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A flying freehold is a freehold above another property, so called because it relies on positive covenants of support from the owner of the property below. At some point in the future, when the original owners move, the covenants will no longer be enforceable. As a result, mortgage lenders are reluctant to lend on the security of such properties and it is extremely difficult to sell them.
Leasehold presents no such problems. A lease is a form of contract, and contract terms pass from successive sellers to buyers. This means that, in practice, when a developer sets up a scheme with ownership of interdependent properties and maintenance of common parts, it is based on leasehold ownership. Leasehold properties change hands subject to positive and restrictive covenants in the lease and the problem with freehold covenants is circumvented. However, in its place arise the drawbacks of long leasehold.
A long lease is a wasting asset. This is because a lease is granted for a defined duration, a specific term of years. However long the period, at the end of the lease the property reverts to the freeholder. Even before reversion, the gradual reduction of years left to run is significant for the long leaseholder. As the years remaining in the lease diminish, so the value of the leaseholder's interest decreases. From the moment the lease is granted, it wastes away. The problem is indiscernible at the commencement of a long lease but becomes acute as the date of reversion looms.
In many circumstances, the lease may be renewed but the landlord may charge leaseholders a great deal of money or refuse the extension. Leaseholders are understandably distressed by this, as a long leasehold costs nearly as much a freehold, yet must ultimately be returned to the freeholder who can sell another lease at the going rate. It can be difficult for a leaseholder to accept that the amount paid for a long lease does not leave one the outright owner of the property.
Leaseholders invariably pay a service charge to their landlord. That is an amount of money levied by the landlord and used legitimately to maintain, repair and run the development. Leaseholders complain that they do not participate in determining the amount, and rightly protest when the service charge they pay is used in a manner they consider inappropriate. For example, the leaseholders pay a service charge for regular works but the landlord may execute the works himself or herself to a questionable standard or install features that are not required or desired by the leaseholders.
Our approach to tackling these long-standing problems has been based on keeping provisions as simple and flexible as possible to provide quick and practical solutions and avoid over-elaborate proposals that could have unintended consequences.
As a freeholder, the unit-holder will not suffer any diminution of the unit's value. The asset will not waste. At no point will a unit-holder relinquish the unit to a higher authority. The unit belongs entirely to the unit-holder. No one has a greater interest in a unit than the registered unit-holder; no landlord will interfere with the unit-holder's enjoyment of the unit.
Mr. Nigel Waterson (Eastbourne): The Minister rightly describes all the benefits of commonhold versus leasehold tenure. However, how does he expect commonhold to take hold in this country if he still maintains that existing developments should require 100 per cent. consent of all interests and that in new developments it should not be mandatory to have commonhold from day one?
Mr. Wills: If the hon. Gentleman will bear with me, I shall come to that point. That is a familiar argument, and it was rehearsed extensively in another place. I will come to that point; I want to spend a little time addressing those concerns, but in their proper place, so I hope that the hon. Gentleman will bear with me for just a few moments. [Interruption.] If the hon. Gentleman would listen to me, he might learn a little more about our proposals for commonhold. It is important to understand exactly what the new form of commonhold will entail.
Each unit-holder, and only the unit-holders, will be members of the commonhold association, which will govern the community and manage the common parts. The commonhold association will be a private company limited by guarantee. In another place, the Government were questioned about choosing that vehicle as the basis for commonhold, rather than another Companies Act company, a limited liability partnership or a tailor-made corporation.
The Government believe that, rather than creating a new corporate body for the commonhold association, it is preferable in the interests of simplicity and familiarity to build on existing provisions. We believe that a company limited by guarantee will offer the most appropriate route. Legal professionals are adept at working with the existing corporate structure, so advice will be available for potential unit-holders and commonhold developers from the start. Many leaseholders have already elected to enfranchise in that way. Using the existing corporate structure throughout the Bill will standardise the commonhold and leasehold reform procedure.
Assuming that the informal processes fail, the first formal process will be an internal complaints procedure. Secondly, under clause 41, we will prescribe the use of the commonhold ombudsman. The commonhold ombudsman will be modelled on the independent housing ombudsman, who has a wide range of dispute resolution procedures at his disposal, including arbitration, mediation and adjudication. The last recourse available will be to the courts. The commonhold rules, coupled with the dispute resolution procedures, will ensure that positive and negative obligations can be imposed on unit-holders and that they can be enforced by the commonhold association.
Ms Ann Coffey (Stockport): As the Minister will be aware, leasehold valuation tribunals are a very formal forum, and both parties are usually accompanied by very expensive lawyers. Has he considered strengthening the more informal independent arbitration procedures as a way of resolving disputes between landlords and leaseholders? He will know that landlords are not now obliged to go to independent arbitration even if the leaseholders would like to do so. I should be grateful if the Minister would consider some of my constituency correspondence, between the Tatton Court residents association and Peveril, which shows the current problem with using leasehold tribunals to try to solve such disputes, and makes a good case for strengthening independent arbitration.
Mr. Wills: I am grateful to my hon. Friend for that intervention, and if she would like to give us that constituency correspondence, my hon. Friend the UnderSecretary, who has responsibility for leasehold reform, and I will certainly consider it. Of course, we would always encourage people to try to resolve disputes before they go to a tribunal. We are carefully considering the working of the leasehold valuation tribunals, and I shall say something about that later in my speech. We are trying to encourage greater use of pre-trial hearings in that procedure, and I hope that that will address many of my hon. Friend's concerns.
Mr. Boswell: I make no particular claim to expertise in these matters, except perhaps to say that, like many hon. Members, I am a long-leaseholder. I am grateful to the Minister for explaining in a reasonable way what he seeks to do. Given the exchanges that have already taken place, is he not a little concerned that the programme motion requires the Bill's Committee stage to be completed by the end of January? Although I have no particular wish to be associated directly with that process, given all the angles and extreme legal complexity of the issues, is it really common sense to rush on with that process and try to get it completed in three weeks? Would it not be much better to take a considered look, so as to make absolutely sure that the wrinkles that remain in a matter as complex as this are properly ironed out?