.

We empathise with the purpose behind the amendments and the concerns of the Committee in relation to it. This issue is one over which we have struggled long and hard. The group brings together all those amendments which set out to amend the rule that the Government have developed which requires that 100 per cent of those with a substantial interest in land to be registered as commonhold land should be required to express their consent to the registration. These would include the freeholder, who must either give consent or have his interest bought out, anyone who holds a lease granted for a period of 21 years or more and others such as those holding certain charges over all or part of the land. That is laudable, but the question for us is whether it is achievable. Our intention in imposing the rule was to ensure that the process of converting to commonhold should be as straightforward as possible and that the management of newly-established commonholds should not be complicated by the existence of more than one class of interest in the units comprising the commonhold.

As I am aware that I am about to disappoint a number of noble Lords, with the indulgence of the Committee I should like to explain in some detail our thinking on this matter. We believe that we may not have articulated as clearly as we might why we are so keen to implement the 100 per cent rule and neither have we exposed our rationale in sufficient detail. This is a difficult area. We have never believed that it would be impossible to devise a system to provide for the conversion of a leasehold to commonhold with fewer than 100 per cent consents of the classes that we have specified. Indeed, the Bill developed by noble Lords opposite in 1996 when they were in government proposed just such a scheme. Today, Members of the Committee have, in varying degrees of detail, suggested ways toward that end. However, our view is that, although it is perhaps possible, such a scheme would be very complex and thoroughly undesirable, and at Second Reading my noble and learned friend the Lord Chancellor signalled as much.

I set out our reasoning We recognise only too well that to obtain 100 per cent of the necessary consents will be difficult, notwithstanding that the courts will be able to dispense with consents where obtaining them proves to be impossible, for example where a leaseholder cannot be traced. That was the example we had in mind in relation to Clause 3(2)(f) to which the noble Lord, Lord Kingsland, referred. However, we believe that the difficulties which would follow from the alternative of allowing conversion with a margin of non-participants of whatever size would far outweigh any conceivable advantages, and that, given the content of Part 2 of the Bill, it is unnecessary.

Both this and previous governments have undertaken to provide for conversion from leasehold to commonhold, but the circumstances are now very different from those which obtained in 1996. Part 2 of the Bill makes available a much more straightforward way to achieve collective enfranchisement for those who are eager to own the freehold of their development than was available when the opposition's Bill was developed and conversion to commonhold was seen by many as the only viable alternative to being caught in the long leasehold trap.

We have given a good deal of consideration to the process of conversion to commonhold. How will it work? We believe that the urge to convert is most likely to occur among those who have not yet taken advantage of the right to enfranchise. If it proves impossible to persuade 100 per cent of the occupants of the existing development to come on board it will be necessary for those who do consent to find the extra money needed to buy out the freeholder's interest in the non-converting units. It will then be necessary either to set up a separate company to hold the freehold of the continuing leasehold flats or, perhaps more likely, make it possible for the commonhold association to do so. The extra work and costs, including legal costs, could be considerable.

Consideration would have to be given to possible amendment of the remaining leases. The memorandum and articles of association of the commonhold association would have to be altered to take account of the ownership and management of the freehold of those units and direct relations with the leaseholders thereof. The commonhold community statement would have to take into account the distinction between commonhold units and non-consenting units and the differential management tasks. To tailor-make the documents and structures that they reflected would not only add considerably to the costs of the conversion process but fly in the face of the thinking behind commonhold, which the Committee recalls is based firmly on parity of interest and uniformity of structure and standardisation, so far as possible, of the documentation.

I was much relieved and reassured that when the noble Lord, Lord Goodhart, outlined his arguments in support of the amendment he acknowledged that problems and difficulties remained to be dealt with. It should also be noted that the original consenters will no doubt expect to recoup the extra costs arising from the conversion process and that will tend to mean either that the selling price per unit is higher than is otherwise justifiable, rendering the units relatively poor value for money, or that the extra costs just cannot be recouped in the short or even medium term.

But the difficulties that arise on conversion are just the start of the potential problems. The management of the resulting organisation, which we expect to be carried out by volunteers as the Committee will recall, will become a great deal more difficult. In addition to running the commonhold association, which despite the efforts we have made to keep it simple will still be a responsible job that requires a mix of skills, including a fair degree of diplomacy, the directors will become landlords. Their leaseholders will be the continuing leaseholders who may already be disgruntled by the conversion process in which they did not take part, for whatever reason, and through which they have been dragged against their will. They may also have had to undergo amendment to their leases or entered into disputes about the value of their remaining interest, particularly if they are not allowed to apply for lease extensions at the end of the lease period.

Inevitably, they will now be in a less favourable position than the unit-holders who are part of the commonhold in terms of both the day-to-day running of the development and the sale of the unexpired portion of their leases in due course. The full members of the commonhold may well find that their own units are worth less than those in a comparable development which does not include continuing leaseholders, and all this before the all-too-common disputes arise between landlord and tenant. Therefore, that arises even before one encounters the normal difficulties in human relationships that those of us who travel down this road know only too well. Those matters will be settled by the machinery provided for the purpose in existing leasehold law rather than the streamlined processes that we hope will apply to commonhold.

Lord Williams of Elvel

I apologise for interrupting my noble friend. It is very important to get the language right. In Grand Committee Members were told that it was impossible to have less than 100 per cent for commonhold except under extraordinary circumstances. Am I right in understanding my noble friend to say that it is perfectly possible to have existing leaseholders under a commonhold association and the problem is one of expense, complication and difficulty?

4 p.m.

Baroness Scotland of Asthal

The issue is not whether it is possible, but whether, bearing in mind all the abreactions which will flow from it, it is desirable and preserves the essence of what commonhold is supposed to be. We considered fully if we could preserve the essence of what we all want from commonhold and retain that as well as having less than 80 per cent and whether there was any other way that that could be done. We reluctantly concluded that even if technically it was possible to construct something that was less than 100 per cent, it would not, because of the consequences, the complexities and the difficulties, be practical to do so because we would not have commonhold occurring as we all want it to; that is, with parity, equality and people working together in a scheme in which they all share an equal part.

The unit holders have their rights under the Act arising, as I said earlier, from their obligation to belong to the commonhold association as members and thus participate in all the important decisions relating to the management of the development, as well as having a freehold interest in their commonhold unit. Leaseholders will not have those rights. Their interest will continue to be time limited by the term of their lease, and it will almost certainly be necessary to curtail their rights to apply for lease extensions. That was mentioned by the noble Lord, Lord Goodhart.

Lord Goodhart

I am most grateful to the Minister for giving way. We recognised that. We suggested that there would be a curtailment of rights for an extended lease but that the conversion of the whole block into commonhold would be accelerated because there would be a right to buy into the commonhold at any time until the unextended end of the lease.

Baroness Scotland of Asthal

We understand that that is what the noble Lord intended. As I said earlier, we would then be left in a situation where the leaseholders would have a less advantageous position in being a leasehold part of a commonhold than they would have in an ordinary leasehold situation. There they would be entitled to become an enfranchised leaseholder under Part 2 of the Bill. That is why we say that one has commonhold on one hand and then the opportunities that are available to become an enfranchised leaseholder on the other, so that where one cannot get 100 per cent agreement there are still opportunities for enfranchisement under Part 2. One has to see both parts of the Bill acting together.

The previous difficulty was that the route to enfranchising leaseholders was seen only to be commonhold. Now we have an alternative. That is why we should like to preserve the purity of the commonhold. It will not just be available for new builds; it will be available to meet the needs of current properties where the occupiers are in agreement.

The commonhold association will be required to manage the common parts under the terms of the commonhold community statement and the memorandum and articles of association, and to set budgets and collect assessments from the unit holders. In circumstances where there are continuing leaseholders, it will also have to set levels of service charges for the leaseholders who will not, because of their minority position, be able to take advantage of the provisions relating to service charges and management stemming from Part 2 of the Bill.

There will be two different classes of occupant with two streams of management under two different statutory regimes. There will be two different sets of moneys to collect with two sets of accounts to produce and potentially almost an infinity of different tailor-made schemes to design and operate. They will bring with them the potential for the kind of drafting problems which have helped to bring leases into disrepute. Perhaps most importantly, there will be the medium to long-term preservation of long leasehold properties. I should not like Members of the Committee to think that that would be seen as a cunning plan to keep even more of we lawyers in good, robust, long-term employment

I hope that I have illustrated why, despite the difficulties inherent in obtaining 100 per cent of the relevant consents, the Government hold to their view that it is the right way to proceed. I am sure I shall be corrected if I am wrong, but I do not recall from looking at any of the documents or from what was said in Grand Committee that the Government have ever said that it was impossible to do. I think that the Government made clear that it was undesirable.

Lord Williams of Elvel

I thank the Minister for giving way. My recollection is that my noble friend Lord Bach said that it was not wholly impossible, but most unlikely that existing builds would convert to commonhold.

Baroness Scotland of Asthal

I obviously take that from my noble friend. I do not think that I have said anything inconsistent today. It is possible. Whether it is practical or desirable is another matter.

As I said earlier, none of the difficulties that I have mentioned is insuperable. As my noble and learned friend the Lord Chancellor indicated at Second Reading, the Government, although sceptical about the prospects, would be prepared to consider well judged amendments that successfully addressed the many difficulties that I have outlined. I am afraid that none of the amendments before us today meets my noble and learned friend's test. Perhaps I may explain why in more detail.

The amendments put down on this topic provide us, as noble Lords have indicated, with four schemes to displace the 100 per cent rule. Those put down by the noble Lord, Lord Goodhart, and the noble Baroness, Lady Hamwee, outline the kernel of a workable scheme to provide for conversion with less than 100 per cent consent. Unfortunately, though it goes some way to setting up the machinery to do it, the proposal does not overcome the serious problems that I have outlined. The commonhold association would be the owner of the freehold and thus the landlord of the continuing leaseholders, with what we believe to be the almost inescapable problems that that would bring. Leases could be exchanged for commonhold unit status at any time subject to payment of a price and to other terms which would almost certainly lead to friction between the leaseholder and the commonhold association. The lease could not be extended, and at the end of its term would revert to the commonhold association who would sell it and retain the proceeds of sale for its own benefit. The extent to which these funds would benefit the recently converted leaseholders might be a cause of friction with those who paid for their commonhold status upfront. The amendments represent the beginning of a journey to a destination which we truly believe that no one, on mature consideration, would want to reach.

The amendments put down by the noble Earl, Lord Caithness, and my noble friend Lord Williams give us the same difficulties as they did previously. The first of their amendments seeks to insert the words, at least 80 per cent of the following classes of person". As we noted on the last occasion when we debated the matter, there are five such classes of persons set out in Clause 3(1), and the wording of the amendment is ambiguous as to what is actually intended. The intention is, of course, to overcome the 100 per cent rule, but the detail is lacking. It makes it very difficult to discern more than the very bare outline of a scheme. I absolutely empathise and understand why that is so, but it creates an insurmountable difficulty. Certainly there is nothing to suggest how the difficulties that I have previously outlined might be addressed. We are also confronted again with the proposition that the votes of the 20 per cent who either did not vote or who voted against the conversion shall be overturned by tribunal decision. As my noble friend Lord Bach then said, we can think of no tribunal or court in this jurisdiction which would welcome legislation directing it to come to a particular decision, presumably regardless of any pertinent evidence. I am afraid that these amendments would not result in a workable scheme for conversion with less than 100 per cent consents. Nor would they provide a way of managing the resultant organisation in a way that would provide the occupants with a stable and reliable home environment.

Perhaps I may turn to the amendments tabled by the noble Lord, Lord Kingsland. With his usual style, the noble Lord has provided us with no fewer than two schemes to overcome the 100 per cent rule. The first we saw last time and is based on an exemption for owners of up to 20 per cent of the total surface area of the land in relation to which the application is being made. I am afraid that it suffers from the same inability to overcome the problems that we foresee for the converters and for the subsequent management of the development.

The noble Lord's second scheme would allow conversion without a majority in favour. I suppose that it is just conceivable that half of the long leaseholders might want to buy out the landlord's interest in all the flats in a development. However, the scheme proposed would give any number of objectors amounting to over 10 per cent of the total an effective veto by allowing them to take their objections to court. Even if they were not successful in their challenge, there would be inevitable costs to be met for both sides. The scheme seems to us to set up the largest potential for difficulty both in terms of the conversion process and for future management.

I turn now to Amendments Nos. 19 and 33 in the grouping. The noble Lord, Lord Kingsland, may accept that he has tabled amendments which appear to contradict his obvious earlier intention to make conversion easier than it might be if the 100 per cent rule were to prevail. The first amendment provides that where leases are to be extinguished under Clause 7(3)(d) or 9(3)(f), all leaseholders should have an opportunity to consent or to be fairly compensated. The county court is given jurisdiction to decide in disputed matters regardless of quantum. The Bill at present requires a registered leaseholder to consent and to be liable to an inferior leaseholder for any loss suffered. It is not by any means clear what the amendments would add other than, I respectfully suggest, a degree of duplication and additional complexity.

To give inferior leaseholders, who in our scheme are entitled to be compensated for their loss but whose consent is not required and thus cannot hold up conversion by withholding it, the right to give or withhold consent would add tremendously to the difficulties in practice of achieving conversion. Nor is it clear how the decision would be made as to whether any particular leaseholder was to be given the right to consent or merely to be compensated.

Amendment No. 33 provides for chargees to consent to the extinguishment of charges over land which is to become part of the common parts. The Bill already provides for such consent by registered chargees in Clause 3. The arrangements made between the applicant for registration and the chargees as to compensation or the substitution of security appear to be matters that should be sorted out between them.

I am afraid that, in our view, these amendments are also defective in almost every respect, achieving, if they would in fact achieve anything, the basis of schemes which would be expensive and unwieldy to achieve and next to impossible to manage.

Perhaps I may finish by suggesting that the obvious and preferable alternative for those, where they comprise the majority, who wish to take control of their own developments on the basis of unequal interests where some are unwilling or unable to participate on the commonhold basis of parity of interest, is to take advantage of the new and much improved scheme for collective enfranchisement provided by Part 2 of the Bill, to which I referred earlier. I know that my noble friend who sits on the Front Bench will be only too anxious to delight noble Lords with the detail of those provisions later this evening.

Although the end result will not be commonhold, the practical application of the new scheme will allow participating leaseholders to come as close to a freehold interest as is possible by giving them the opportunity to take control of their freehold via a holding company, to grant themselves very long leases, and to have the final say in the management of their developments. I respectfully suggest that the enfranchisement scheme is itself tailor-made for circumstances in which fewer than 100 per cent of the occupants of the development consent. Furthermore, the scheme takes the interests of the minority fully into account.

We believe that collective enfranchisement is the route for those unable to achieve the 100 per cent consents required to convert to "pure" commonhold. I hope that I have now said enough, and at great length, to convince noble Lords that the hybrid of commonhold with non-consenting leaseholders would be a vitiated scheme, having neither the advantages of commonhold for the unit holders nor the advantages of enfranchisement for the leaseholders.

I hope that noble Lords will be prepared to withdraw their amendments, although it is with a degree of sadness that I have to impart such news to Members of the Committee.

4.15 p.m.

Lord Selsdon

I lack the erudition of many other speakers in our debate, but I now have the honour of being, while still confused, confused at a much higher level. On the one hand, we have a government who have universal support for the introduction of commonhold for new and existing developments. Amendments have been tabled from all sides of the Committee which seek to encourage the conversion to commonhold of existing buildings. The Government have said in response, "Yes, we like the principle, but we shall make it rather difficult, if not impossible, so to do". So the leasehold situation with existing buildings will run for 125 or perhaps even 149 years.

I had thought of tabling a series of amendments at this stage, but I have decided to do that only when we reach Report stage. That is because I believe that there are solutions to the basic fault here. As drafted, the legislation assumes that there will be parties who will not approve of the concept of commonhold. Those parties could comprise existing tenants with either short or long leases, head lessors, banks with mortgages on buildings or the freeholder himself.

The properties involved fall into two groups. In general most of the properties comprise semi-detached or terraced buildings in London, Brighton or Hove, often containing no more than 10 flats or perhaps as few as six flats. The other group is made up of newer developments which may hold as many as 50 or more separate flats. Over the past two years, it has become apparent that, when most proposals are considered, there will be at least one in five who will object; namely, a 20 per cent objection rate. For that reason, I support the proposal put forward by the noble Lord, Lord Goodhart.

However, let us consider what would take place were the following situation to emerge. In a building comprising five flats, two-thirds wish to enfranchise and qualify under the existing legislation, half wishing to go ahead. Those who do not wish to go ahead will probably say something like, "We do not wish to go ahead". However, the underlying reason for that decision may be that they wish to leave their properties to their estates without creating increased value, or that they cannot afford it and do not want to court the shame of admitting that they cannot produce the large amounts of money required. The remaining four flats find that they cannot easily finance the purchase of the last property. The reason that they cannot do so is partly because banks will not lend mortgage money on such properties to a company; they will lend only to an individual. Thus the cost and the difficulties of securing long-term funds are increased. However, let us suppose that into the breach comes the freeholder who owns the freehold and is willing to permit enfranchisement and the conversion to commonhold. Why should it not be possible for that freeholder to retain one commonhold interest with a sub-tenant for a while, if he wishes to do that voluntarily? As I have said, many solutions can be put forward to this problem.

I am afraid that I have made a mistake. Following the new Williams code, I should have declared my interests at the start of my remarks. When I last spoke on this subject, I had already helped on enfranchisement and had no interest. Now, in consultation with members of my family and friends, I believe that I may have as many as 200 or 300 interests to disclose concerning friends who may be involved. Furthermore, I am a director of a publicly quoted construction company that has consulted with the Lord Chancellor on commonhold. I am somewhat over advised, but I am advised by practical people. Indeed, my current advice to those who may wish to become involved in all this is as follows: please do not consult with your lawyers until 24 hours before you intend to complete, because by doing so you may not be charged for more than 24 hours of expensive time.

If the noble Baroness would be willing to say that she has not got it right, my noble friend has not got it right and that the noble Lord, Lord Williams, has not got it right, but that altogether and collectively noble Lords have got it wrong, amendments tabled on Report may put forward a number of voluntary proposals to which it would be worth listening.

Lord Richard

I start by declaring an interest as chairman of LEASE, the leasehold advisory service.

I am disappointed by the reply of my noble friend the Minister. She said that she came fresh to it. I am sure that is true. When she said that, I was reminded of the story of the late Lord Hailsham, who once came back from a weekend to his ministerial office with his red boxes. He passed them to civil servants, who opened them and discovered that they had remained for the whole weekend in the same state as they had been when he had left on Friday evening. When his private secretary remonstrated with him, he said, "No, no. Better fresh than briefed". It occurred to me that my noble friend may be fresh, but I am not quite sure how well briefed she has been on this particular point.

I want to look at the practicalities of the issue. Everyone seems to be agreed that the chances of getting 100 per cent in virtually any given set of circumstances is extremely small. Indeed, in Grand Committee, as my noble friend Lord Williams of Elvel said, the government view then was that it was almost impossible. If that is so, then the structure of the Bill seems to me to be quite wrong.

On a number of occasions today, my noble friend was selling collective enfranchisement as the alternative to commonhold. It may be in certain circumstances, in which case I am surprised that the Government have not produced a Bill in which commonhold is confined to new builds—because that will be its practical effect—and leasehold and collective enfranchisement are available for other blocks of flats which are already standing.

Secondly, my noble friend has moved the Government's position slightly. It is no longer impossible to do it at 80 per cent, but it is now undesirable and very complicated. Both of those seem to me to be matters of judgment. It would be complicated certainly, but the question surely is whether the complications that would arise are worth putting up with in order to achieve an extension of the commonhold principle. I would have thought that it is not beyond the wit of man—and certainly not beyond the wit of the Lord Chancellor and his advisers—to produce something, which could come to the House on Report, that took account of that particular principle. I am not in favour of confining commonhold to 100 per cent. Frankly, it makes nonsense of the whole concept.

Finally, I say to my noble friend that if the Bill works out in a way whereby commonhold will be confined to new builds and collective enfranchisement will be available for anyone else, then it has been grossly oversold. That is not the view of the general public and it is not the view of a number of tenants who ring up or write in to LEASE, and that is a great pity.

Lord Goodhart

The disarming manner of the Minister has sugared what is, I am afraid, in all other respects, a disappointingly bitter pill. I am very sorry that the Government have not found themselves able to move on this issue. That view is shared by all of those who have spoken on the amendment from all sides of the House.

The main argument on which the noble Baroness relied is that you do not need to have commonhold in these situations because you can get almost all the benefits you need from collective enfranchisement. I do not regard that as true.

In the first place, many—indeed, most—of the problems outlined by the noble Baroness as applying to commonholds where some of the units were held on leasehold also apply to cases of collective enfranchisement. There are exactly the same difficulties and possible conflicts of interest in the case of collective enfranchisement where you have some of the leaseholders who are also owners through being members of the RTE company on the one hand, and the remaining leaseholders who are not members of the RTE company on the other. As I see it, that is exactly the same as the problems that would arise—I accept that they would arise—if you went one step further and converted the RTE company into a commonhold.

Indeed, there is one serious problem with RTE companies which would be avoided by taking the further step and moving on to commonhold. Unless the Government are minded to accept an amendment which we have tabled for a later stage of the Bill, there will be no necessary and automatic link between holding a lease on a building which is owned by an RTE company and being a member of that company. In other words, if a leaseholder takes part in collective enfranchisement, as the Bill now stands that leaseholder can assign the lease but it does not automatically follow that the assignee will become a member of the RTE company; the assignor may remain a member of the RTE company. The effect of that is that there will be, potentially, an increasing severance between ownership of a property and residence there, or the ownership of a lease there. That is something which, in the longer run, will cause serious difficulties. It is something we shall have to go into when we get to our amendment in due course; it is not part of this group.

There is a considerable advantage in having the indissoluble link between ownership of the unit and membership of the commonhold association in the case of commonhold. That is one reason why it is desirable that it should be made possible to move on from collective enfranchisement—which will often be necessary as the first step in the process—to converting the property into a commonhold.

As we recognise, there are arguments of expense because you will have less than 100 per cent of the leaseholders buying the freehold. But exactly the same situation arises on collective enfranchisement as arises on conversion into a commonhold. Although collective enfranchisement will certainly be helpful, we see no reason why it should not be made possible to move on to commonhold status without 100 per cent participation.

It is likely—we hope that it will be the case—that commonholds will become a very popular form of property holding. If that turns out to be the case, then the 80 per cent, 90 per cent or even 95 per cent of people who want to convert will be deprived of the possibility of converting into what is a more popular—and therefore a more valuable—form of property holding in a way which will cause no damage to the interests of those who do not wish to proceed with the conversion.

The only real difficulty we see in conversion is that an extra set of regulations will be needed to specify how a commonhold which includes leases is to be dealt with. That does not seem to us to be a serious disadvantage. It is therefore inevitable that some of us will wish to return on Report with a revised, and possibly co-ordinated, version of the amendments. I hope that in the interim the Government will be prepared to reconsider these issues. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 2 to 10 not moved.]

Clause 3 agreed to.

4.30 p.m.

Lord Kingsland moved Amendment No. 11: After Clause 3, insert the following new clause— "FLYING COMMONHOLD (1) Commonhold land may consist of, or include, a building, or part of a building, which is above or below other land. (2) Where subsection (1) applies, a positive covenant relating to the commonhold or the other land entered into between the commonhold association and the registered proprietor of an estate in the whole or part of the other land shall be enforceable by and against their successors in title if the covenant so provides.

The noble Lord said: The noble Lord, Lord Goodhart, will recognise immediately that Amendment No. 11 has been shamelessly purloined from the proceedings that took place in the previous Parliament. I apologise in advance for so doing. I hope, however, that the noble Lord will be able to support the substantive amendment and some of the points that I shall make in relation to it.

I had the honour of speaking to the amendment moved by the noble Lord, Lord Goodhart, on 20th February 2001 in Grand Committee (Official Report, col. CWH18). I have no intention whatsoever of repeating my remarks. I shall simply say, telegraphically, that, as I understand it, a central feature of the Government's plans for urban society in the 21st century is the harmonious blending of residential homes with working offices—in other words, mixed developments.

It seems to me a great shame that the Government are not prepared to contemplate the concept of flying commonholds. We already have a severe restriction, as we learnt earlier in today's debate, on the ability to convert to commonhold with less than 100 per cent. Here we have a further restriction: unless the commonhold is from the ground floor up, it will not be possible for residential buildings either to convert to commonhold or to be commonhold new build.

I suggest that the amendment so ingeniously drafted by the noble Lord, Lord Goodhart, provides the Government with the perfect "let out". It not only furnishes an elegant legal solution to the difficulties of positive covenants; it also ensures that the department of the noble and learned Lord the Lord Chancellor and the Minister responsible for these matters in the House of Commons can look in the same direction, at the same time, together. I hope that the Government will greet the amendment with a great deal more warmth and humanity than they greeted that proposed by the noble Lord, Lord Goodhart, last February.

Amendment No. 13 is in a sense consequential on Amendment No. 11 and I do not think that I need to say any more about it.

Amendment No. 38 seems unassuming enough in its reference, Page 14, line 3, leave out 'not'".

In fact, it relates to forfeiture. It is not clear to me why there should be no power of forfeiture in the arrangements for managing commonhold properties. Surely the most effective sanction against a unit-holder failing to discharge his financial (or other) obligations to the association is to charge the unit as security for due performance. Unless the association has such security, its only ultimate remedy is to prove in the defaulting unit-holder's bankruptcy, in which it may recover only a small dividend.

One of the provisions which might properly be contained in the CCS is one prohibiting any new charge being created over the unit unless any debts due to the association shall first have been discharged (or will be discharged simultaneously with the execution of the charge). Absence of such a sanction might make it difficult to "sell" a commonhold scheme. I beg to move.

Lord Williams of Elvel

Some amendments tabled by myself and by the noble Earl, Lord Caithness, which are grouped with those of the noble Lord, Lord Kingsland, cover a slightly similar subject although it is not totally relevant. Having accepted the grouping, perhaps I may speak to Amendments Nos. 29 to 32 and to the paving amendments.

The amendments relate to the structure and common areas. It is absolutely necessary for these to be maintained and insured by the commonhold association. The existing provisions, as I understand them, make the balance of a structure which is not maintained or insured by the unit-holder the responsibility of a commonhold association. This could place too much responsibility with unit-holders, to the risk of the community as a whole.

This subject was debated in Grand Committee, so I shall pass over it quickly in the hope of a helpful response from the Government.

Lord McIntosh of Haringey

I begin by responding to Amendments Nos. 11 and 13 in the name of the noble Lord, Lord Kingsland. Under our law, positive covenants do not run with freehold land after the first purchaser has sold on his interest. Amendments Nos. 11 and 13 would allow a commonhold to be developed above non-commonhold land. That brings into play exactly the problem of positive covenants. The second subsection of the proposed new clause in Amendment No. 11 would make it possible for covenants to be entered into between the commonhold association and the proprietor of what might be called the supporting land, which would be enforceable by and against the successors in title of both the commonhold association and the supporting land—although, perhaps a little oddly, they would be enforceable if the covenant so provided. That was a defect when the noble Lord, Lord Good hart, put forward the same amendment and we commented at it at the time.

It seems to me that the amendment would allow a flying commonhold to be built, even if the protection sought to be provided by the amendment were not available. However, let that pass; it is not critical to the argument. The argument goes back a long time. When we debated the matter previously, we had the pleasure of the company of the noble and learned Lord, Lord Wilberforce. I hope that he is well. Thirty-six years ago, the noble and learned Lord chaired a committee on positive covenants affecting land. He reported to Parliament in 1965.

The noble and learned Lord the Lord Chancellor and I are open-minded a s regards the extent to which it would be appropriate to impose positive covenants more widely on freehold land than is provided for in the Bill. However, the amendments are not the way to achieve that end. My noble and learned friend the Lord Chancellor said recently that it is our intention to leave open the wider question of whether and to what extent it should be possible to make the burden of positive covenants binding on buyers of freehold land more generally—and he referred to the committee of the noble and learned Lord, Lord Wilberforce.

The Law Commission is considering the matter. Your Lordships may think that 36 years is a long time but it has not been continuous consideration. The House will acknowledge that the Lord Chancellor is a doughty champion of the commission when legislative programmes are being prepared. He certainly wants them brought forward as fast as possible. The recommendations that are produced by the commission in due course will be consulted on widely and will be treated with the utmost seriousness by government when they are formally presented. We acknowledge that the amendment has raised an important problem but it is not one that can resolved in the Bill, so I invite the noble Lord to withdraw the amendment.

The noble Lord, Lord Williams, referred to Amendments Nos. 29 and 32 and described others in the group as paving amendments. I shall say something about them because we must take them together. Amendments Nos. 20 to 23 would make it compulsory for the commonhold community statement to refer to areas subject to the exclusion of specified structures; exclude from the definition of a unit the structures that delineate an area; refer to two or more areas of land as comprising a commonhold; and have regard to Clause 24(2), which deals with limited use areas.

Often, none of those circumstances will arise in a particular commonhold or part of it. The Bill makes it possible to do those things where it is appropriate. The amendments would make them mandatory, whether or not they would be appropriate. In the case of a detached house in a commonhold development, there is no reason to exclude structures, fittings, apparatus and appurtenances from the definition of the unit—any more than it would be necessary to exclude the garden fence that delineates the boundary of the property from the definition or to refer to two or more areas where only one area comprises the unit. Our approach is more flexible and effective.

Amendment No. 24 requires the commonhold association to insure and repair the structures of buildings in all commonholds. That would be the appropriate course for blocks of flats but that is not the only situation. There could be no justification for making the commonhold association responsible for the insurance and maintenance of detached, semi-detached or even terraced houses. The current draft of the commonhold community statement, at rules 22 and 25 of Part 4, requires the commonhold association to be responsible for those matters where blocks of flats are involved. I do not imagine that the noble Lord, Lord Williams, intended the amendment to go so wide but we have included in the commonhold community statement the requirements in question.

Amendments Nos. 29 and 30 attempt to define all structural parts of a commonhold as common parts, then define what they mean to include in the term "structure". It would be inappropriate to define all structural members as common parts and thus the responsibility of the commonhold association. Our definition, which makes everything within the commonhold that is not defined as a unit common parts, achieves the proper end. What is and what is not structural for the purposes of insurance and maintenance of blocks of flats will be for the developer to define in the first instance. If it turns out, in light of experience in a particular commonhold, that the definitions do not work, the commonhold association—which is, after all, made up of individual unit holders—can amend the commonhold community statement.

I make the same point in respect of Amendments Nos. 31 and 32. If the structure is common parts, as it will be in a block of flats, the commonhold association must insure and maintain it. Where the structure is not, as in a house, the association should not do so.

Amendment No. 38 would lift the ban on the commonhold community statement, providing for the transfer or loss of interest in land within the commonhold on the basis of some occurrence or non-occurrence in the future. Our objection to that proposal, as we understood it, was that it would depart from the provision that a commonhold should not be established in circumstances in which it might be deprived of all or some of its land other than with the agreement of the association's members. The noble Lord, Lord Kingsland, argued the amendment on the basis of forfeiture in case of default. I confess that my original understanding of the amendment's meaning was not that argued by the noble Lord.

Forfeiture is not something that we want to import into the commonhold. It is widely hated by leaseholders. We will explain further when we reach the group headed by Amendment No. 25. For the present, I hope that the noble Lord, Lord Kingsland, will not press Amendment No. 38 in particular.

4.45 p.m.

Lord Goodhart

Before the noble Lord, Lord Kingsland, replies, I apologise for not having spoken before because my attention was briefly distracted. The fact that we did not table Amendments Nos. 11 and 13 in particular does not indicate any disagreement with them. We did not table those amendments because they had an outing and that is as far as we proposed to take them. We entirely support the amendments in principle and I am happy to endorse the remarks made by the noble Lord, Lord Kingsland, on flying commonholds.

Lord Selsdon

I, too, support my noble friend, but having heard the Minister, I do not understand why there cannot be flying commonholds when there are flying freeholds—even if the positive covenant issue cannot be overcome. Throughout London where terraced houses are being broken up through enfranchisement, often there is a flying freehold—such as a garage at the rear. I am referring not to mixed developments but to residential developments. If a terraced house is redeveloped where commonhold is proposed, if there cannot be a flying commonhold where there is some cut-in above or at first-floor level, the whole principle of commonhold is frustrated. If the Government are not willing to consider such amendments, they are effectively frustrating the introduction of commonhold.

Lord Kingsland

I agree entirely with the Minister that 36 years is a long time to respond to the brilliant report that the noble and learned Lord, Lord Wilberforce, drafted as long ago as 1965. However, it is not necessary to enter into all the complexities into which the noble and learned Lord was compelled to enter. Here, we are simply looking at the kind of neutral covenants between landlord and leaseholder that are found generally in the leaseholds of properties on different floors and which raise limited problems in relation to positive covenants.

The Government constantly tell us that they have achieved great things in the four and a half years that they have been in office. Are the Government saying that finding a solution to positive covenants in relation to mixed properties, where the lower floor does not involve commonhold, is beyond their ingenuity and invention? I cannot believe that.

Lord McIntosh of Haringey

I was merely acknowledging that the matter did not have as high a priority as some noble Lords might wish. While I am responding to the noble Lord, Lord Kingsland, perhaps I may answer the noble Lord, Lord Selsdon, who drew an analogy with flying freeholds. I believe he would agree that flying freeholds are not particularly successful. Lawyers and mortgage companies do not like them. I would not wish to introduce an analogy with flying freeholds too readily.

Lord Selsdon

I apologise to the Committee. I should have declared an interest when I spoke earlier. I have just managed to complete an agreement on a flying freehold without the help of the best minds in the land. However, it was accepted in the end because it was a voluntary agreement between two parties.

Lord Kingsland

I have now completely forgotten what I was saying.

Lord McIntosh of Haringey

I believe that the noble Lord was making fun of the tardiness of the Government in acting on positive covenants—a legitimate point.

Lord Kingsland

I think that that is a good note upon which to conclude discussion on this grouping. I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

[Amendment No. 12 not moved.]

Clause 4 agreed to

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

[Amendment No. 13 not moved.]

Schedule 2 agreed to.

Clauses 5, 6 and 7 agreed to.

Clause 8 [Transitional period]:

Lord Williams of Elvel moved Amendment No. 14: Page 4, line 31, after "Part" insert ""the first

The noble Lord said: In moving this amendment which stands in my name and that of the noble Earl, Lord Caithness, perhaps I may, for the convenience of the Committee, speak also to Amendments Nos. 15, 16, 17 and 18. These are very technical and minor amendments, if I may put it that way. As I understand it, Clause 8 provides for a "transitional period" between registration of the estate as commonhold and registration of a first unit-holder as proprietor. During this period, the Bill provides that commonhold regulations may be disapplied or modified. However, the Bill makes no mention of who the members of the commonhold association will be during the time from the sale of the first unit and the end of the construction and selling period. We also need clarification concerning respective responsibilities during this time. These amendments attempt to address those issues. I beg to move.

Lord McIntosh of Haringey

These amendments would add to the Bill a new concept of a second transitional period, during which further regulations would introduce a special regime to govern the actions and responsibilities of the commonhold association between the sale of the first unit and the sale of the last. The matter was debated, although not at great length, in Grand Committee. I understand the point that the noble Lord, Lord Williams, is trying to make, but our intention is that the commonhold community statement should come into force as soon as the first unit is sold and that it should govern the management of the commonhold from that time.

Therefore, the responsibility for paying commonhold assessments will apply to all unit-holders in the proportion laid down in the statement, and based on a budget. The purpose of this is that it should act as a real incentive to a developer to move quickly to sell units and fully establish the commonhold, as the responsibility for maintaining the unsold units will become more onerous on the developer as time passes. We believe that an extra layer of regulation is unnecessary and, therefore, do not support these amendments.

Lord Williams of Elvel

I am grateful to the noble Lord, Lord McIntosh—apparently, I have to call him that rather than referring to him as "my noble friend". However, I am grateful to my noble friend for his comments. We did discuss the matter in Grand Committee. I shall have to refer to my noble advisers regarding what course or action I take on Report. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 15 lo 18 not moved.]

Clause 8 agreed to.

Clause 9 agreed to.

Clause 10 [Extinguished lease: liability]:

[Amendment No. 19 not moved.]

Clause 10 agreed to.

Clause 11 [Definition]:

[Amendments Nos. 20 to 23 not moved.]

Clause 11 agreed to.

Clauses 12 and 13 agreed to.

Clause 14 [Use and maintenance]:

[Amendment No. 24 not moved.]

Clause 14 agreed to.

Clause 15 [Transfer]:

Lord Williams of Elvel moved Amendment No. 25: Page 7, line 37, at end insert— (5) Outstanding debts and arrears due to the commonhold association must be paid upon transfer of the unit.

The noble Lord said: This amendment stands in my name and that of the noble Earl, Lord Caithness. Again, this is a technical amendment that forms part of a rather extensive group, to which no doubt one of my noble friends on the Front Bench will respond.

The amendment is designed to enable the commonhold association to resolve any disputes involving the unit on the transfer of the unit as clearly and cheaply as possible. The whole issue of transfers of units seems to me to be a matter that needs to be clarified. There are other amendments in this group, but this is the essential one that I wish to address in order to save time. I beg to move.

Lord Goodhart

I shall speak to Amendment No. 37, which is included in this grouping. This amendment, like others in the group, is intended to deal with the potentially very serious problems that arise from non-payment, or late payment, of contributions to a commonhold association. The problem is that persistent non-payers or late payers—perhaps late payers are, in a sense, even worse because it is more difficult to take measures against them ultimately—may impose serious hardships on other members of the commonhold association. For example, the commonhold association may be unable to carry out maintenance or repairs because it does not have enough money in hand; it may have difficulty in paying its bills; and it may need to call on the other members of the association to pay more.

At present, where you have landlords and tenants, the former can use the threat of forfeiture. In practice, forfeiture is very rarely enforced because the landlord has to serve a notice calling for any defects to be remedied and give time for compliance under Section 146 of the Law of Property Act. Again, where the failure is in the payment of rent, similar provisions apply enabling a tenant to obtain relief, but such relief can only be obtained on payment of what is due. Therefore, that is a powerful and effective weapon.

Of course, that weapon could be too effective. In the hands of aggressive landlords it can be used too soon, or too frequently, and can be a cause of serious concern to tenants who are faced with inappropriate use of forfeiture proceedings. Any equivalent in the case of a commonhold association is far less likely to happen because the association is also made up of the various members. They know that any threat that they use against a recalcitrant member of the association is one that can also be used against them. Quite frankly, abuse of any power equivalent to forfeiture in the case of a commonhold association is a very remote danger.

Without the threat of forfeiture or its equivalent, it is far more difficult to enforce timely payment of the necessary contributions to the commonhold association. It is not right that non-payers or late payers should be able to force the other members of the association to pay for the maintenance costs of common parts, repairs, and so on, which can only be recovered much later.

It is, of course, true that a commonhold association can bring a claim against a unit-holder for non-payment. It can get judgment and in due course ask the court for a charging order over the unit. But that is a slow and expensive procedure that gives the charges due to the commonhold association no priority over any other charges.

We therefore believe that a fairly draconian remedy is needed. We would go further than the proposals of the noble Earl, Lord Caithness, and the noble Lord, Lord Williams of Elvel, and say that it is not enough to wait until there is a sale by a unit-holder and then recover debts out of the proceeds of sale. That may well be too late. In the great majority of cases, one would be dealing with a unit-holder who remains in occupation. Amendment No. 37 proposes that a commonhold community statement should contain a right for the commonhold association to sell the property in the event of a default, and to recover the money due out of the proceeds in priority to all other interests. In practice, it is most unlikely that the power to sell would have to be exercised in any but the most extreme cases because the threat of it would be sufficient to ensure that the money was found by the unit-holder, or possibly by a unit-holder's chargee who wants to preserve his or her security.

Our amendment does not spell out the necessary provisions of the commonhold community statement in detail. That statement would need to include, for example, provisions for giving notice of an intention to exercise the power to a unit-holder and other interested parties, and to give time for payment. We believe that such an amendment is essential if commonholds are to work properly. The absence of anything giving priority and an effective weapon for enforcement of charges is a serious defect in the current proposals.

5 p.m.

Lord Kingsland

I rise to speak to several amendments in this group. First, I shall speak to Amendments Nos. 59, 60, 61, 62 and 63.

It is an important principle that, in Clause 36, enforcement should only be between unit-holders and the association. Tenants will not be directly liable to the association, so they should not have rights except against their landlord. Tenants of a freehold would not have rights, except in the law of tort, against neighbouring freeholders, and the same should apply to commonhold.

Secondly, paragraph (i) should be left out of Clause 36 as compulsory ADR will lead not only to delay but possible prejudice. Amendment No. 62 would add new paragraph: (j) enabling a tenant to offset any payments made to the association against any monies owning to the unit-holder as landlord". Although Clause 19(3)(a) states that regulations "may" make a similar provision, there is no reason for that provision not to be on the face of the Bill.

It is self-evident that compensation involves property rights, and it is my firm view that the courts are the proper forum to determine those. Indeed, not allowing the court to determine such rights could have important implications under the Human Rights Act.

I turn to Amendment No. 63 and the two insertions that are proposed by paragraphs (c) and (d), referring to charging the interest of a unit-holder", which is an essential provision for preventing default. Otherwise the association has no effective sanction. Relying on obtaining a judgment and subsequently enforcing it by charging order is too slow, costly and cumbersome. There may be no equity left in the property by that stage. An express costs sanction is an essential deterrent to prevent unit-holders from defaulting, and it is a way in which to avoid prejudice to the other unit-holders, particularly when the amounts involved may be under the small claims limit.

I dealt with the matters involved in Amendments Nos. 65, 67, 72, 81 and 83 at length in the Grand Committee debates on the Bill last winter, and I shall not trouble your Lordships again. However, there is a new clause—Clause 41—which introduces an ombudsman, and I should like to say something about that.

Ombudsmen are very fashionable, and one always exposes oneself to a certain amount of political danger if one questions their relevance. Nevertheless, I shall take that risk by saying that I wonder whether an ombudsman is an appropriate addition to the rich tapestry of remedies that the Government have already provided in the Bill.

The proposal is for regulations that could make it compulsory for a commonhold association to be a member of such a scheme. They could require the commonhold association, but not the unit-holders, to co-operate with the ombudsman. Finally, they could require a commonhold association, but not the unit-holders, to comply with the ombudsman's decision. I believe that the proposal is both unnecessary and ill thought out.

If disputes are to be determined in accordance with legal principles, the court or an arbitrator is the appropriate forum and there is no need for an ombudsman. If ADR mediation, or something similar is required, a voluntary ADR scheme would be sufficient. Commonhold associations could even choose to include references to such a scheme in the commonhold community statement.

If the ombudsman will not apply strict legal principles, it is a breach of the rights of the commonhold association—and potentially unfairly prejudicial to the rights of all the other unit-holders not involved in the dispute—for, first, a reference to the ombudsman to be compulsory and, secondly, for the ombudsman's decision to be binding on the commonhold association—particularly if the unit-holder involved in the dispute is not bound by the decision. It is a possible human rights breach for a unit-holder potentially to be jointly liable on such a judgment debt when the unit was not a party to the proceedings in which the judgment arose.

A further criticism is that, when the identity of the unit holder changes on the sale of a unit, there will be difficulties in determining whether the old or the new unit holder is liable to a creditor. Would the relevant date be when the creditor obtained judgment, when the money became due, when the work commenced, when the work was completed or when the work was requested? Potentially a person may sell his home and face a claim many years later of which he had no previous notice.

Lastly, the potential for unlimited personal liability in respect of contracts to which unit holders are not a party, and over which they may have little control, can only act as a deterrent to the purchase of commonhold properties. The problem which the proposed amendment is designed to cure that—is, that contractors are likely to be cautious about dealing with commonhold associations if limited liability may make it impossible to collect sums owing—is unlikely to arise in practice. Contractors are, after all, used to dealing with limited liability companies and any contractor who is concerned can demand payment in advance of, or, for substantial sums, payment to be held for his account.

Baroness Scotland of Asthal

I shall deal with the amendments, if I may, in order, although Amendment No. 37 spoken to by the noble Lord, Lord Good hart, would introduce into commonhold a right afforded to the commonhold association to sell units upon the non-payment of money owed to the association by unit holders. In the leasehold context that right is known as forfeiture, as the noble Lord rightly said. Amendment No. 25, proposed by my noble friend Lord Williams, provides that debts due to the commonhold association by a unit holder must be paid on transfer of a unit.

Although the noble Lord, Lord Goodhart, made it clear at the Second Reading of the Bill's predecessor that the recovery of debts owing to the commonhold association by unit holders is foremost in his mind—I should imagine that it still is—we are a little surprised that he has chosen this route to address his concerns. We remain firmly of the opinion that forfeiture, or any similar provision by whatever other name, is quite inappropriate for commonhold. The Committee will recall that at Second Reading the noble Lord indicated that, as is often the case in leasehold, the threat of forfeiture would be enough to secure payment of debts to the commonhold association, and, indeed, he repeated that this afternoon. This may be the case, but behind every threat there must lie the possibility of action, and the possibility of a right to forfeiture being realised in the commonhold context remains for us anathema.

We are apprehensive about importing a means of prematurely terminating a lease into commonhold because one of the fundamental precepts of commonhold is freehold ownership of units by unit holders. We cannot conceive the merit of marrying together two concepts that are on the face of it so incompatible.

Lord Goodhart

I am grateful to the noble Baroness for giving way. Does she accept that in the case of freeholds where there is a charge over the freehold, the chargee or mortgagee does have a right to sell and therefore this is simply importing into the commonhold system something which is already entirely familiar within the freehold system?

5.15 p.m.

Baroness Scotland of Asthal

I accept that the concept of a charge is an appropriate one for freehold and, of course, with commonhold it would be possible, if someone secured judgment in relation to a debt, to secure the return of their money if secured by way of a charge. That is precisely what we say would be the appropriate course. Forfeiture, as the noble Lord will know well, having trammelled along these lines for many years—and, I hesitate to say, many more years than I—has been a sword of Damocles used to great disadvantage to leaseholders and has as a result fallen almost into disrepute.

As I say, we are apprehensive, therefore, about importing a means of prematurely terminating a lease into commonhold because one of the fundamental precepts of commonhold is freehold ownership. That is a kernel that we believe cannot be over-emphasised.

A commonhold unit is a freehold estate in commonhold land. Forfeiture is a process used by the holder of a superior interest to prematurely terminate an inferior interest in his property. Termination of the interest by the holder of the superior interest occurs because of the failure of the holder of the inferior interest to fulfil an obligation owed to the holder of the superior interest. Such a relationship simply does not exist, and is not intended to exist, within commonhold. We are talking about unit holders who have a parity of position without superiority or inferiority. There is no one with an interest in a commonhold unit superior to that of the unit holder. The commonhold association is the registered proprietor of the freehold estate in the common parts but has no claim to the units, nor should it, we believe.

Apart from the innate unsuitability of forfeiture as a vehicle for debt recovery in commonholds, we have stressed previously—I repeat this today—that forfeiture is widely abused and hated in the leasehold context. I do not think that that is putting it too high. In recognition of the problems with forfeiture, provisions in Part 2 of the Bill will curb the ability of landlords to serve forfeiture notices without a determination by a leasehold valuation tribunal or LVT. I am sure that the Committee does not want to import into commonhold a process that has been widely condemned in its application to leasehold tenure and which we are currently seeking to rein in.

As far as this amendment and Amendment No. 25 are concerned, we have stated before that there is a wide range of debt collecting machinery available to the commonhold association. By not accepting these amendments for commonhold forfeiture nor, as was previously suggested, imposing a statutory first charge in favour of the commonhold association, nor introducing any particular mechanism for recovering debt exclusively within commonhold, we are not in any way preventing the commonhold association from recouping debts owed to it by unit holders. We are simply reluctant to set up a special debt collection process which would apply in the commonhold context alone.

Amendment No. 37 goes rather further as it would allow a power of sale immediately in the event of any default of payment. The noble Lord, Lord Goodhart, seeks to introduce an even more draconian provision than one has to date seen.

Lord Goodhart

I am grateful to the noble Baroness for giving way. That was not my intention. What I said, and what the amendment is intended to do, is simply to state the general principle and leave the details to be contained in the commonhold community statement. That will be contained in regulations. It is intended that those regulations could contain all the necessary provisions about the giving of notice, the time for compliance with payment of the debt and so on. It is not as stark as the noble Baroness believes.

Baroness Scotland of Asthal

I am comforted to hear that but it just returns us to our former position in terms of the superior and inferior matter. We believe that it would be inappropriate to introduce forfeiture at this point.

I turn to the amendments spoken to by the noble Lord, Lord Kingsland. I may have some happier news for him in relation to a couple of his amendments although generally I am afraid that we are not with him. Amendment No. 59 would make the contents of the regulations governing the operation of commonhold mandatory. We are not able to see any advantage to replacing "may" with "shall" and the disadvantage might be later arguments about the vires of any action by the commonhold association.

I shall try to deal with the other amendments briefly, as the noble Lord did. Amendment No. 60 would omit the paragraph that gives a tenant of a unit holder the right to enforce a duty imposed on another tenant, unit holder or the commonhold association. As a result, the tenant, whose lease already in effect contains the commonhold community statement and memorandum and articles of association to which he is committed as a full unit holder, would none the less be in a much worse position than the unit holder from whom he holds his lease. Presumably the noble Lord, Lord Kingsland, expects that a tenant in that position would rely on his unit holder to carry out any enforcement on his behalf. That, I respectfully suggest, is not a feasible proposition and is inconsistent with other areas of the Bill where reference to the term "unit holder" is specifically taken to include reference to a tenant of a unit holder.

Amendment No. 61 would omit the paragraph that allows the regulation to specify a particular alternative dispute resolution scheme in advance of bringing legal proceedings. Clause 41 stand part is also in this group. As I understand it, deleting that clause would remove the ombudsman scheme, leaving no standardised scheme for dispute resolution.

The Government will consult widely about what should go into the regulations to ensure that those who have expertise in the various areas to be covered have had ample opportunity to advise us. There is expertise within and outside the Lord Chancellor's Department to assist us. If we were left in the position to which the noble Lord's amendments are leading us, the risk is that there would be no expert guidance to those who found themselves living in and operating commonhold. We have to maintain our proposition that standardisation of procedures is a considerable potential advantage to come out of the commonhold scheme and we wish to retain the power to prescribe where it seems to us good to do so, always bearing in mind that, if the balance of advantage in due course seems to suggest other ways to achieve our aims, regulations can be amended quickly and efficiently.

Amendment No. 62 provides, though less completely than the Bill does at present, for a tenant to offset any moneys paid to the commonhold association against what he owes to the unit holder. Clause 19(3) makes fuller and better provision for that, we respectfully suggest, so the amendment would provide less protection for tenants. I am sure that that is not the noble Lord's intention.

Amendment No. 63 would provide for charging a defaulter's interest in his unit to secure payment of compensation, costs and interest. As I have said, that would narrow the possibilities open to a commonhold association when pursuing debts. A charging order is one possibility, but only one among many. I am not convinced that, in so far as we are providing a freehold interest in a unit, it is appropriate to hedge the enjoyment of that interest around with special powers. If, in due course, a dispute has reached the stage at which the defaulter owes compensation, costs and interest to the commonhold association, it is surely time for the courts to be involved. Armed with an appropriate order, the whole range of debt collecting machinery will be open to the commonhold association. In parenthesis, the noble Lord has presented forfeiture as an easier route—faster and cheaper—but I do not think that that is the universal experience of those who have sought it as a solution.

Amendment No. 65 would put beyond doubt that the directors of a commonhold association could include in their annual estimate a sum up to the value of an amount owed by a defaulter, provided they had taken reasonable steps to recover the loss from the defaulter. In practice, that would mean inviting the members of the commonhold association to cover the outstanding sum between them. That will sometimes be a more attractive proposition than, say, putting off the necessary and programmed repairs to the roof or the lift until the balance of the account has built up to where it would have been if the defaulter had paid up.

No doubt the members will want to hear what steps were taken to recover the debt. Equally beyond doubt is their absolute discretion as to whether to accept the explanation and the sum in the estimate. We will consider the noble Lord's amendment and come back to the matter on Report. As Amendment No. 67 is closely connected, we shall also have a further think about that as well. We are not quite so persuaded about the need for that one, but we shall give it active consideration.

Amendment No. 72 is a further attempt to introduce a special debt collection process for commonhold, securing all moneys due to be paid as commonhold assessments by way of statutory first charge. We are still of the view that hedging the freehold nature of the commonhold units around with special arrangements will make them less attractive purchases than might be the case and we shall continue to resist the suggestion.

As we noted last time, we are unable to see what the noble Lord expects to achieve with Amendment No. 81, to which he has not spoken specifically today. If the commonhold association finds that documents are non-compliant, it can arrange for them to be amended and revisited. It does not need a declaration from a court to tell it so. The clause is designed to give unit holders whose lives are, to a great extent, governed by those documents, an opportunity to force an unwilling commonhold association to act if the documents are non-compliant. Amendments Nos. 82 and 83 would extend the period in which an application to the court is to be made from three months to six months. We see no advantage in that proposed extension, particularly as the court can grant permission for an application to be made at any time by virtue of sub section(4)(c).

Finally, the noble Lord expressed some doubts about the ombudsman clause. I noted the hesitance and reluctance with which he ventured those comments. I share the wisdom of that hesitance. Clause 41 introduces an ombudsman scheme into the Bill. Your Lordships may well be aware that the Government take the view that it should be closely modelled on the independent housing ombudsman scheme. We believe that there is real merit in keeping disputes arising in commonholds away from the courts and tribunals in so far as it is proper to do so, always with the proviso that the courts will be there in the last resort. Clause 34(3)(b) requires the directors of the commonhold association to consider alternative dispute resolution before resorting to the courts. The independent housing ombudsman scheme is inexpensive, quick and flexible and has a good reputation. An ombudsman scheme seems to us to be a perfectly good model to adopt as one approach to dispute resolution. As the noble Lord, Lord Kingsland, said, nothing else is in place, so we would be sorry to lose this opportunity and we would rather keep it.

Lord Williams of Elvel

My noble friend has given the Committee a great deal to think about in what I appreciate was a rather long and complicated legal exposition to which those with greater training than I have will no doubt pay a great deal of attention. In the meantime, I beg leave to withdraw my very simple amendment.

Amendment, by leave, withdrawn.

Clause 15 agreed to.

Clause 16 agreed to.

Clause 17 [Leasing: residential]:

5.30 p.m.

Lord Goodhart moved Amendment No. 26: 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: This grouping appears to me to be a little odd. Amendment No. 26 and the Question whether Clause 17 stand part are certainly grouped together appropriately, but the remaining amendments seem to deal with entirely different subject matters. I do not know whether the noble Lord, Lord Kingsland, wishes to degroup them.

Amendment No. 26 specifies on the face of the Bill a maximum length of seven years on the lease of a unit and bans the taking of premiums for any lease of a unit. The amendment raises the question of the philosophy behind commonhold. We believe in principle that commonhold should be a form of collective or co-operative ownership, whichever term one wishes to use, for those who live in the property.

We all know about the problems which have led to the proposals for commonhold, but those problems apply only to the people who live in the property. From the point of view of investors, it simply represents a different form of investment, and there is no difference in principle between buying leasehold and freehold properties as an investor. They may involve different rates of return and there may be different tax advantages one way or the other, but there is no question of any hardship.

Therefore, in the creation of commonhold one is considering the interests of the people who live in the property and who suffer from problems facing those who live in leasehold properties. We accept that unit-holders cannot always be resident in the property. Some people may want to buy a commonhold unit for their retirement, which is not due for a while. Unit-holders may be posted abroad and may wish to retain their property as a place to which they can return when their posting ends. Of course, there may be other reasons why people want to let their units rather than live in them themselves. Therefore, there can be no question of banning a letting.

However, we believe that it is important that we do not recreate the existing problems by allowing unit-holders to grant long leases of units, thereby making unit-holders long-term investors rather than occupiers of a property who may have to be away for limited periods of time.

The seven-year maximum appears to us to be an appropriate limit. Nowadays, seven years seems to be regarded as the boundary line between shorter and longer-term leases; for example, under the Land Registration Act leases for seven years or less will not be registrable, while leases for more than seven years will be. It is certainly now unusual to find a rack-rent lease of a residential property given for a term longer than seven years.

Therefore, we believe that it is important for there to be a fairly strict limit on the type of lease of units that can be granted. We do not believe that restricting the period to seven years will reduce the value of units; we believe that it will preserve the reasons for which commonhold is being introduced. We consider this to be a sufficiently important issue for the limit to be on the face of the Bill rather than in regulations. I beg to move.

Lord Kingsland

I respectfully agree with the noble Lord, Lord Goodhart, about this particular grouping. I should have drawn it to the attention of the Government Whips before the debate. I believe that, apart from the Question whether Clause 17 stand part, it would be more felicitous for the remaining headings to be considered when we reach the grouping beginning with Amendments Nos. 35 and 36. However, I know that the noble Baroness will have—

Lord McIntosh of Haringey

No one told us that this matter had been drawn to the attention of the Whips' Office. However, if the noble Lord, Lord Kingsland, wishes to debate it in a different form, we shall try to accommodate ourselves to it.

Lord Kingsland

It is entirely my fault that the matter was not drawn to the attention of the Whips. I do not for one minute suggest that in this particular instance the Government have in any way fallen below the high standards that one would expect them to meet.

I shall simply address the Question of Clause 17 stand part. This proved to be a controversial matter in the debate that took place last February. In a way, I am quite surprised that it has not injected greater enthusiasm among Members of the Committee this afternoon.

Clause 17 imposes restrictions on a residential unit-holder's right to create a lease of his unit. According to the Explanatory Notes, the intention is that regulations made under Clause 17(1) should set down both that no premium should be payable for a lease, which should be at rack-rent, and that the maximum period for a single-term lease should be restricted to seven years.

Criticism was made of this clause at Second Reading. The noble Lords, Lord Goodhart and Lord Richard, considered that some restriction would be appropriate, although I do not believe that they said—at least, on that occasion—what the restriction should be. However, in all events, they believed that the present proposals were too restrictive. My noble friend Lady Gardner of Parkes, drawing on her great experience of company law and strata titles in New South Wales, opposed any restrictions on lettings. The noble Baroness, Lady Hamwee, suggested that tight restrictions would hamper reinvigoration of the rental market.

As the principal intent behind the proposals for commonhold is to place unit-holders into as nearly as possible the same position as if they were outright freeholders—that is, with as few restrictions as possible on their powers of dispossession and alienation—the presumption should be against any restriction unless clearly justified.

If the concern is that problems may arise if some unit-holders are, in effect, absentee landlords, those problems are more properly to be treated as problems of management. They should be dealt with in accordance with the CCS and/or the memorandum of association rather than by regulation. For example, if a person in occupation of a unit has a sufficiently substantial interest in possession—say, a lease for seven years or more with at least two years unexpired—there may be a provision that he, as a person more likely to be interested M the day-to-day affairs of the commonhold than his absentee landlord, should be able to exercise certain rights of the unit-holder, such as voting at association meetings, either generally or on certain specific issues. In any event, the proposed restrictions are far more restrictive than those imposed by, say, Section 41 of the Settled Land Act 1925.

The Bill does not deal with the leasing powers of trustees of land; nor does it spell out the consequences of granting an invalid lease for an innocent purchaser. If it had been intended that such matters should be dealt with by regulation to be made under Clause 19, then they are all matters of fundamental importance. They should be debated and form part of the primary legislation and should not be left to delegated legislation.

Lord Selsdon

I do not understand why there is any need for restrictions. I should like to draw the attention of Members of the Committee to certain changes within this environment.

Increasing numbers of banks are introducing mortgages under the heading, "Buy to rent". That is partly due to falling interest rates and the desperately low return that retired people get from their pension. In many countries in which there have been low interest rates there has been a tendency for those who are semi-retired or retired to buy a property that they let to supplement their pension, which is often very small. In many cases they might let something for the rest of their life. They are seeking not to be Rachman-type landlords but to get a good return on their income and to increase their pension.

That attitude should be encouraged. If there are restrictions, we may end up—we currently do so—with a large part of the housing stock being empty. Rooms that are available to let are not let. Someone who buys a commonhold unit may face restrictions although he has no intention of living there; factors that are beyond his control—he may be sent overseas—may also operate.

For those reasons, I am all for minimum restrictions. I take the point that was made by the noble Lord, Lord Goodhart, who said that we do not want to replicate the leasehold system by the backdoor. The matter needs to be thought through.

Lord McIntosh of Haringey

When the noble Lord, Lord Goodhart, spoke to Amendment No. 26, he said that it was part of the philosophy that lies behind commonhold. I hope that I can persuade him that the matter is nowhere near as fundamental as that. We are talking about the way in which to draft a Bill that reflects a matter about which I believe we both agree. The amendments have been placed in this group because they concern the content of the commonhold community statement, the memorandum and the articles of association. I am prepared to agree that on reflection some of the later amendments in this group would have been better placed in the group that contains the amendments through which the noble Lord, Lord Kingsland., seeks to place the entire memorandum, articles and CCS in the Bill. That may be partly because I incited him to do just that. However, I shall come to the issue of why I may have done so in due course.

I turn first to Amendment No. 26. The wording used by the noble Lord, Lord Goodhart, reflects the Government's intentions. That is why I said that there is no disagreement in purpose between us. Those are indeed the terms on which the Government intend to allow letting.

The noble Lord, Lord Kingsland, proposes to remove the entirety of Clause 17, which deals with residential leasing, from the Bill. I listened to him very carefully but I am still not clear whether that means that he would put the information in the CCS or another document, or whether he would remove the restrictions altogether.

Lord Kingsland

I am grateful to the Minister for giving me an opportunity to respond—I will not have to deal with this matter again at a later stage. He will be aware that he will soon respond to my suggestion that the regulations dealing with the substance of the memorandum of association and the CCS should appear in the Bill in a schedule. On the assumption—the generous assumption—that the Minister thinks that that is a good idea, it would be my intention to introduce on Report amendments to the schedules to deal with those matters.

5.45 p.m.

Lord McIntosh of Haringey

I think that I better understand the noble Lord's point—it is that if the CCS, the memorandum and the articles are in the Bill, one does not need Clause 17. Well, as he said, we shall argue about that when we reach the appropriate point in the Bill. His proposal would be very damaging because it would resurrect many of the problems that are inherent in long leasehold and which we are seeking to remove with the Bill.

We think that it is better—this is why I say that a matter not of principle but of procedure is involved—for leasing restrictions to be set out in regulations. We have already heard—we shall later hear more—about the flexibility that would be available if certain matters were dealt with by regulation. We believe that this is a good example of that. Our original intention was to impose very tight controls on the letting of residential units. Much pressure was put on us in that regard. It was pointed out that tight regulation would tend to make commonhold developments unpopular because buy-to-let would be next to impossible. The noble Lord, Lord Selsdon, reiterated that point. We were told that a significant part of the market in flatted properties, particularly in London, was for investment and that that was a legitimate use of commonhold procedures. We considered that advice and decided to take it. Amendment No. 26 sets out the terms at which we have arrived.

This proposal is about the ability to react to the market. We want to be able to adapt to the market in due course if it appears that a different term of years proves to be more attractive to developers and purchasers. For that reason we think that the mechanism of setting the terms by regulation is the right mechanism and, although we are grateful for the acceptance of our reasoning and the conclusions to which we have come, we do not think that it is appropriate for the provisions to be in the Bill. Further primary legislation is required to change the situation.

Amendment No. 39, which appears in the name of the noble Lord, Lord Kingsland, would entail specifying in the commonhold community statement the voting rights of members at meetings of the commonhold association. We believe that that degree of detail is more appropriate in the statement itself; we do not need to go into that in detail—the degree of flexibility is sufficient.

Article 23 of the current articles of association provides that a resolution shall be decided by a show of hands. Article 31 provides that a show of hands will be decided on the basis of one member one vote. However, if the chairman, a group of five members at the meeting or one-tenth of the members at the meeting demand a poll, members will have one vote for every unit that they own. The poll may be taken in such a manner as the chairman directs. We believe that that is a straightforward means—so far as any of these matters can be called straightforward—of allocating votes in a commonhold and that it strikes the right balance of equality between members and the recognition that those with a larger property investment in the commonhold may have a greater interest in the outcome of a resolution.

The noble Lord also tabled Amendment No. 40 and proposes to remove Clause 32. That clause specifies that regulations about the commonhold community statement will require the statement to state how it can be amended. That follows on from the amendment to place the commonhold community statement in the Bill. He must recognise in advance, I am afraid, that we are going to resist that proposal.

Amendment No. 40 would insert a new clause stating that regulations should require a commonhold community statement to state how it can be amended. If the noble Lord had not attempted to remove the entirety of Clause 32 that amendment would not be necessary.

I do not know whether the noble Lord wants me to comment on Amendments Nos. 48 and 49, which he did not discuss.

Lord Kingsland

I sought to indicate earlier that I want to deal with those matters when we come to the group of amendments containing the proposal to introduce the memorandum of association and the CCS into the Bill in schedules.

Lord McIntosh of Haringey

In that case I shall reserve my comments for later.

On the substantive issue with which the Committee is concerned, I hope that the noble Lord, Lord Goodhart, will not press Amendment No. 26.

Baroness Hamwee

Before my noble friend responds, I ask the Minister to say a little more about the flexibility that he suggested is appropriate in this situation. That seems to indicate that the Government may from time to time take a different view of, for example, what is an appropriate length of term of a lease. I wonder whether that involves flexibility that borders a little on being unfair to successive generations of unit holders. They may not know when they acquire the units what they can expect in terms of the Government's prescribed conditions. Therefore, the flexibility may be on the part of the Government. I take the Minister's point. There is a need to be able to respond to market conditions. Equally, I believe that that contains some unfairness and uncertainty for unit-holders, with which at present I do not feel comfortable.

Lord McIntosh of Haringey

I believe the answer is that the memorandum and articles and the commonhold community associations contain substantial elements which cannot be changed by individual commonhold associations. There is certain scope for flexibility at the margin, but the whole point of the way in which this has been drafted is that these are requirements of Government laid down by regulation. That means that they can be changed only with the approval of Parliament, either tacit or explicit.

Lord Goodhart

I refer to the point raised by the noble Lord, Lord Selsdon, on Amendment No. 26. There is nothing to stop unit-holders buying a unit in order to rent. They would be perfectly entitled to rent at a rack-rent for seven years and at the end of the seven years re-let again. I believe that that is even potentially a problem. This issue is important and I would prefer to see the restrictions on the face of the Bill. Nevertheless, our intention and that of the Government are the same. I shall consider with my noble friends whether we need to raise the matter again. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 17 agreed to.

Clauses 18 and 19 agreed to.

Clause 20 [Other transactions]:

Lord Kingsland moved Amendment No. 27: Page 9, line 34, leave out subsections (3) to (6).

The noble Lord said: Here, we have yet more restrictions on the right of a unit-holder to deal with his or her unit. No explanation or justification for them has been given in the Explanatory Notes. They will tend to inhibit many common and often informal arrangements made in good faith and beneficial to everyone. What of the case where a unit-holder's aged mother agrees to contribute to the purchase of a unit in the unit-holder's name on terms that she has a beneficial interest in the unit and/or the right to live there?

Such arrangements often enable the younger generation to get on to the property ladder. Surely the new law on commonhold should encourage that? The restrictions in Clause 20(3) to (6) would have the reverse effect. Any such restrictions as may be justified are more properly to be imposed by the CCS; so that in the case of new development a unit-holder will know and accept the proposed restrictions before he contracts to purchase the unit and, in the case of a conversion from leasehold, a unit-holder will have been able to consider and discuss them before giving his consent to the application to register commonhold.

As regards Amendment No. 28, Clause 21 imposes yet another restriction on unit-holders. The intention, as stated in the Explanatory Notes, is, to preserve the integrity of the unit, and also to ensure that no event takes place that would require a change to the commonhold community statement (CCS) which is not in the control of the commonhold association". There may be circumstances when it is convenient or financially necessary for a unit-holder to deal with part only of his unit; for example, again, if he wishes to accommodate his aged mother in a flat for which she has contributed her own money. For the same reasons as already given, any such restriction that may be justified is more appropriately imposed by the CCS. I beg to move.

Baroness Scotland of Asthal

When we last saw Amendments Nos. 27 and 28 we were able to say to the noble Lord that the Government were tabling amendments which we believed went some way to achieving what he seemed to want. We, too, had recognised that the restrictions on the creation of interests in commonhold units seemed unnecessarily stringent and we tabled amendments to lift them.

As we noted at that time, we presumed that what is now Amendment No. 28, which would allow the creation of interest in part-units, subject to the provisions of the commonhold community statement, is intended to relax the absolute prohibition on interests and charges on part-units. We believe we have done that. We will now allow interests, except prescribed interests, on part-units following a resolution in favour by the commonhold association. It is still our intention that charges over part-units should not be possible and that is for reasons which noble Lords have already heard.

A charge over a part unit, should it prove necessary in due course to enforce, would result in a change being required to the commonhold community statement, which would not be under the control of the commonhold association. We believed that we went more than half way to meet the noble Lord on the previous occasion. I am sorry to see that these amendments have come back.

The provisions of Clause 20, as they presently stand, represent a considerable relaxation to the restrictions in the previous version of the Bill prior to Report. In the circumstances, I hope that the noble Lord will feel able to withdraw his amendment.

Lord Kingsland

I am sorry to have sounded churlish in the remarks I uttered. My reading of the modest changes made by the Government is somewhat different from that of the noble Baroness. Nevertheless, I shall take her comments into account and reflect on the matter before Report. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 20 agreed to.

Clause 21 [Part-units]:

[Amendment No. 28 not moved.]

Clause 21 agreed to.

Clauses 22 and 23 agreed to.

Clause 24 [Definition]:

[Amendments Nos. 29 and 30 not moved.]

Clause 24 agreed to.

Clause 25 [Use and maintenance]:

[Amendments Nos. 31 and 32 not moved.]

Clause 25 agreed to.

Clause 26 agreed to.

Clause 27 [Charges: general prohibition]:

Lord Kingsland moved Amendment No. 33: Page 12, line 23, at end insert— (6) A charge shall not be extinguished under subsection (3) or (4) unless either—

1. (a) the chargee first consents in writing,
2. (b) fair compensation is paid to the chargee for such extinguishment, or
3. (c) adequate substituted security is provided for the chargee by way of a charge, or charges, on one or more of the commonhold units in the commonhold.

(7) The county court shall have jurisdiction to determine any matter arising under subsection (6) whatever the amount or value of the compensation or security involved.

The noble Lord said: Subsections (3) and (4) of Clause 27 provide for the extinguishment of existing charges over commonhold land in so far as they relate to the common parts. There is no provision to compensate a chargee for his loss. It might have been felt unnecessary if consent to an application to register a freehold estate in commonhold land had to be 100 per cent, including that of all proprietors of charges. In that context I refer to Clause 3(1)(c).

Such a provision seems necessary if consent is less than 100 per cent, as proposed in the relevant amendment, or if in some cases, consent is deemed to have been given under Clause 3(2)(e), or if consent is dispensed with under Clause 3(2)(f) or if a charge is not protected by registration or a caution against dealing.

Lord McIntosh of Haringey

In the grouping that was agreed, Amendment No. 33 was included in the group with Amendment No. 1. We shall, of course, try to answer it, but if the noble Lord had wished us to take it out, it would have been helpful to know in advance.

Lord Kingsland

I am most grateful to the Minister. It seems only just and consistent with Article 1 of the first protocol of the European Convention on Human Rights, which, as the Minister knows, refers to the peaceful enjoyment of property, that a chargee can get fair compensation or adequate substituted security before his charge over common parts is extinguished. I beg to move.

Baroness Scotland of Asthal

I am more than happy to repeat what I said when I spoke to this matter earlier today. The noble Lord will remember that I answered this issue in relation to Amendment No. 33 when I commented on Amendment No. 19. I said at that stage in relation to Amendment No. 33 that it provides for chargees to consent to the extinguishing of charges over land that is to become part of the common parts. The Bill already provides for such consents by registered chargees in Clause 3. The arrangements made between the applicant for registration and the chargees as to compensation or the substitution of security seem to us to be a matter to be sorted out between them.

I am afraid that these amendments, as we have already respectfully suggested—and I am happy to repeat it—are defective in almost every respect. They would achieve only the basis for a scheme that would be expensive and unwieldy and, in our view, next to impossible to manage. I think that was the penultimate matter that I dealt with.

Lord Kingsland

I am aware that the Minister had responded to my Amendment No. 33, before I had spoken to it. I hoped that, having heard me speak to it, she would on reflection change her mind. Plainly, she has not done so. In those circumstances, I shall further reflect on the matter. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 27 agreed to.

Clause 28 [New legal mortgages]:

[Amendment No. 34 not moved.]

Clause 28 agreed to.

Clause 29 agreed to.

6 p.m.

Clause 30 [Form and content: general]:

Lord Kingsland moved Amendment No. 35: Page 13, line 15, leave out "prescribed

The noble Lord said: There is a large number of amendments in this group, and also some amendments in the group beginning with Amendment No. 26, to which I draw the attention of the Committee.

I shall not deal with each amendment. It will suffice to draw the Committee's attention to the purpose behind this group of amendments. The purpose is to insert on the face of the Bill the details that would be required to establish a commonhold community statement and the provisions for the memorandum and articles of association of the commonhold association.

I had given notice to the Minister, the noble Lord, Lord McIntosh of Haringey, of my intention to do this; and my intention was formilated in an earlier debate that took place in the Grand Committee last winter. I had hoped that the Government would be prepared to accept that these two documents, or at least the framework for them, would form part of schedules to the Bill, in the best traditions of the 1925 property legislation. However, having heard the noble Lord, Lord McIntosh, speak on several occasions on this issue, I despaired of that occurring.

Therefore, the real motive for my amendments today is to get the draft regulations that the Government have kindly published—in both the CCS and the memorandum of association—on to the face of the Bill today, so that at a later stage I shall be in a position to table amendments. The direction in which I wish to take both those schedules is, to some extent, indicated by the other amendments in the group.

The noble Lord, Lord McIntosh, rightly admonished me at Report stage earlier this year for having tabled what I thought the schedules ought to be, rather than what the Government thought the schedules ought to be. I hope I have learned from that experience. I have therefore taken the Government's drafts and tabled them as schedules. If the Government accept that, it would be my intention to amend them on Report and for the matter to be resolved at Third Reading. If, of course, the Government do not accept that approach, I shall have to consider very carefully whether to re-table these amendments at Report stage, seek the support of the House to defeat the Government and then amend the schedules at Third Reading.

I hope that I have said enough to enable the noble Lord, Lord McIntosh, or the noble Baroness, Lady Scotland, to respond to this group of amendments.

Lord Monson

Perhaps I may seek clarification of Amendment No. 192, to which Amendments Nos. 35 and 36 are paving amendments. It is true that Amendment No. 192 is tabled in the name of the noble Lord, Lord Kingsland. It is not a government amendment. However, I believe that in its entirety it replicates the most recent draft commonhold community statement, helpfully sent to me and no doubt to many other noble Lords by the Lord Chancellor's Department on 8th October. I admit that I had not previously studied it, but it contains a couple of matters that puzzle me. If for technical reasons, because the amendment is not in their name, the Government feel that they cannot answer, perhaps the noble Lord, Lord Kingsland, can.

Why in paragraph 22 is it made obligatory for each unit-holder to insure his or her contents? It is a sensible thing to insure one's contents, but surely it is nobody else's business if one fails to do so. If your contents are stolen or burned, you are the only loser. It does not affect the other unit-holders at all. Of course, paragraph 23 puts teeth into the provisions of paragraph 22. Similarly, paragraph 25 provides that each unit-holder shall maintain the interior of his property, and paragraph 26 gives the teeth to that.

It is clearly right that each unit-holder should ensure that nothing that happens in his unit adversely affects others, such as allowing taps to drip and baths to overflow, but that is covered by paragraph 61. If, for example, a unit-holder demolishes an interior, non-load-bearing partition and fails to re-erect it, why should that be any business of the other unit-holders? It does not affect them in any way. I should be grateful for an explanation of why those two rather onerous provisions are included in the draft.

Lord Kingsland

It would be entirely appropriate for the Government to respond to the noble Lord. It is the Government's draft.

Lord McIntosh of Haringey

We have already debated that specific issue in the absence of the noble Lord, Lord Monson, on an amendment moved by the noble Lord, Lord Williams of Elvel. I refer the noble Lord to Hansard when it is produced.

I have made a rod for my own back. It has been my principle in business all my life that if I have failed to communicate something, that is my fault and not the fault of the person to whom I have failed to make the communication. I was seeking to persuade the noble Lord, Lord Kingsland, to do what I did in opposition on a number of occasions when I thought that the substance of the legislation was contained in various secondary documents, whether codes of conduct, draft memorandum and articles or whatever, and that we could not debate the substance of the Bill effectively unless we had them on its face for the purposes of debate.

It was never my argument that codes of conduct, guidance principles, memorandum and articles, community statements or any such document should stay on the face of the Bill and I do not believe that that is the point the noble Lord is trying to make. I am merely setting the scene because the noble Lord is suggesting that we should leave the matter before the Committee now, debate it at the Report stage and take it off again at Third Reading.

What I did in opposition was rather different. I tried to concentrate the minds of the then government by putting the code of conduct in an amendment and immediately proposing a huge number of amendments to my own. The noble Earl, Lord Caithness, the noble Baroness, Lady Blatch, and other distinguished Ministers thought that that was outrageous, that I was doing things which had never been done before and was abusing the procedures of the House. Generally speaking, I got a lot of stick for it.

However, I believe that I was right and that what the noble Lord, Lord Kingsland, is trying to do is defensible. I just do not believe that he is doing in the right way. It would have been clearer for all of us if instead of having a number of amendments in this and previous groups he had tabled as the two schedules what are now Amendments Nos. 192 and 193. By the way, they are in the wrong place—of course, they should have appeared in the Marshalled List after Schedule 2. That is the fault of the Public Bill Office and not my fault.

Lord Kingsland

I am grateful to the noble Lord for giving way. I must defend the Public Bill Office, which has shown enormous courage in the face of adversity in having to cope with two such enormous amendments. It has been stoic and splendid. The Public Bill Office took this step because it correctly recognised that huge amendments in the middle of the Marshalled List would distort the picture. Therefore, as the substance of the two amendments would not be debated today, merely the Question of whether they should be part of the Bill, it was regarded as appropriate to place them at the end of the Marshalled List. I say most humbly to the Minister that on this occasion the Public Bill Office got it absolutely right.

Lord McIntosh of Haringey

If the noble Lord, Lord Kingsland, persuaded the Public Bill Office of that conclusion, I accept what he says. However, I believe that it is wrong. I believe that the correct procedure would have been to place the amendments after Schedule 2, which is paved by Clause 5, and we could have debated all the matters at the same time.

However, we have passed by a number of amendments which would change the memorandum and articles and the commonhold community statement and there are more to which the noble Lord, Lord Kingsland, has not spoken. Perhaps I may make a suggestion to him. I believe that rather than put the provision on the face of the Bill at great expense and at the risk of considerable confusion, the best course would be if he and I, Ministers from the Lord Chancellor's Department and other Members of the Committee who are interested met between now and the Report stage. We should take the matter offline and undertake to return to it at Report in whatever form could be agreed. However, I do not believe that we can deal with the matter in the way that is being proposed. It would not be fair to include another 36 pages in the Bill with the intention of removing them.

6.15 p.m.

Lord Monson

In order that I may locate the answers to my questions, will the Minister be kind enough to say whether the noble Lord, Lord Williams of Elvel, raised the points earlier today or during the Grand Committee?

Lord McIntosh of Haringey

It was today and it was not necessarily the noble Lord, Lord Williams, who raised them. I believe that I raised them in response to the noble Lord.

Lord Kingsland

I hear what the Minister says and I feel that I am condemned if I do and condemned if I do not. During the Bill's previous passage through your Lordships' House, I tabled not the Government's text but the text I thought the Government ought to have drafted. And what did the noble Lord, Lord McIntosh of Haringey, say? He said that I was wrong to provide my own solution. He said that first I should set out as amendments the text of the Government's solution and then table amendments to that.

Lord McIntosh of Haringey

I was saying that that was wrong because if it were agreed it would have meant that some parts of the memorandum and articles would be statutory and some parts would not. The noble Lord, Lord Kingsland, has nothing to lose. If he agrees to withdraw the amendment now and to discuss the matter in as formal a manner as he wishes between now and the Report stage, it can still be dealt with in the way he wishes then. In other words, he can table the schedules and propose to amend them as he wishes at the Report stage.

Lord Jacobs

Is it proposed that the regulations be debated privately outside the Chamber after which amendments can be tabled, or is it proposed, as suggested by the noble Lord, Lord Kingsland, that we should be able to debate the regulations in the House even though the final result is not included on the face of the Bill?

Lord McIntosh of Haringey

It is proposed that the draft documents should be debated privately and that there should then be an opportunity for them to be debated on the Floor of the House. Any regulations which follow legislation will be considered by the House in the usual way and nothing would derogate from that.

Lord Kingsland

The noble Lord, Lord Goodhart, has not intervened in the debate and therefore I do not know what position the Liberal Democrat Party is likely to take on the matter. In all the circumstances, the best course is for me to accept the offer of the noble Lord, Lord McIntosh, to have a meeting between now and the Report stage. I am most grateful to him for making it and I know that it was made in a constructive spirit. Let us go ahead with the meeting and see where we go from there. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 36 to 39 not moved.]

Clause 30 agreed to.

[Amendment No. 40 not moved.]

Clauses 31 and 32 agreed to.

Clause 33 [Constitution]:

Lord Goodhart moved Amendment No. 41: Page 15, line 24, at beginning insert "Subject to section "Limited liability partnerships",".

The noble Lord said: In moving Amendment No. 41, I should like to speak also to Amendments Nos. 50, 89, 94, 142 and 144. I believe that about two years ago the noble Lord, Lord McIntosh, piloted through this House the Limited Liability Partnerships Act 2000. That Act introduced a new form of body corporate which is particularly suitable for small businesses, small companies and simple organisations consisting of only a few people where one wants a corporate structure with limited liability without complicated memorandum and articles, boards of directors and so on. That appears to be an eminently suitable structure for a commonhold which has, say, fewer than 10 members, all of whom expect to be able to participate, broadly speaking, in the management of the property. Certainly, if one is looking at a small property—for example, a converted house which has five or six flats—that appears to be the absolutely obvious way to do it. It is simpler and involves a good deal less formality.

The purpose of these amendments is to provide an opportunity to use the limited liability partnership structure instead of the considerably more formal structure of a company limited by guarantee in the case of commonhold associations and right-to-manage and right-to-enfranchise companies. One has no board of directors, but a simple agreement between the members rather than the full memorandum and articles. That is plainly an appropriate form—in many cases it will be the most appropriate form—which should be included as an option, leaving the choice to the members when forming a commonhold association, RTM or RTE company. I believe that it is a pity if the Government, having invented this new form of corporate body, refuse to allow it to be used for a purpose for which it is particularly well suited. I beg to move.

Lord Kingsland

I believe that I am right in saying that when the noble and learned Lord, Lord Mackay of Clashfern, contemplated the introduction of a similar Bill in 1996 he had in mind a sui generis structure for the commonhold association. The noble Lord, Lord Goodhart, has suggested that a limited liability partnership is an appropriate form. As the noble Lord, Lord McIntosh of Haringey, is well aware, we suggested last February that it should be a company limited by shares on the grounds that it is a myth to believe that all unit-holders will be the same in terms of their financial interest in a commonhold and their financial outgoings. Earlier, I spoke at great length on that matter, and I have no intention whatever of repeating the long speech that I then made. I simply repeat that I need some convincing that a company limited by guarantee is the appropriate vehicle for a commonhold association.

Lord McIntosh of Haringey

I hope that on this occasion the grouping that we have proposed is acceptable. Here we have done two things. First, we have included with Amendments Nos. 41 and 50 in Part 1 dealing with commonhold in the name of the noble Lord, Lord Goodhart, the comparable amendments in Part 2 which deal with leasehold. I am glad the noble Lord agrees that that is the right course to take. Secondly, for a reason which I believe that the noble Lord, Lord Kingsland, understands, we have also included Amendments Nos. 42 to 45 which would make the corporate vehicle for a commonhold association a company limited by shares rather than by guarantee. The reason for our objection to both proposals is very similar.

I start by turning to the amendments relating to limited liability partnerships. When the matter was raised earlier we took the easy way out because limited liability partnerships came into force only on 6th April of this year. The easy argument was that we did not know what would happen to them and possibly we should not place on the face of a Bill an untried piece of legislation. I cannot use that argument with the same force now because the process has been going since 6th April. I must tell the Committee that about 850 firms have registered as limited liability partnerships since the legislation came into force. As we originally expected, a good number of them are professions and include, for example, accountants, solicitors and architects, but they also include couriers, electrical contractors, design consultants and a Conservative club. (I do not know how that works.) Although that process continues, neither the number of inquiries nor actual registrations is as high as originally intended, and Companies House is considering reducing its limited liability partnership team in the light of experience over the past few months.

I turn to the more substantive point rather than the premature argument. The amendments would give the Secretary of State the power to make an order and regulations at an unspecified point in the future to provide that commonhold associations, right-to-manage and right-to-enfranchise companies may be set up as limited liability partnerships as an alternative to the present structure of a company limited by guarantee.

It is probably easier if I talk simply in terms of the commonhold association, although the arguments apply to all three vehicles. I am glad that the Committee has had the opportunity to look at this again. There remains an element of unknown quantity about limited liability partnerships. Although 850 are registered, they have hardly started work. The main catalyst for the 2000 Act was concern expressed by professional partnerships about the increasingly high levels of damages awarded against them in professional negligence actions. However, they are not moving from a company limited by guarantee but from a partnership of the more traditional form. Clearly, the conceptual foundations of the 2000 Act do not apply to commonhold associations.

Section 2(1)(a) of the Limited Liability Partnerships Act 2000 provides that in order to establish a company as a limited liability partnership, it must be a lawful business carried out with a view to profit. As the Bill proceeded I explained that there was no intention in the genesis and evolution of limited liability partnerships that they should be used by organisations not operating with a view to profit. That is really the nub of the issue as far as we are concerned. A commonhold association may make a profit, but that is not the object of the company; the object is to carry out the functions of a commonhold association in relation to the body named in the memorandum and articles of association.

In residential commonhold, the commonhold association's main concern will be to facilitate the growth and development of a thriving community of unit-holders and to enable them to play an active role in determining the future of that community. We can make similar points about the right-to-manage and right-to-enfranchise companies. That is the fundamental difference and why we would oppose the limited liability partnership route.

So far as concerns Amendment No. 44 tabled by the noble Lord, Lord Kingsland, we cannot accept the idea of a commonhold association having objects other than those specified in the Bill and memorandum and articles. The objects stated in the memorandum and articles give a fuller exposition of the object of the commonhold association in Clause 33 of the Bill.

The noble Lord, Lord Goodhart, may argue that Section 2(1)(a) of the 2000 Act could be disapplied in order to establish any or each of our three companies as limited liability partnerships. However, that is a fundamental clause in the Limited Liability Partnerships Act. It appears second in order only to a provision establishing that a new form of body corporate called the limited liability partnership is to be made available and as such is prescriptive of one of the keystones of the limited liability partnership. Therefore, I must respond to the noble Lord by asking a question: why use the limited liability partnership format for a commonhold association if it will be necessary to tamper with one of the underlying premises on which it is based? It seems slightly perverse to choose as the format for a commonhold association a corporate body that will require fairly extensive surgery on its conceptual basis in order to integrate with commonhold.

We have previously debated these issues. Therefore, on the basis of the updated and revised—in the light of experience—responses which I am now able to give I hope that the noble Lord, Lord Goodhart, will not pursue his amendments.

6.30 p.m.

Lord Goodhart

I am grateful to the Minister for his response. I am rather sorry about it because it seems to me that if limited liability partnerships are being incorporated at a lower level than expected, the Government might rather welcome something which may lead to the incorporation of a few hundred more of them and make the whole operation more successful.

Lord McIntosh of Haringey

The object of the exercise is not to please government but to provide a corporate vehicle which corporate bodies want.

Lord Goodhart

Indeed. The Limited Liability Partnerships Act refers to the need for a business to be carried on at a profit. That dates back to the definition of partnership in the partnership Act because unincorporated partnerships do and, for a very long time, have had to carry on business at a profit. On the other hand, I am not convinced that that restriction is fundamental. The limited liability partnership seems to me a suitable form of incorporation for a body which is small enough so that all its members are involved in the conduct of its business or activities, whether or not those are carried on with a view to profit. Of course there would be no drafting problem with disapplying that particular provision in the Limited Liability Partnerships Act. However, this is by no means the most important amendment to the Bill. In the circumstances it is unlikely that we will have any strong desire to return to it. Certainly for the time being, therefore, I ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 42 to 46 not moved.]

The Deputy Chairman of Committees (Lord Murton of Lindisfarne)

The next two amendments are improperly marshalled. Amendment No. 48 comes before Amendment No. 47.

[Amendment No. 48 not moved.]

[Amendment No. 47 not moved.]

Clause 33 agreed to.

[Amendments Nos. 49 and 50 not moved.]

Schedule 3 [Commonhold association]:

[Amendment No. 51 not moved.]

Schedule 3 agreed to.

Clause 34 [Duty to manage]:

[Amendments Nos. 52 to 56 not moved.]

Clause 34 agreed to.

Clause 35 [Voting]:

[Amendments Nos. 57 and 58 not moved.]

Clause 35 agreed to.

Clause 36 [Enforcement and compensation]:

[Amendments Nos. 59 to 63 not moved.]

Clause 36 agreed to.

Clause 37 [Commonhold assessment]:

[Amendments Nos. 64 to 72 not moved.]

Clause 37 agreed to.

Clause 38 [Reserve fund]:

[Amendments Nos. 73 to 79 not moved.]

Lord Kingsland moved Amendment No. 80: 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: In moving Amendment No. 80, I draw the attention of the noble Lord, Lord McIntosh of Haringey, to the fact that this was a matter that we debated at some length on a previous occasion. I have tabled the amendment today because I believe strongly that the Government's judgment on this matter is plainly wrong. In my submission, it is not only right but logical that the reserve fund of an association should be held as a tax exempt trust fund and that the interest accrued only on the sum should be vulnerable to taxation. I beg to move.

Baroness Scotland of Asthal

I hope I do not disappoint the noble Lord in that it is I who is to respond and not my noble friend Lord McIntosh with whom he tangled on the last occasion.

Lord Kingsland

I shall certainly get a different, if not a better, answer.

Baroness Scotland of Asthal

The amendment seeks to introduce into commonhold a form of fund holding developed for leasehold funds by Section 42 of the Landlord and Tenant Act 1987. As Members of the Committee will know, 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.

Section 42 was not designed to exempt service charges from taxation, though it was suggested at the time that it would have the useful effect of ensuring that tax treatment of such funds was more equitable and less capricious than appears to have been the case then.

The provision that service charges be held on trust by the payee for the tenants as beneficiaries 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. Section 42 implements the recommendation made in paragraph 7.3.5 of the report of the Committee of Inquiry on the Management of Privately Owned Blocks of Flats, the Nugee Report of 1985, which stated that: Where the money has not yet been expended it is important that funds are safeguarded against the risk that the landlord becomes insolvent or misappropriates funds. We therefore recommend that it should be held in a trust fund". It is clear that the primary benefits of the statutory trust fund for leasehold service charges in Section 42 of the 1987 Act are twofold. First, money paid by tenants to the payee, as defined in Section 42(1) is safe from creditors in the event of the payee's bankruptcy or liquidation. This is particularly important because in the majority of cases the payee will be the landlord. It is evident that any wrongdoing or mismanagement of funds by him should not result in financial hardship to tenants. Secondly, Section 42 ensures that the payee is subject to the duties of trustees and will therefore be liable for a breach of trust if the money is misappropriated or not adequately safeguarded or invested. The trust set-up also enables the tracing of service charge funds under the arrangements for trust funds.

These considerations, important as they are, 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 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. Commonhold association funds are funds of the company, not of the directors. With respect, we believe that that is a significant distinction.

Clearly, the purposes for which Section 42 was included in the 1987 Act do not apply in commonhold and it is not necessary for the directors of the commonhold association to be placed under trustee duties in relation to reserve fund moneys.

I hope that that explanation is sufficiently clear to persuade the noble Lord on this occasion and that he will see some merit in the way in which we have advanced this matter.

Lord Kingsland

I think that the noble Baroness has approached the solution at which she finally arrived from a different angle from that of the noble Lord, Lord McIntosh of Haringey.

Lord McIntosh of Haringey

The idea that this Government should not be seamless is utterly unacceptable. I agree with every word spoken by my noble friend Lady Scotland. I would have said the same myself.

Lord Kingsland

I do not say that the noble Lord does not agree with his noble friend Lady Scotland. I wish merely to point out that when this matter was discussed on the last occasion, the argument used by the noble Lord in support of this conclusion was entirely different.

I am not surprised at the words of the noble Baroness. I shall reflect on her answer and consider whether this matter might be brought back on Report with the possibility of putting it to your Lordships' House. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 38 agreed to.

Clause 39 [Rectification of documents]:

[Amendments Nos. 81 to 83 not moved.]

Clause 39 agreed to.

Clause 40 [Enlargement]:

[Amendment No. 84 not moved.]

Clause 40 agreed to.

Clause 41 agreed to.

Clauses 42 to 57 agreed to.

Schedule 4 agreed to.

Clauses 58 to 64 agreed to.

6.45 p.m.

Baroness Gardner of Parkes moved Amendment No. 84A: After Clause 64, insert the following new clause— "COMMONHOLD COMMISSIONER AND REGIONAL BOARDS (1) The Secretary of State may by regulations establish the post of Commonhold Commissioner. (2) The Commonhold Commissioner may determine such disputes and complaints arising within a commonhold association as the Secretary of State may by regulations prescribe. (3) Regulations may provide for the establishment of Commonhold Regional Boards which may act on behalf of the Commonhold Commissioner. (4) The Commonhold Commissioner shall, on receipt of an application for an order under subsection (2) above—

1. (a) determine the application himself, or
2. (b) remit the application to the appropriate regional board for determination, as he considers appropriate.

(5) The power to confer jurisdiction on a tribunal under section 64(3) above shall include the power to confer jurisdiction on the Commonhold Commissioner.

The noble Baroness said: I tabled the amendment after having spent most of the summer Recess in Australia. I lived in a strata title unit in New South Wales, an arrangement which is the equivalent of commonhold. That experience taught me a great deal about the difficulties that people encounter in such apartment blocks. It also made me curious to learn as much as I could about the legalities of the New South Wales system.

I invested in a definitive volume on the subject, Strata Title Units in New South Wales, although I should tell noble Lords that it was horribly expensive. It provides all the information required to respond to many commonly asked questions and is written in such a way that ordinary people can understand it. I was interested to learn that the author of the book had been the commissioner for strata title. I wondered why a commissioner had been appointed. I learned from the book the reasons why the position was created. My proposal for the establishment of a commonhold commissioner and regional boards seeks to create a parallel with the strata title commissioner.

Perhaps I may draw the attention of Members of the Committee to the text of this book. However, first I should point out that many people lived in strata title accommodation before any specific law had been enacted to control such accommodation. Until a law was passed in July 1973 and enacted in 1974, any dispute between individuals or bodies corporate, could only be remedied by instituting proceedings in the Supreme Court. In many instances the nature of the dispute neither warranted the attention of that Court nor was it practicable to institute those proceedings. It was for this reason that once a dispute arose, whether between residents in the scheme or between a resident and the body corporate, it lingered on until such time as common sense prevailed or the disputants found some other means by which it might be resolved". People became extremely frustrated when they found that their problems could not be dealt with in a simple and straightforward manner. The book goes on to explain that: The Act creates the position of Strata Titles Commissioner —whose equivalent would be a commonhold commissioner— and invests in the holder of that position the power to determine a wide range of disputes or complaints capable of arising within a strata scheme. It further provides that within a prescribed area, there shall be a Strata Titles Board". I shall not go into the detail at this point because later I can give the book to the Minister, who might be interested to read it. However, I shall cover one or two further points: [The board] is invested with exclusive jurisdiction to hear certain types of dispute which, through the nature of those disputes, merit judicial determination. In the case of any dispute capable of being determined by the Commissioner, there is no right of appearance of the parties before the Commissioner". The text covers the details of application and so forth. It then states that: It should be appreciated … that only disputes arising within a strata scheme, are capable of being settled by either the Commissioner or a Board. Disputes arising under any other form of property ownership". are not covered by this jurisdiction. Furthermore, any dispute arising between the participants of two different strata schemes or between a participant in a strata scheme and an occupier of adjoining premises unrelated to the scheme, are equally incapable of being determined under this legislation". The book contains a great list of the kinds of cases that can be determined. I was particularly interested in one example—there are a number of examples given—which is exactly the kind of thing that occurs even now in other types of properties. Example No 1 states: The body corporate has resolved to invest the moneys which it holds in its sinking fund for a period of five years. A number of proprietors in the scheme are of the opinion that the bulk of moneys will be required within the next two years to pay for repainting of the common property. Those proprietors would be entitled to seek an order", from the commissioner requiring that this be taken into account and a decision made.

The essence of it is that it would be an inexpensive way of operating the system. If, as the Government claim, they really want to see commonhold come in, it is important to place a provision such as this into the Bill at this stage so that if at a later time it was found that such a commissioner was needed, one could be appointed quite simply. It will be no good at all if we have to come back with further primary legislation to do this. That is the kind of thing that never happens soon enough. If we consider how leasehold and commonhold have taken years to reach this point, it would certainly be a long time before there was enough parliamentary time to come back again on this.

I do not think that it is at all parallel to the ombudsman scheme referred to in Clause 41. It is quite different from that. The idea is to make it easy for people to handle disputes and to reduce the very high cost of the legal fees involved. I was impressed in New South Wales by how simple all kinds of tenancy matters are and how minimal are the costs for both landlord and tenant compared to this country in terms of letting or sale of a lease. It was quite enlightening for me to see the difference.

It is a simple idea. I am putting it forward today in order that the Government may give thought to the matter. I obviously do not expect the amendment to be accepted without thorough investigation, but it deserves thorough investigation as it may prove to work very well. It would show that the Government are really serious about wanting to see more commonhold in this country. I beg to move.

Lord Monson

In rising to support the noble Baroness, Lady Gardner, perhaps I may clear up a misconception on the part of the Government. At Second Reading, I ventured to suggest that, for all the Government's good intentions, the commonhold system would not automatically lead to sweetness and light all round. In his reply, the noble and learned Lord, Lord Falconer of Thoroton, said: We would be grateful to hear from the noble Lord"— that is myself— on any detailed points of concern so that we can work with him to try to reduce as much as possible any problems in the working of commonhold".—[Official Report, 5/7/01; col. 919.] I am afraid that I have no suggestions to make.

I am not blaming the Government for anything; I think that they have done as good a job as they can. The problem lies with human nature. It is in the nature of neighbours to quarrel sooner or later. Those in semi-detached or terraced houses will quarrel more frequently than those in detached houses; those in flats will quarrel more frequently than those in semidetached or terraced houses. In flats, noise comes not only laterally but from above and below, and there is the added problem of the eventual use or misuse of common parts.

This applies equally of course to leasehold flats where the lessees have the right to manage, as I know from personal experience, albeit at one remove, as I have mentioned two or three times before. I do not think anything can be done about it. You can draw up a very rigid legal framework, but there still has to be give and take between occupants of flats which cannot be encompassed within a legal framework. There are bound to be disputes and the proposal of the noble Baroness seems as good a way as any of resolving them.

Baroness Scotland of Asthal

May I say straightaway to the noble Baroness, Lady Gardner, how pleased we are that she is involving herself with such energy in this regard. I shall be very pleased indeed to see the results of her investigations. I can reassure her that we are committed to the development of commonhold and want to see it thrive.

The noble Baroness, Lady Gardner, is widely experienced in the ways of commonhold in other jurisdictions. As she is aware, while developing this Bill we have quite shamelessly borrowed good ideas from a number of other jurisdictions. We make no apologies for that. We are aware of the good work done by the strata title commissioners and their counterparts around the world, but we wonder whether the dispute resolution function is not better carried out in the way that we are proposing.

To arrive at the noble Baroness's model, particularly in the early stages of commonhold, would be prohibitively expensive. Of course there will be disputes within commonhold, and of course they will need to be settled—preferably by a body with relevant expertise—but a specifically appointed commissioner, with supporting staff and suitable accommodation, is not the only way to approach the problem. As I say, in the early stages of commonhold development it is perhaps not justifiable.

As the noble Baroness will be aware, we are keen to promote alternative dispute resolution processes in the commonhold context. As the noble Baroness mentioned, Clause 41 provides for the approval of an ombudsman scheme. Our thinking at the moment is that the commonhold ombudsman scheme should be very closely modelled on that of the Independent Housing Ombudsman, whose input into our planning process has been most welcome and has been viewed by many as a great success.

One of the possibilities open to us would be to appoint the Independent Housing Ombudsman as the commonhold ombudsman in the first instance. This would bring us expertise, a wide range of alternative dispute resolution processes, excellent value for money and a system well used to dealing with disputes from all around the country which works well and is well respected.

In other jurisdictions, as the noble Baroness said, the equivalent of the proposed commissioner has other duties such as the maintaining of registers, zoning and planning regulation and the collection and scrutiny of accounts. All of these functions are carried out by other distinct bodies in England and Wales, and the noble Baroness has recognised this in proposing only that the commissioner should deal with disputes.

I hope that I have said enough to persuade the noble Baroness that we are taking dispute resolution seriously and intend to see that it is in good hands from the outset. An appropriate mixture of locally served notices, an ombudsman, tribunals and courts ought to provide all that we need to resolve any dispute arising in commonhold.

We shall look at this matter because it is our intention to have a system which will give effective resolution, speedily and in a cost-efficient way, for those who engage in commonhold. We gratefully take into account everything that the noble Baroness said in relation to this matter. We thank her for the interest and the energy with which she has raised these matters in the past. It has given us great pause for thought.

Baroness Gardner of Parkes

I thank the Minister for her reply. I would draw her attention to the fact that the amendment does not insist on the making of an appointment but gives the power to make such an appointment. While I appreciate that at the outset it would be costly, by the time such an appointment was to be made it would represent a great saving on legal costs. That is why I think it is well worth considering. I ask the Minister to look at this in detail between now and the next stage of the Bill.

One example that I did not refer to concerned someone who wished to put a barbecue where it would offend the nostrils of everyone above. That is the kind of situation that was resolved. It may not be appropriate in our climate, but it is a typical instance of what can be simply resolved.

Of course, it was not ever done without a fee. The applicant always had to pay a fee, and a separate fee for every separate item in dispute. The intention was that the system should be not exactly self-financing, but inexpensive.

I understand that the setting up of the structures could be expensive, especially if it involved duplication. Nevertheless, I should like to see a provision of this kind on the face of the Bill to permit its introduction at a time when commonhold became common by which time a large number of people would be involved and it might then be an economy. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clauses 65 and 66 agreed to.

Schedule 5 agreed to.

Clauses 67 to 69 agreed to.

Clause 70 [Premises to which Chapter applies]:

7 p.m.

Lord Kingsland moved Amendment No. 85: Page 33, line 8, at end insert ", and (d) no part of the premises is let on a tenancy to which Part 2 of the Landlord and Tenant Act 1954 (c. 56) (security of tenure for business, professional and other tenants) applies.

The noble Lord said: When this matter was debated previously in Grand Committee there seems to have been agreement on all sides that there is a problem with mixed development buildings—in that it is generally inappropriate for the residential tenants to be managing the commercial parts of the property. Commercial tenants expect commercial management of premises.

A landlord's involvement in the management of the commercial part is generally much more time consuming than in relation to the residential part. The buildings in the residential parts must be kept in repair; but there is not on the whole a large dispute about what needs to be done. Disputes are mostly about timing and cost. Decisions regarding commercial premises, however, have to be taken on a much more proactive basis. The landlord has to decide what works have to be done to make the premises attractive for new tenants. Moreover, commercial tenants, where the landlord has the repairing obligation, will be much more demanding than the residential tenants, who have to bear the repair cost themselves through a service charge.

That problem was recognised on all sides in our earlier debates. So what was the Government's response? The primary argument advanced by the noble Lord, Lord Whitty, was that allowing the amendment would mean that landlords could evade the residential tenant's right to manage by converting small parts of the development into business premises. The noble Lord gave the example of a landlord converting a broom cupboard into an office and an attic into a factory.

If that is as good an argument as the Government can produce, there should be little opposition to my amendment. It is obvious that, in order to convert a broom cupboard into an office, there must be planning permission. I should like to see an attempt to install a steam hammer for metal pressing in the attic of the average British flat! No doubt there might be a risk of a landlord seeking to convert part of a block of flats into commercial premises; but the reality is that this will not occur in any but a very few instances. Residential blocks are, by and large, simply not suitable for conversion into commercial premises.

The noble Lord, Lord Whitty, also drew attention to what is now Clause 94(6)(a) of the Bill. This, he said, meant that commercial parts would not be subject to the right to manage. Let me say at once that the clause is uncharacteristically opaquely drafted. If the intention is that the responsibility for the commercial parts should rest with the landlord, it does not say so. Moreover, it leaves almost unworkable demarcation disputes. Just what are, functions with respect to a matter concerning only a part of the premises consisting of", in the case under discussion; namely, a commercial unit?

A fairly standard matter that arises in the case of shops on the ground floor of mixed developments relates to the frontage of the shop and the type of advertisements that may be displayed. After the right to manage has been exercised, is that a landlord's responsibility, or an RTM company's responsibility?

The noble Lord, Lord Jacobs, suggested in Grand Committee that landlords should be given 999-year leases on the commercial part. I for my part can see that this could be a most productive way forward, although it is noticeable—although not necessarily significant—that the noble Lord, Lord Whitty, did not address the suggestion.

It is the view of this side of the Committee that the Government's proposals for mixed developments are, as currently formulated, unhappy. The only practical solution to these problems, for the time being, is to exclude mixed developments from the scope of the automatic right to manage. This would not prejudice residential tenants with bad landlords, because the current rights to manage would still exist. I beg to move.

The Minister of State, Department for Transport, Local Government and the Regions (Lord Falconer of Thoroton)

The noble Lord's amendment would have the effect of disapplying the right to manage for all properties where any part of the premises was subject to a business tenancy. As he said in introducing the amendment, the matter was discussed previously in Grand Committee and my department has given it earnest consideration.

As my noble friend Lord Whitty explained previously, we cannot accept such an amendment. The right to manage is intended to allow leaseholders who have a majority stake in a property to take over the management of that property. The amendment would have precisely the opposite effect; indeed, it would prevent leaseholders who had acquired 99 per cent of a property on long leases being able to manage the block merely because the remaining 1 per cent was subject to a business tenancy. It would open up a serious loophole which an unscrupulous landlord would be eager to seize upon. He could frustrate the right to manage by letting a small part of his property on a business lease. It must be remembered that business leases extend way beyond factories; they extend to professional activity as well. The practical effect of the amendment would thus be to allow landlords to put any property that they wanted outside the scope of the right to manage. I accept that that is not the intention, but that is what would happen.

The noble Lord, Lord Kingsland, suggested in Grand Committee that if the amendment were not acceptable—it is not, because it excludes a significant body of people from the protection afforded—we might wish to consider bringing forward an amendment of our own which had the effect of excluding the commercial element of a mixed-use block from the right to manage. Other Members of the Committee strongly supported his approach. I mention my noble friend Lord Lea. I appreciate that Amendment No. 86 in the name of the noble Lord, Lord Kingsland, is intended to achieve that. But, as I have said, we believe that it would go much further in its effect and that it would also prevent the leaseholders being able to manage the common parts.

Those who have been involved in this area over a long period of time—much longer than I—will know that we have looked long and hard at how best to apply the right to manage to mixed-use properties. They will also have heard us set out the very real problems that would be encountered in any attempt to impose a statutory division of management responsibilities within an interdependent block.

We have reflected hard on these proposals since the Bill received its Second Reading but still find them intractable. The fundamental difficulty is that responsibility for the fabric of a structure as a whole for related matters such as insurance for the structure and for any parts or services which are common to both the domestic and the non-domestic sections of the block could not sensibly or realistically be divided between the two parties. It would leave the landlord responsible for the fabric of the property. Only those responsibilities that relate solely to the interior of the domestic parts and any common parts exclusively associated with them would transfer to the RTM company. In most cases, that would be of little use or benefit to the residential leaseholders. All the major management decisions and most costly aspects of management would remain with the landlord, who would continue to recoup the costs from leaseholders through the service charge. The right to manage would in effect be totally emasculated simply because 1 per cent of the property was a business tenancy.

I appreciate that the amendments may stem in part from concern that the RTM company might lack the motivation and expertise to manage the non-domestic part successfully. 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. Clause 93(6)(a) explicitly reserves to the landlord all management functions relating exclusively to units that are not leased to a qualifying tenant. Although the problem is difficult, we remain satisfied that the Bill's approach is the best solution available at this time.

We resist also Amendment No. 87, which would remove the provisions that permit the right to manage to be acquired for mixed-use properties with no more than 25 per cent in non-residential use. I appreciate that, if we were to accept either of the other amendments, that threshold would not be needed, but as we do not accept them, we need to retain the threshold. In those circumstances, I invite the noble Lord to withdraw the amendment.

Lord Kingsland

The noble and learned Lord will not be surprised that I am exceedingly disappointed. Mixed-development buildings form a central part of the Government's thinking for 21st century urban development. It is crucial that the people who inhabit those developments can enjoy the right blend of legal rights and duties to ensure that they have the incentive to maintain the fabric of those buildings properly. If the Government's town and country planning philosophy in relation to mixed development is to succeed, it is vital that the Government find the appropriate legal framework.

I accept entirely the Minister's assurance that much cerebration took place over the summer to find a better balance. I am despondent that—despite the intellectual resources that the department has at its disposal, which are considerable and renowned—-a solution cannot be found. I will reflect on the Minister's response. It is likely that I shall return on Report with a modified proposal. Meanwhile, I beg leave to withdraw the amendment.

Amendment by leave, withdrawn.

[Amendment No. 86 not moved.]

Clause 70 agreed to.

Schedule 6 [Premises excluded from right to manage]:

[Amendment No. 87 not moved.]

On Question, Whether Schedule 6 shall be agreed to?

7.15 p.m.

Baroness Gardner of Parkes

I refer to those tenants who have enfranchised their properties and now find themselves under a management scheme over which they have no control and the terms of which are harsher and more expensive than a leasehold. Will tenants who enfranchise any property under the scheme find themselves more adversely affected? I was telephoned on that subject and have been promised chapter and verse. Why does the Bill not help freeholders of houses in a mews or other location? If the landlord applies for and secures a management scheme, that could have a dramatically adverse effect on the former leaseholders.

Apparently, different policies apply to different major estates. With some, as soon as the property has been enfranchised and is freehold, those concerned are told, "You are on your own. It is up to you what to do". Other estates insist on major repair obligations. In one case quoted to me, the tenants have to pay for a warden to patrol the mews. Can anything be done by amending Schedule 6 or could the issue be dealt with at a future stage?

Lord Falconer of Thoroton

I am not sure that this is the appropriate schedule, but the debate gives me the opportunity to acknowledge the problem that the noble Baroness identified. We are reflecting on the correct approach. I cannot guarantee at the moment that the correct approach is to amend the Bill but we will let the noble Baroness know how we intend to deal with the issue.

Schedule 6 agreed to.

Clause 71 [RTM companies]:

Lord Kingsland moved Amendment No. 88: Page 33, line 26, leave out "a" and insert "an

The noble Lord said: The phrase "a RTM company" is shorthand for "a right-to-manage company" but the Bill does not define an RTM company as a right-to-manage company. In other words, "a RTM company" is, as a matter of statute, simply an RTM company—not shorthand for a right-to-manage company. I beg to move.

Lord Goodhart

This can be described as an Earl Ferrers amendment. Late one evening during the progress of the House of Lords Bill, we had an extensive debate and a Division on whether the reference should be to "a hereditary peer" or "an hereditary peer". On that occasion, I disagreed with the noble Earl but I think that the noble Lord, Lord Kingsland, is right. The Bill ought to be drafted in a way that reads the same as it will be pronounced. I do not imagine that even anybody on the Government Benches would talk about "a RTM company".

Lord Falconer of Thoroton

Everyone had the same thought. Maybe it is a blast from the past. I am told it is simply a matter of drafting convention. I am informed that where a Bill creates a new entity such as the RTM company, the standard practice is to refer to it as "a". That does not take the matter much further forward but clearly parliamentary counsel proceed on the basis of convention. I do not feel remotely confident to intervene. Throughout the progress of the Bill, I will force myself to refer to "a RTM company"—and respectfully ask the noble Lord to withdraw the amendment.

Lord Kingsland

If that is so, drafting conventions are hardly ambassadors for the English language.

It seems to me that this is an opportunity for the Minister to create some constitutional law. He can exploit the opportunity by making a distinction here between abbreviations that are abbreviations of a full statutory definition and abbreviations that are not. In other words, it might be understandable if "RTM company" had been defined somewhere in the Bill as a right-to-manage company in full. But in this case it has not been so defined.

"An RTM company" is, as a matter of statute, simply an RTM company. In those circumstances, to describe it as "an RTM company" is not only an abuse of the English language; it also makes any convention that insists that that be the case seem absurd. I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 89 and 90 not moved.]

Lord Kingsland moved Amendment No. 91: Page 33, line 28, leave out "guarantee" and insert "shares with at least the minimum paid up capital, divided into "A" shares and "B" shares

The noble Lord said: This grouping includes Amendments Nos. 92 and 93. I shall speak, first, to Amendment No. 92, and then deal with Amendments Nos. 91 and 93. In saying that this amendment is an important one, one has to acknowledge that every amendment is, in a sense, an important amendment when one is addressing a legislative document.

We believe that this amendment is essential in order to make the right to manage workable. The proposal put forward here is a modification of what we proposed when the Bill was last in Committee. The proposal that we made on the previous occasion was that RTM companies should be ordinary limited companies with a share capital. The reason for that proposal is simple: it is important to realise that an RTM company is a small business. Its business is the management of blocks of flats. No business can be run without some working capital.

In Grand Committee, I gave what I thought to be some simple examples in that respect. Let us suppose that a contract for works is let to builders. As not infrequently happens, the works prove more extensive than anticipated and the costs overrun the estimate. Where will the RTM get the money to pay for the overrun? It will only have raised the estimate by way of service charges; and getting in more service charges cannot be done that quickly. No bank will lend money because the RTM company has nothing to offer by way of security. Hence my proposal that RTM companies should have some share capital.

Noble Lords may wonder what response the Government gave to this point in Grand Committee. The noble Lord, Lord Whitty, said: I appreciate that the leaseholders' company which takes over the management of the property needs to have access to funds". So, I respectfully concluded that the Government accept that RTM companies need to have some money. So far, so good. But what did the noble Lord propose should be clone to solve the problem? The answer is precisely nothing. The noble Lord, Lord Whitty, went on to say that requiring, share capital would price a lot of leaseholders out from the start and create far too great a threshold for them to pass through into the right-to-manage company".—[Official Report, 27/2/01; col. CWH 125] With the greatest respect to the Minister, that is not an answer. If an RTM company needs money to operate, it needs money to operate. Just saying that it is all too hard for the tenants is simply, with respect, naive. The RTM companies run a great risk of failing unless they have adequate working capital.

On behalf of the Liberal Democrats, the noble Lord, Lord Goodhart, said that even if tenants did raise share capital in order to start an RTM company—I trust that If am not misinterpreting him here, though I am sure that he would be the first to point that out to me if that were the case—the first thing that the new RTM company would do is give all the tenants a year's service charge holiday. The directors of any RTM company that did any such thing might well find themselves the subject of directors' disqualification proceedings if the RTM did, in consequence, fall into financial difficulties.

None the less, we on this side of the Committee sought to modify our proposal in order to make it more attractive to the Government. The proposal put forward in the amendment now before us is that RTM companies remain companies limited by guarantee but with a substantial guarantee given by the tenants. Under the Bill as currently formulated, RTM companies will be formed with each member having to contribute £1 to the company in the event of the RTM company being wound up. On that basis an RTM company is effectively worthless.

Under my proposal, the guarantee given by each tenant would, in broad terms, have to be the equivalent of two years' service charges. The advantage of this proposal is that an RTM company would have a borrowing capacity from the start to enable it to obtain some working capital from a bank. Yet, at the same time, the tenants would not actually have to part with money at the start. As I understand it, that was the main objection to the original proposal. Thus our amendment would lead to RTM companies being much better able to cope with the demands that they are likely to face from the outset. I commend it to the Committee.

I turn now to Amendments Nos. 91 and 93. We believe that these amendments are essential in order to make the right to manage workable. There are two aspects involved: the first is to ensure that RTM companies are adequately capitalised, which I have just discussed; and the second is to recognise the landlord's important interest in the RTM company.

The Bill proposes that landlords should be members of the RTM company with one vote. The landlord would have no right to sit on the board. The extent of the landlord's rights would be to attend general meetings of the company and be out-voted every time by the tenant members of the RTM company.

I understand that the Liberal Democrats propose that the landlord should have no involvement at all in RTM companies. I have to say that I find that position difficult to understand. In any event, I am not sure that it would be compliant with the Human Rights Act because the landlord would be deprived of an involvement in a property in which he has an interest.

The only way properly to recognise the landlord's legitimate interest in the property is to allow him to sit on the board of directors. The technical way in which that can be done is to create two classes of shares—A shares, which are held by the tenant, and B shares, which are held by the landlord. I beg to move.

7.30 p.m.

Lord Goodhart

Our amendment, as the noble Lord, Lord Kingsland, said, would remove the landlord from membership of the RTM company. However, that amendment is the first amendment of the next group, so I shall not speak to it now, although the subject has been raised.

Lord Falconer of Thoroton

I hope that the noble Lord, Lord Kingsland, will not be upset. I know that the noble Lord, Lord Goodhart, will not be upset when I say that I do not intend to reply to that amendment until it has been moved.

The group to which the noble Lord, Lord Kingsland, spoke refers to the constitution of the RTM company. As has been made clear earlier in the Bill, we believe that it should be a company limited by guarantee. The noble Lord proposed that it should be a company limited by shares when we discussed the matter earlier in connection with commonhold. The general proposition of the noble Lord, Lord Goodhart, was that all the companies provided for in the Bill should be capable of being limited liability partnerships. Although the point was only touched on by the noble Lord, Lord Kingsland, I should perhaps deal with it now.

The noble Lord, Lord Kingsland, tabled a similar amendment in the previous Committee proceedings and my noble friend Lord Whitty explained why such changes were not appropriate. I do not think that anything has been said today to change the position fundamentally or to persuade us otherwise.

To remind noble Lords of our reasoning, we considered it important in the first place that the three different companies provided for in the Bill—the RTM company, the RTE company and the commonhold association—should have the same basic structure. That will allow those leaseholders who wish to do so to move with relative ease through the three. Where they have acquired the right to manage, the leaseholders may then wish to use the same company as the vehicle to purchase the freehold. The amendment would prevent that happening. In particular, it would mean that leaseholders would always have to set up separate companies to acquire the right to manage and to purchase the freehold. I appreciate that the noble Lord, Lord Kingsland, has now proposed that the commonhold association, but not, so far at least, the RTE company, should be a company limited by shares. He will know from the debate on his earlier amendments that that proposition is not acceptable to the Government.

The noble Lord suggested in the previous Committee that it would be possible for a company limited by shares to mutate into a company limited by guarantee. We sought advice on that interesting view and have been told that that cannot happen. Furthermore, that does not address the fundamental issue of how a single company can be both an RTM company and an RTE company at the same time. If we were to accept the noble Lord's amendments, one would have to be limited by guarantee and the other by share. I cannot see how it is possible for the same company to be limited simultaneously in two different ways.

Our more fundamental objection is to the twin proposition that the RTM company, as a company limited by share, should have a high minimum amount of share capital and that individual members should take on an equally high minimum personal liability. As the noble Lord, Lord Goodhart, rightly noted in the previous Committee, the formulae suggested by the noble Lord, Lord Kingsland, would effectively price many leaseholders out of exercising the right to manage. While I appreciate the good intentions behind the amendment, the practical effect would be to make the right to manage inaccessible to the vast majority of leaseholders. As my noble friend Lord Whitty said in Committee, it will create an incentive for the landlord to make the service charges as high as possible. Indeed, if he can make sure that the leaseholders struggle to pay them once, he can be sure that it will be impossible for them to accumulate enough to pay them effectively for a second and third time. We cannot agree to the opening up of such a glaring opportunity for landlords to undermine the right to manage.

That said, I can well appreciate concerns that the leaseholders who take over the management of a property should have the necessary funds behind them to be able to do the job properly. We agree and strongly encourage them to do so. But, as has been said previously, that is a matter for guidance and not for the face of the Bill. Leaseholders already have to pay for the management of the property and will therefore exercise the right to manage, knowing that they will have to meet the costs that they run up themselves. The additional requirement is unnecessary and would be a very heavy burden.

The objection remains the same whether the sums have to be paid up front as share capital or guaranteed in cases of future liability, which is the twist that the noble Lord, Lord Kingsland, has brought to the debate this evening. The suggested requirement to pay two years' service charge is too high. It is a loophole for landlords to push up charges, to try to frustrate the right to manage and generally to price leaseholders out of exercising the right to manage. Whether they do it by having to give a guarantee to that effect, or whether they have to put it up front in the form of share capital, the barrier is the same.

The noble Lord also proposed that either the freeholder, under Amendment No. 98, or the landlords together, under Amendment No. 95, should have the right to appoint a minimum number of directors of the RTM company. We do not see why that is necessary and certainly do not think it appropriate. As has been said many times, the right to manage will give everyone with a significant stake in a property a balanced and proportionate say in its management. I cannot see why we should unbalance that by giving landlords the right to insist on their own directors.

Those proposals seem to be based on the unhelpful assumption that leaseholders cannot be trusted to manage the property in which they have acquired the majority stake and that landlords need some special protection. We disagree. There is nothing to justify the landlord, with his minority stake in the property, having a disproportionate degree of protection. We agree, of course, that everyone with a stake in the property should be able to take action to promote their interest when the RTM company fails to do its job. The Bill already provides for that, but our view remains that such rights should be granted on a fair and equitable basis.

We have no objection in principle to the appointment of a director nominated by the landlord. Indeed, we would see nothing wrong in the landlord himself becoming a director. But we feel that that should be a matter for the members to decide for themselves collectively.

The amendment of the noble Lord, Lord Kingsland, addresses how the Government should set about prescribing the constitution of the RTM company. Your Lordships have already seen an outline draft of the RTM constitution. If the noble Lord, or any other Peer, has concerns about that draft, he is more than welcome to let me know what those are. There will be further drafts—we hope to make a further version available before too long. In addition, there will be full public consultation before the text is finally decided.

In view of the openness on our part, I am disappointed by the amendment tabled by the noble Lord, Lord Kingsland, his suspicions of our intentions and his wish that we make regulations subject to affirmative resolution. He is shaking his head to indicate that my fears are completely misplaced, for which I am grateful. In the light of my remarks, I hope that the noble Lord will withdraw his amendment.

Lord Kingsland

I thank the noble and learned Lord, Lord Falconer, for his full response to my amendment, but I am rather disappointed at what he said—by his tone rather than the content. He seemed to be extremely hurt by the fact that I tabled an amendment on the topic at all. I apologise, but what matters is finding a solution to the problem. RTM companies need adequate resources to ensure that the fabric of the building that they manage is properly maintained. In my submission, the provision in the Bill for the protection of RTM companies and the fabric of the buildings is inadequate.

The noble and learned Lord's response is, "Ah, wait until you see the regulations". Perhaps I have misunderstood and that they are matters that should be covered by regulations and guidance. Is it not reasonable to assume that when these documents become a reality and I glance at them, I shall see the solution to my problem? Is that a reasonable supposition? The noble and learned Lord shakes his head.

Lord Falconer of Thoroton

I shall not respond. I have indicated that making sure that there are sufficient funds is a matter for guidance, not for imposing hurdles of a statutory kind which we believe will debar in practice many leaseholders from exercising the right to manage. What we intend to do in guidance is indicate the kinds of step that the appropriate and prudent leaseholder should take in ensuring that the RTM is sufficiently funded. But it will be guidance; it will not be the kind of statutory requirement that the noble Lord envisages by way of a hurdle before one can set up an RTM, as these amendments propose.

Lord Kingsland

I am most grateful to the Minister for that clarification. Of course I shall return to the matter on Report. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey

I beg to move that the House do now resume. I suggest that further consideration in Committee be resumed not before 8.40 p.m.

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

House resumed.