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Lord Strabolgi: My Lords, I am sorry to interrupt the noble Lord just before he starts, but I would prefer to describe what my amendments are about before the noble Lord replies to them, although I should be interested to hear what he has to say on Amendments Nos. 27 and 101.

Lord Lucas: Certainly, my Lords. I gave some warning at Committee stage and indeed at Report stage that there would be a great deal to digest on this matter. The reality is always a little bit of a shock. Some 25 pages I have promised, and 25 pages, near enough, we have.

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I said in Committee and at Report that it was necessary to clarify the moment when a relevant disposal took place, particularly as we had introduced a criminal offence for a landlord not to offer the right of first refusal to his qualifying tenants when he wished to sell his interest. This offence will crystallise if a relevant disposal takes place before the offer notices have been served on the tenants, so it is essential that we should define the point of disposal. With your Lordships' indulgence, I shall proceed to do so in some depth.

The crux of all this material is contained in Amendment No. 27, which introduces a new Section 4A into Part I of the Landlord and Tenant Act 1987. All else follows from this. Subsection (1) of new Section 4A applies the right of first refusal to a contract to make a disposal. The remainder of the amendment also applies the right of first refusal to transfers of rights under a contract and to a contract to transfer rights under such a contract. There are further changes to other provisions of the Act, which I shall refer to later.

Amendment No. 28 introduces Amendment No. 101 which is a schedule that restates most of the remainder of Part I of the 1987 Act so as to simplify the procedures for the exercise of tenants' rights, and to apply those procedures in relation to contracts and special cases. Amendment No. 101 is the only other substantive amendment in this group, and it may help the House if I describe how it is arranged, and how it dovetails with the other clauses in the Bill.

Part I of the schedule, which is Amendment No. 101, replaces Sections 5 to 10 of the 1987 Act, which deal with the principal rights of first refusal. Part II of the schedule replaces Sections 11 to 15 of the 1987 Act, which deal with the enforcement by tenants of rights against a purchaser. Part III of the schedule replaces Sections 16 and 17 of the 1987 Act, which deal with the enforcement of rights against subsequent purchasers and termination of rights. Part IV of the schedule contains consequential amendments.

The consequences for the rest of the Bill are as follows: Clauses 91 and 92 of the Bill, and Schedule 6 to the Bill are to be left out, by means of Amendments Nos. 29, 30 and 109, as their content has been subsumed in Amendment No. 101. Clause 89 of the Bill, which amends Section 4 of the 1987 Act in relation to associated companies, remains unchanged. Clause 90 of the Bill, which introduces new Section 10A, the criminal offences, also remains unchanged. Clause 93, which amends the Landlord and Tenant Act 1985, remains unchanged, apart from the effect of Amendment No. 31, which we have already discussed.

I should now like to describe the main features of the schedule in Amendment No. 101, to explain how making an exchange of contracts a "relevant disposal" affects the structure of Part I of the Landlord and Tenant Act 1987.

Part I of the schedule in Amendment No. 101, sets out the principal rights of first refusal. It provides that where the landlord proposes to make a relevant disposal he shall serve an offer notice on the qualifying tenants of the constituent flats. The offer notice will need to comply with the requirements appropriate to the class of

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disposal. These are set out in new Sections 5A to 5D, which cover cases where contracts precede conveyance (the "normal" way of selling property), sales at auction, grants of options or rights of pre-emption, and conveyances not preceded by contract. Section 5E sets out the additional requirements where the disposal is for non-monetary consideration. Noble Lords will recall that procedures for special cases were introduced in Committee and currently reside in Schedule 6 to the Bill. Importing them into the body of the Act will make it easier for practitioners to follow.

New Sections 6, 7, 8 and 8A cover the next stages in the process: either the acceptance or not of the landlord's offer by the tenants, and the landlord's obligations when the tenants accept the offer and nominate a purchaser. The drafting of new Section 6 on acceptance of the landlord's offer has been simplified in comparison to the corresponding provision in the 1987 Act.

Clause 91 of the Bill introduced the new principle of "advance or withdraw" in the subsequent procedures, and these have been imported into new Sections 7, 8 and 8A, which are set out in Amendment No. 101. This means that when one party has received a notice or other document from the other, he must either act on it and advance to the next stage of the procedure, or withdraw from the process. An example is in new Section 8A(4): once the landlord has sent a form of contract to the tenants' nominee, the nominee must either withdraw or offer an exchange of contracts. If either party fails to act when required, this is treated as a withdrawal.

New Sections 8B to 8D cover the landlord's obligation in the special cases of auctions, disposal for non-monetary consideration and options respectively. New Section 8D is particularly interesting as it clarifies an issue on options and rights of pre-emption. The grants of these are relevant disposals, but the transfers following from their exercise are not. This caused a difficulty because tenants are not likely to hear about such transactions until the option has been exercised, and it was unclear whether they had any rights to purchase from the new landlord. New Section 8D makes it clear that they do have such rights. The necessary amendment to Section 4 of the 1987 Act, which deals with exclusions to the right of first refusal, is in subsection (2) of Amendment No. 27.

New Section 8E requires the landlord to use his best endeavours to obtain any consent required before disposing of his interest but, if it is not forthcoming, allows him to dispose of his interest elsewhere within 12 months, but on no better terms than those offered to the tenants. This recasts existing provisions in the 1987 Act.

New Sections 9A and 9B provide for notices of withdrawal by the tenants and the landlord, including provision for costs. Again, the principles are the same as in the 1987 Act, but the drafting has been simplified and now caters for contracts.

The other way, apart from withdrawal, that the procedure can come to an end is for the landlord's offer to the tenants of his interest, under Section 5 of the Act,

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to lapse. New Section 10 in Amendment No. 101, which replaces Section 10 of the 1987 Act, allows the offer to lapse only if the premises cease to come within the scope of the 1987 Act. The process may lapse only if the landlord serves the requisite notice on the tenants, but cannot be done after a binding contract has been entered into. Only if the landlord can lawfully rescind the contract, for example if the purchasers fail to complete, can he sell his interest on the open market.

Part II of the schedule in Amendment No. 101 deals with the enforcement of the rights of tenants to buy their landlord's interest when it has been disposed of to a third party. This corresponds to the provisions in Sections 11 to 15 of the existing legislation, as already amended by Clause 92 of the Bill. These rights come into play when the landlord has made a disposal without first offering his interest to the tenants, or has sold on better terms than were offered after negotiations had broken down.

These rights are triggered when the tenants hear about the disposal, either by means of a notice served under Section 3A of the Landlord and Tenant Act 1985, when the conveyance has been completed, or by some other documents if Section 3A does not apply. In both cases, the documents must alert the tenants to their rights under Part I of the 1987 Act and the time limits for action. These other documents will assume a greater importance in the future, as they will become servable on exchange of contracts, when Section 3A of the 1985 Act will not yet apply.

New Section 11 describes the circumstances in which these rights are enforceable and new Section 11A enables the tenants to serve a notice on the purchaser, requiring him to give information about the disposal. This is similar to the existing provision in the 1987 Act.

The right to force the purchaser to sell the interest disposed of at the price paid has undergone important changes, now that the relevant disposal has been defined to include the exchange of contracts. New Section 12A allows the tenants to take the benefit of the contract if they find out about it before completion. They have six months to serve a notice electing to take the contract, starting with the time that the purchaser complied with an information notice or the tenants were informed that the disposal had taken place.

New Section 12B applies when a Section 12A notice could have been served but has not been, or where the disposal did not consist of entering into a contract. In general this will mean that tenants can compel a sale after conveyance, and is analogous to the existing right in Section 12 of the 1987 Act. It is, however, important to realise that tenants have a choice in most contract cases. They can either serve a Section 12A notice and take the contract, or wait for completion and serve a Section 12B notice to compel the sale. The only restriction will occur when completion is due to take place after the end of the six-month period for action by the tenants. In this case they must follow the Section 12A route and take the contract, because if they wait for the conveyance, they will be out of time for serving a Section 12B notice.

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The remaining new sections in Part II of the schedule are these: new Section 12C allows the tenants to compel the grant of a new tenancy by a superior landlord when the original disposal was the surrender by the landlord of a tenancy held by him (corresponding to Section 15 of the 1987 Act); new Section 12D makes supplementary provisions for nominated persons (corresponding to subsections (7) to (9) of Section 12 of the 1987 Act); new section 13 gives a leasehold valuation tribunal jurisdiction to determine certain matters (corresponding to Section 13 of the 1987 Act); and new Section 14 makes provision for withdrawal by the tenants from a transaction compelling a sale after completion or a grant of a new tenancy under Sections 12B or 12C (corresponding to Section 14 of the 1987 Act).

Part III of the schedule in Amendment No. 101 deals with the consequences when tenants exercise their rights under Part II of the schedule but discover that the purchaser no longer holds the estate or interest that was the subject matter of the original disposal. These provisions correspond to Sections 16 and 17 of the 1987 Act. New Section 16 requires the purchaser to pass the notices on to the subsequent purchaser and inform the tenants of the subsequent purchaser's name and address. The notices then apply to the subsequent purchaser. If not all the purchase has been transferred, the original purchaser is still responsible for the parts he has retained.

New Section 17 deals with the termination of rights against a purchaser or subsequent purchaser, either when the premises no longer come within the scope of Part I of the 1987 Act, or the tenants have not pressed their claim against a purchaser within three months of serving a notice under Sections 12A, 12B or 12C.

Part IV of the schedule contains consequential amendments.

I thank the House for listening to this rather long explanation. I hope that the noble Lords have found it clear and helpful. I beg to move.

6.15 p.m.

Lord Strabolgi: My Lords, I am very grateful to the Government for tabling all these amendments, and also to the noble Earl, Lord Ferrers, who wrote a letter at the end of last week to warn us what was on the way. I thank him for sending the first draft. Of course, the second draft, which arrived this morning, was rather different, and I am very glad that I came in quite early today to try to grapple with it.

The clarification of "relevant disposal" in the new Section 4A of Amendment No. 27 is essential now that the failure to offer first refusal to tenants before disposal is to be made a criminal offence. It is now clear that the Act bites on the first occurring act of disposal, whether it be the right of pre-emption, option, exchange of contract or creation of an interest. In another place there was adverse comment on the fact that the Master of the Rolls in Mainwaring v. Trustees of Smith's Charity had to find unclear whether "relevant disposal" was the contract or the conveyance, but he came down in favour of the latter.

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Such a decision is clearly contrary to the prohibition against a disposal of the equity contained in the 1987 Act and surely arose out of flawed drafting. It would have opened further avenues of abuse from unwilling and rogue landlords who could then have entered into contracts with curious and peculiar terms only acceptable to their preferred purchasers which the tenants would then have to match. The current clarification of "relevant disposal" has closed that particular avenue.

I turn now to Amendment No. 101, which was described so ably by the noble Lord, Lord Lucas. I deal first with my Amendments Nos. 107 and 108 because they are of more substance than Amendments Nos. 102 to 106. Paragraph 2 of the new Part IV (on page 39 of the Marshalled List) reformulates but does not change the former Section 5(6) of the Landlord and Tenant Act 1987 and specifies the period for the available votes of which the qualifying majority must have more than 50 per cent. The number of available votes is then fixed.

The practical consequence is that for any block of flats, numbering, say, two to 100 flats, a majority of one (and various other permutations) is vulnerable to losing one or more of its qualifying votes and disqualifying itself although it still has a qualifying majority of what is left. Therefore 100 flats need a majority of 51. If before the exchange of contract the nominated purchaser loses one vote by virtue of that one tenant being evicted, or having died, he will still have a majority of what is left--that is, 50 of the 99. But he will not have a qualifying majority as defined. That is surely unjust.

By the time a person or persons have taken on the nominations he has committed himself to costs and consequences, whether in the straightforward sale or in the new auction proposals. He also becomes liable for landlord's costs under the Act itself. If he should wish to withdraw because of withdrawals of support and funding, that is a matter for him. He should not, I submit, be obliged to withdraw under either paragraph 9A(2) of Amendment No. 101--it is page 29 of the Marshalled List--or paragraph 14(2), which is on page 37.

The particular problem of the current situation is that unwilling landlords and their preferred purchasers target tenants who are part of the qualifying majority to make them withdraw their support. There is some evidence that that is what happened with the Smith property sale to the Wellcome Foundation, which the noble Lord, Lord Lucas, rightly criticised at an earlier stage of the Bill. If paragraphs 9A(2) and 14(2) are deleted, the advantage to the landlords, their preferred purchasers and agents of such conduct is minimised.

Amendments Nos. 102 to 106 which stand in my name are minor amendments. The 1987 Act allows the acceptance and nomination to be in the first two month period, although a second two months is allowed for the nomination if the tenants wish it. The use of the word "within" rather than "before the end of" means the nomination cannot occur before the end of the first two month acceptance period. That can be a disadvantage to both the landlords and tenants who want to get on with

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the disposal. I also suspect that it is a change which is probably unintended in the drafting. I suggest that the amendments are an improvement to the drafting in this respect.

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