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7.33 pm
Mr. Barry Gardiner (Brent, North): Hon. Members come into the House because we believe that some things are right and that some things are wrong. We come into the House because we want justice for those that the law has been unable to protect. We come to make law and also to change law; we come to improve it and thereby to improve the lives of the people whom we represent. It is for that reason that I wish to speak in this debate.
Since 1884, when the first Leaseholders (Facilities of Fee Simple) Bill was introduced and defeated, hon. Members have sought justice for leaseholders in this country. In the 118 years that have elapsed since then, they have introduced 31 different Bills dealing with leasehold reform. All but two of those 31 Bills have been defeated and, of those two, only one managed to achieve fundamental reform that gave—and then only to a very limited group of leaseholders—the full benefit of home ownership. Such has been the power of property and the landed classes in this country, and such is the injustice that so many people outside Parliament have hoped for years that a Bill might overcome.
For the past five years people in the media, such as Mira Bar Hillel, Sarah Pennels and Karen Wolfson, have campaigned for the Bill. Peter Haler and Tony Essien from LEASE—the Leasehold Advisory Service—have also campaigned for the Bill and all of them would want me to pay tribute today to the years of their lives that Stella Evans, Charlotte Martin, Neil Mulcock, Joan South, Shula Rich, Owen Humphries, Nigel Wilkins, Joyce Glasser, Terence Michael, John Patterson and Muriel Guest-Smith have devoted to trying to achieve justice for leaseholders through legislative change.
Not all those individuals agree with each other—let alone with the Government—and I will freely and honestly say, with some of them overhearing me, that on many occasions most of them have succeeded in being a complete pain. They have certainly refused to let successive politicians off the hook. However, for those of us working in Parliament on the issue of leasehold, they have kept us focused on the problem. Whatever merit there may be in the Bill is due to them. I have the greatest admiration for them all and believe that they deserve the gratitude of the whole House. The faults in the Bill must rest, I fear, with us politicians.
There is both merit and fault in the Bill. It is of course in the nature of Parliament that we are quick to point out the fault and happy to take the merit for granted. However, we should recognise that the Government have sought in the Bill to achieve three important changes. First, commonhold is a form of tenure that is used all over the world. It enables a flat owner to enjoy the full and inalienable benefits of ownership rather than having the mere right to inhabit a property for a designated period of time. Until now, this form of tenure has not existed in England and Wales. The Bill will introduce it, and that is good.
Secondly, the no-fault right to manage that the Bill will give establishes the principle that the leaseholder—the person who lives in the property and who pays the bills—has the right to determine what work needs to be done and how their money is to be spent. That, too, is good.
Thirdly, the process of enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993 has been too complicated and too expensive. It has left many leaseholders no better off because of onerous qualification and residency requirements. The Bill will reduce that burden and simplify the process. That, too, is good.
My hon. Friend the Minister will rightly expect that my remarks will focus on an examination of the Bill's defects. He will know too that I wish to suggest ways in which these may be remedied in Committee. I hope that he will take comfort from the fact that I and others acknowledge the progress that has been achieved and welcome the central benefits that I have just outlined.
At the time that the House was breaking up for the Christmas recess, an application for forfeiture was heard in the county court. The freeholder who made the application was the London borough of Camden and it related to unpaid service charge and ground rent in the sum of £1,266.38. The flat involved is one of three in a converted house and its market value is £350,000. On 13 December, the application for forfeiture was heard and, on 21 December, forfeiture was implemented. Neither the local authority nor the judge in this case appears to have made any inquiries as to the circumstances of the leaseholder or her whereabouts. Forfeiture was granted in a straightforward way and the London borough of Camden has recovered more than its £1,266.38. It has made a profit on top of the debt it was owed—a profit that amounts to £348,733.62. So let no one in the Chamber say that forfeiture is a reasonable penalty to be available in the hands of landlords.
To its credit, the Camden New Journal noticed the case and made further inquiries. Unlike the council or the court, it bothered to check the land registry and discovered that the flat had no mortgage outstanding on it which suggested that, at the very least, the owner would have been easily able to secure funds against her equity in the property and pay the amount due. From talking to neighbours, it also discovered that the owner had not been seen for two years and was thought to have had a breakdown. If that is correct and the woman is in psychiatric care, she faces the prospect on her return to health of finding that she has no home to return to and has suffered the most enormous financial loss. That is what forfeiture means in practice. It is the power that a freeholder has to repossess a person's home in relation to what may be an insignificant debt. It is unjust and this Bill should abolish it. It does not.
Of course debts must be paid, and the all-party group for leasehold reform and commonhold, which I chair, took evidence from building societies and other financial institutions on how such debts might be handled. They were of the view that such debts could be handled perfectly adequately through the small claims court in the first instance. Ultimately, it should be possible to force a sale of a property in order to pay a debt, but the balance of the funds after settlement of the debt should revert to the leaseholder.
The Minister will argue that the Bill makes it more difficult for a landlord to implement forfeiture. Clauses 160 to 162 do indeed insist, for example, on a determination of the breach before a landlord can serve a section 146 notice for forfeiture under the Law of Property Act 1925. However, such arguments are fundamentally flawed in two respects. First, they fail to
understand that many unscrupulous landlords use the threat of forfeiture as a means of polite extortion. I call such landlords, as my hon. Friend the Member for Burnley (Mr. Pike) remarked, the ground-rent grazers. Grazing animals require vast areas to feed on and they make up in bulk what they lack in quality. Siemarc, Castle New Tower Holdings, the Compton Group, Helpfavour, Shenstone's and Estate Management Ltd. are all ground-rent grazers which have bought up tens of thousands of freehold interests, usually at auction and very cheaply in the north of England.The freehold interests are sold for a few pounds each. Unlike London and the south-east, most of the properties are leasehold houses rather than flats. The ground-rent grazers have little interest in the ground rents themselves. They are usually a nominal sum of only a few pounds per annum. Unlike a service charge, however, a ground rent is due whether demanded or not, and on a house the right of forfeiture can be pursued by the landlord for arrears of ground rent. For the sake of a £4 ground rent that is a day overdue and has not been demanded or invoiced, the ground-rent grazer can start recovery proceedings. On top of the £4 ground rent, recovery costs are then invoiced. That is what those companies want.
I will not forget the case of Mr. Mitchell of Rugeley in Staffordshire who told me that he had paid his ground rent of £20 promptly when reminded, but that his freeholder, Castle New Tower Holdings, had demanded £698.78 for its time and trouble in sending him an overdue notice in which it pointed out that his home was under threat of forfeiture. For many elderly people in such a situation it is the threat that they might lose their home that frightens them into paying such extortionate charges. It is simply no use for the Minister to insist that the Bill will require notification of ground rent or that forfeiture will be made more difficult, because as long as forfeiture exists unscrupulous landlords will use it to extort money from elderly and vulnerable people.
The second reason why such arguments are flawed is perhaps even simpler to understand. It is against natural justice that a creditor should be allowed to recoup vastly more than the amount that they are owed by selling another person's home from under them. It is particularly intolerable when there are perfectly effective alternative means for enforcing the debt without such disproportionate suffering and loss. I urge the Minister to assure the House that this matter will be given the closest scrutiny in Committee, with a view to ending such clear exploitation. Forfeiture should be abolished.
On commonhold, I have welcomed the principle behind it and commented that we lag behind the rest of the world in introducing it. I can now add that we have gone about it in a peculiarly British way. Commonhold is not the completely new and separate form of title that it is in other countries and that campaigners hoped it would be here. It is defined in clause 1 as
- "a freehold estate in commonhold land".
Commonhold unit-owners are, therefore, freeholders. The fact that the commonhold community association must form itself as a limited company under company law has made the Bill unnecessarily complicated. Good
examples of simpler systems are available off the peg from Australia and the United States. I regret that we in this country did not have the humility to learn from them.I wish to focus on two aspects of the introduction of commonhold which can more easily be remedied and on which I hope there may be more chance of changing the Minister's mind. They are the unanimity requirement for conversion to commonhold and the failure to insist that commonhold becomes the default tenure for all new-build blocks of flats or conversions of houses. Before the 1997 election, the Labour Party published a policy document entitled "An End to Feudalism". Some say that it has become quite scarce these days in Government circles, but I am pleased to quote from it. It says:
- "Labour will introduce legislation creating the commonhold tenure. Our proposal is that this should apply where new tenancies are created and where existing leaseholders wish to transfer from their current status. In such cases the support of a majority of the leaseholders will be required to effect the transfer."
In any large block of flats, such as those that make up most of the great estates in London, there are, at any given time, people who are trying to sell their property and who will have no interest in converting to commonhold. There will be elderly people who consider it not worth the investment for the relatively short period of the rest of their lives or who are too ill to get involved in such an undertaking. There are also absentee leaseholders who are sub-letting the premises as an investment and have no interest in participating in a commonhold association. By their insistence on unanimity, the Government have at once held out commonhold as the panacea for the ills of leasehold tenure and simultaneously made it unattainable for all existing leaseholders. It is a quite staggering achievement to neuter one's own Bill before it ever gets on the statute book, but that is quite simply what clause 3 ensures.
Ministers have sought to justify that provision in another place by expressing their concern about possible legal challenge to any interference with an individual's property title against their will. I simply point out that such provision already exists in our law. Under section 36 of the Landlord and Tenant Act 1987 there exists the provision for the county court to make an order amending all leases in a building on the basis of the majority support of the leaseholders. There is no reason why similar constraint could not apply in this case.
Conversion to commonhold should be available on the same terms as the majority consent for leasehold enfranchisement. The spectre of challenge under human rights legislation is one that a Labour Government have seen off in the past. Indeed, the Minister will recall that when the Duke of Westminster challenged the Leasehold Reform Act 1967 in the European Court of Human Rights, it ruled:
- "Eliminating social injustices is an example of the functions of a democratic legislature. More especially, modern societies consider housing of the population to be a prime social need, the regulation
- of which cannot entirely be left to the play of market forces . . . even where such legislation interferes with existing, contractual relations between parties".
Put in common parlance, a Government with, shall we say, less timidity faced down the legal challenge and gave the noble Lord a good whipping. I urge my hon. Friend the Minister not to wreck the centrepiece of his Bill because some duke shakes a legal opinion at him.
This is a fundamental flaw, which the Government must seek to redress in Committee.
Even more timid is the refusal to end leasehold tenure for all new build or conversions to flats. The Government state that the new commonhold legislation needs time to bed down before the option of leasehold is cut off. They ignore the fact that commonhold already works perfectly well in every other legal jurisdiction in the world without the safety net of leasehold. The Government even refuse to introduce a sunset clause for leasehold.
Ministers have stated that developers will prefer to build for commonhold as a premium will attach to it, and leasehold will therefore wither on the commercial vine. That is what Christine Hamilton, and Jeremy Bentham before her, would have called "nonsense on stilts". Any examination of the leasehold market will reveal that there is absolutely no difference in the purchase price paid for a property on a 99-year lease and that paid for a property on a 99-year lease with a share of the freehold. The market just does not recognise any premium, albeit for what is clearly a superior title.
The thought that developers will be tempted to forgo all the financial benefits from lease extension and enfranchisement on a leasehold block in favour of a non-existent premium is ministerial self-delusion on a grand scale. The Bill both precludes existing leaseholders from converting to commonhold and ensures that there will be precious few opportunities for would-be purchasers to take up commonhold tenure in new developments or conversions.
If Ministers are adamant that they will not dispense with leasehold for all new build, I would still offer them one way in which they might honourably cling on to their drug of choice. They should consider including in the Bill a provision that any new build or conversions sold on a leasehold basis are sold only as leasehold with a share of the freehold. There can be no objection to that as it is an existing and proven tenure, but it would deny the landlord the additional opportunity for financial gain from the leasehold system through ground rent, eventual lease extensions and, ultimately, enfranchisements. By taking away that opportunity for exploitation of the tenant, the Government would at least create the chance that some commonhold developments will get built. I urge the Minister to indicate in the wind-up whether the Government are prepared to consider such a compromise, to give commonhold some chance of establishing itself.
I have one final consideration about commonhold. I ask the Minister to liaise with his colleague, the Minister for Housing and Planning, to make provision that the type of property tenure can be admitted as a relevant and material consideration for planning authorities. If the Government are serious about wishing to advance commonhold over leasehold, it would be prudent to allow planning
authorities to discriminate in its favour. I trust that the matter may be considered in the context of the current planning White Paper.Turning to the provisions on leasehold, I welcome enthusiastically the principle of the no-fault right to manage that the Bill introduces. Over 60 per cent. of all correspondence received by the all-party group in the past four years related specifically to problems and complaints about management. The fundamental reason why reform is necessary is that leasehold confers on the freeholder exceptional and unwarranted privileges and powers. Those powers fundamentally distort the relationship of investment and control in a property. Power should be related to the equity stake that one has in a property; under leasehold tenure it is not.
Imagine that I purchase a new car for £12,000 or £15,000 under a leasehold scheme, only to find that the garage recalls it after a month to fit it with a new set of tyres. "Don't worry, they're not needed," I say, "I've only done a 1,000 miles." "That may be so," says the garage, "but we've decided that we want to fit them and we're going to charge you £600 for the privilege." "But it's my car," I protest. "No," says the garage, "you merely own the right to drive around in it for 99 years." We would not consider that a sensible way to own a car. Nor is it a sensible way to own a home.
The value of the freeholder's interest on a property with a 999-year lease is no more than a couple of hundred pounds. By contrast, the leaseholder may have paid hundreds of thousands of pounds for his lease. Yet it is the freeholder who has the effective power in the relationship and who decides how the property is to be run and managed on a daily basis. I repeat: the proper relationship of power and investment has been distorted. It should be that the greater the equity, the greater the control; in fact, it is the reverse. The freeholder decides when a new roof is to be put on or when the heating system is to be overhauled. It is the freeholder qua manager who puts out the tender and chooses the contractor. Yet it is the leaseholder who foots the bill and pays a service charge commission, typically 15 per cent., for the privilege of not being in control of his own home.
Existing legislation gives unscrupulous managers enormous opportunities to exploit the vulnerable. Managers derive their income from commissions received on a building's capital works. It is therefore in the manager's interest to increase the capital cost of work done to maximise their income. The all-party group heard horrifying accounts of corrupt managing agents from a number of witnesses including the police: managers who had failed to maintain properties in accordance with the lease; managers who over-specified contracts and used arm's-length contracting companies to undercut genuine quotations, which they then carried out to cowboy standards, charging exorbitant costs for second-rate work; managers who absconded with leaseholders' funds, and managers who set up their own in-house insurance brokers so as to receive two lots of commission, charging one-off retail-price premiums for property insurance concluded on a wholesale basis.
Adam Smith may not be the most frequently quoted economist on the Labour Benches, but never was a truer word written than when he set down in "The Wealth of Nations":
- "Landlords, like all other men, love to reap where they never sowed."
The Bill gives the freeholder the right to be represented on the board of the right-to-manage company. Worse, it insists that the no-fault right to manage can be exercised only by a limited company—something that will deter many leaseholders from availing themselves of their right in the first place. The freeholder has recourse under the Bill to refer any dispute to a tribunal, and many tenants organisations have made it clear that they consider that large estates will be able to use the threat of legal action once more to impose their will on the right-to-manage company. Leaseholders do experience intimidation by landlords. That is a fact. Giving the landlord the right to sit on the board will inevitably curtail the very freedom of leaseholders to manage their own affairs that the Bill has so properly sought to bestow on them. I urge the Minister to consider what safeguards can be introduced when the Bill goes into Committee.
Before moving from the subject of the right to manage, I must welcome schedule 9. Public sector leaseholders who, under the right to buy, purchased flats situated in council blocks have fared badly. In the 1980s, councils were encouraged to sell off defective housing at the same time as honey-trap legislation encouraged council tenants to avail themselves of the right to buy. They were given council-guaranteed mortgages when commercial lenders would not lend without a full structural survey. Subsequently, right-to-buy leaseholders found themselves paying service charges for what is often an extremely poor standard of service to them as council leaseholders.
Those works designated as improvements have not been challengeable under section 19 of the Landlord and Tenant Act 1985; consequently, council landlords have been inclined to designate works as improvements rather than repairs. Council leaseholders are deeply unhappy that the Bill does not enable them to seek the same redress as their private sector counterparts through exercise of a similar right to manage, but they will welcome clause 147 and schedule 9 with their provisions to ameliorate their position.
I turn now to enfranchisement and the question of valuation. The Bill simplifies certain of the previous regulations governing residency and qualification. That is a good thing and I welcome it. The only way to ensure that all forms of exploitation related to leasehold tenure are finally done away with is to give leaseholders the opportunity to own their own homes absolutely by enabling them to acquire a share of the freehold interest in their property through enfranchisement.
Cost has always been the major obstacle to enfranchisement, and the major element in that cost—at least since 1974—has been what is known as marriage value. Under the Leasehold Reform Act 1967, passed under a Labour Government, marriage value was not deemed to be part of the valuation of the freehold interest. The leaseholder was obliged to pay only the capitalised value of the ground rent plus the reversion of the site value. Subsequently, the 1969 Lands Tribunal ruled in
Custins v. Hearts of Oak Benefit Society that marriage value be calculated as part of the valuation. Immediately, the Labour Government introduced further legislation to overturn that perverse decision. The then Secretary of State for Wales made the Government's position clear when introducing the new provision, stating:
- "It is really a corrective Clause which will be welcomed by one million householders in the country, for it removes the misunderstanding which has existed ever since the Custins decision by the Lands Tribunal".—[Official Report, 22 May 1969; Vol. 784, c. 738.]
I do not seek to embarrass Ministers by quoting their own words back at them—at least I do not seek only to embarrass them; it is just that they stated matters so much more clearly and better when we were in opposition. In the policy document "An End to Feudalism" prepared by my right hon. Friends the Members for Greenwich and Woolwich (Mr. Raynsford) and for Holborn and St. Pancras (Mr. Dobson), the case was stated succinctly, as follows:
- "one of the most complex elements is the provision for 'marriage value', the added value of owning the property and the land together. This has played an increasingly significant role in valuations in recent years. To streamline and simplify the valuation processes, we believe that it is right to go back to the fundamentally sound logic behind the 1967 Act, which did not include 'marriage value' in the valuation process. Its subsequent appearance has tilted the balance significantly in favour of the landowner and there is a strong case for it to be deleted."
Under the leasehold system, a freeholder can sell a property for its full market value—there is no difference between the price of a 99-year lease and the share of the freehold interest—yet after a period of time that property reverts to the freeholder who can sell it again for its full market value. That happens despite the fact that throughout the period of the lease the freeholder has made no contribution to the maintenance and upkeep of the property. In its simplest form, the argument against marriage value is that the freeholder has already received the full market value for his freehold interest. The calculation of marriage value is worked out by reference to the depreciation in the leaseholder's asset. It is that discrepancy between the full market value of an unencumbered 99-year lease and a depreciated lease that represents the marriage value. The leaseholder is therefore
asked to pay a second time through marriage value the loss that he has already sustained from the depreciation of his asset.The overwhelming number of representations received by the Government during their consultation on that issue urged them to scrap marriage value. They should have done so. They are not simply morally wrong to permit it; they are, ironically, technically wrong also. The Government have stated that
- "Most compulsory purchase regimes are based on full open market valuation, and the government does not see a persuasive case on public interest grounds for departing from that principle in this instance."
- "An opinion of the best price at which the sale of an interest in property would have been completed unconditionally for cash consideration on the date of valuation, assuming:
a. a willing seller;
b. that, prior to the date of valuation, there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest, for the agreement of the price and terms and for the completion of the sale;
c. that the state of the market, level of values and other circumstance were, on any earlier assumed date of exchange of contract, the same as on the date of valuation;
d. that no account is taken of any additional bid by a prospective purchaser with a special interest; and
e. that both parties to the transaction had acted knowledgeably, prudently and without compulsion."
- "a prospective purchaser with a special interest".
The RICS practice statement makes it absolutely clear that a leaseholder in a collective enfranchisement must be regarded as a special purchaser—that is, someone to whom the property has a particular attraction that it does not possess for the market in general. According to that statement:
- "The special purchaser is, in almost every case, the owner of either:
i. an interest in land which has or could have a particular relationship with the property concerned, e.g. the owner of an interest in a nearby or adjacent property; or
ii. another interest in the property being valued, e.g. a superior landlord or an under-tenant".
- "A superior landlord or a sitting tenant may be a special purchaser because the merging of the two interests might liberate 'marriage value' which would justify a higher price than any other purchaser could afford to pay".
I earnestly hope that all my criticisms of the Bill are ill-founded. I honestly hope that the Bill will achieve its stated aims. The first of those aims is to encourage the growth of a new property tenure of commonhold for new-build flats and conversions to flats. If more than 60 per cent. of new-build flats in the next five years are commonhold, and leasehold withers as Ministers predict, I will be delighted to eat my words.
The second aim is to enable existing leaseholders to transfer through to commonhold community associations and gain the benefits of an inalienable title to their home. If even 10 per cent. of right-to-enfranchise companies succeed in effecting that transfer, I shall rejoice at my own folly for ever doubting Ministers and their civil servants.
The Bill's third aim is to enable existing leaseholders to throw off the yoke of landlords' managing agents and avail themselves of the no-fault right to manage. If only 10 per cent. of current residents associations successfully establish themselves as right-to-manage companies, I will be astounded by the Bill's success.
The fourth aim is to enable existing leaseholders to enfranchise more easily. In that respect, my threshold drops lower still, to a mere 5 per cent. increase in the number of leasehold blocks that are able to enfranchise. I would be prepared to acknowledge that as a real success for the Bill. The House and the Minister will recognise that I have set exceedingly small benchmarks by which to measure its success. They are a measure of my pessimism and do not in any way reflect the enormous good will that I wish him on the success of the Bill, for which I have campaigned assiduously over the past four years.
I trust that the Under-Secretary will say in her winding-up speech whether her expectations are any higher than mine and whether she accepts that the targets that I have set are fair. The virtue of setting them is that we can assess properly the extent to which the Bill fulfils its purpose. I am confident that in perhaps six or seven years' time we can begin afresh the enterprise of making radical and comprehensive reform to the laws governing property tenure in this country. After all, what is six or seven years between comrades? Leaseholders have been waiting since 1884.
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