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Lord Williams of Elvel: My Lords, I did not hear the noble Lord, Lord Selsdon, declare his interest in this matter before he started his speech.

Lord Selsdon: My Lords, I did not believe that I had any interest. I have already enfranchised and I am no longer a tenant. But if I did not disclose that, I apologise to the noble Lord. I was explaining that my interest lies in the background and experience that I have gained.

The problems lie in money and valuations. All kinds of problems may arise from the Bill. There are about 2.1 million leases in the country--one million flat leases, which are mainly in the South East and the Greater London area, and one million or so house leases, most of which are outside that area. They have different land values, depending on where they are, different ground rents and different leases. Those two million or so leases affect mothers, fathers, grandparents and children. It is a wide group of people. I am worried that if we do not have sufficient time to devote to the Bill it may go through with many flaws.

I shall give your Lordships some examples of flaws. When is a house a house? When is a flat a flat? And when are they not? In efforts some time ago to stop enfranchisement, various landlords devised certain schemes. If they took a house and cut a little out of it, it ceased to be a house and became a flat. As a result, a freehold could not apply. It was then decreed by others that a house with a little cut out of it was neither a flat nor a house. It was a dwelling but it did not qualify for enfranchisement under the Act.

I have another example. People insisted that one could not buy a leasehold or hold a head lease unless it was through a corporate entity--meaning a company. The company would hold the head lease and the lesser interests of the sub-leases would have to be held through companies. That was fairly distressing for people who wanted to have a nice flat on a reasonable lease but did not like the idea of being a company. Those companies were then created with great advisers. Some of the companies found that their sole asset was the flat. This is where my taxation point comes in. The occupant of the flat was not the owner. The flat was owned by a company. Therefore, someone might have construed that the occupant of that flat had a benefit in kind, which might well be a taxable benefit.

Those are areas which cause me concern. If we now find that there is no residential test, a company which enfranchises may then have the right to assign that

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lease to the beneficial owner. But does that beneficial owner then incur a capital gains tax liability? Those points need to be looked into.

In general, this is a Bill which all sides seem to welcome. There are some small issues of concern such as valuations but the problem is that in one area we are treating houses and flats differently. Why cannot we treat them in the same way? Why cannot the time of valuation be the time the notice is served or the time that the value is agreed? If a valuation has been made and the acquisition of the freehold interest is in principle in place, surely we should encourage people to move forward as quickly as possible. The owner of the freehold would like to have his funds so that he may reinvest in another area of activity. On the other hand, some tenants want the right to enfranchise and then hold on for as long as possible without coming up with the money. To me, that seems unfair.

Equally, when one looks to enfranchise, if the minimum number of people needed to qualify agree to enfranchise, the price is lowered. All kinds of side deals may be struck where 95 per cent of those involved wish to agree, but, having worked out with clever lawyers that they need only a certain number, the price is lower. In the end, of course, this is all about money.

I hope that the noble and learned Lord will agree to give the House enough time to cover all the points in detail. I have wondered whether it is the Labour Party seeking to win the householder's vote in the next election that has led to this legislation suddenly being brought before us. The measure will take time to consider. I commend it to the House and I am grateful for the opportunity to speak today.

3.31 p.m.

Lord Goodhart: My Lords, on these Benches we welcome the Bill. However, we do not do so unreservedly because we have a number of doubts and queries, some technical and some more substantial. However, taking all in all, we welcome it warmly. I should declare an interest to the House because I am the owner of a flat that is currently leasehold.

In some ways, the introduction of commonhold marks the most important change in land law since the Birkenhead reforms of 1925. Speaking as a lawyer rather than as a human being, one can describe this as an exciting Bill. In this country, unlike anywhere else in the world, we have developed a curiously hybrid system of long leasehold, which is a hybrid of owner occupation and the renting of property. A premium or lump sum is paid when the lease is acquired and then only a relatively small ground rent is paid. One would need to be a social historian to understand why this system developed. I suspect that it is because the Westminster estate and other major landowners in urban areas wanted to keep control over their land rather than selling it outright to developers, or developing it themselves and then selling off the freeholds.

However, over the years, the leasehold system has been shown to have many disadvantages. First, when the lease comes to an end, lessees have to move out,

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buy a new lease, or pay a much higher rent than they had been paying in the past. Secondly, as the lease approaches its end, its value diminishes sharply. It is then extremely difficult to secure a mortgage on leases with less than 30 or 40 years to run.

Particular problems arose in the early 1960s in Cardiff and elsewhere in south Wales where very large areas had been developed on long leaseholds which were all about to expire at the same time. This meant that a large number of ordinary working people potentially faced the loss of their homes unless they were able to pay substantial sums of capital for new leases on the freehold. The result of that was the introduction of the Leasehold Reform Act 1967 which enabled most long leaseholders to enfranchise--to acquire the freehold--on terms which were favourable to them. The Act was challenged by the Duke of Westminster under the European Convention on Human Rights, but that challenge was rejected in the European Court. As a result, for many years now, very few, if any, new houses have been built for sale as leaseholds. Indeed, many leaseholders of houses have enfranchised.

However, the situation is quite different as regards flats. For the reasons explained to the House by the noble and learned Lord the Lord Chancellor, flats cannot be built for sale as freeholds. Under present law, insuperable difficulties must be overcome as regards liabilities for the maintenance of buildings, the ownership of common parts and so forth. Since the First World War and until the 1980s, it has been unattractive to build flats for rent because rent controls made it uneconomic for landlords to do so. Furthermore, tax advantages could be secured when buying leaseholds because mortgages were tax deductible whereas rents were not.

I agree that the best answer to these problems is commonhold. It is a form of ownership which has worked well in other countries, in particular in the USA, but also in Australia, Canada and many other areas. Commonhold overcomes the technical difficulties of freehold flat ownership and it gives the unit-holder an interest which potentially will last for as long as the building itself. One criticism of the scheme which has been voiced in some quarters is that the conversion of an existing block of flats to commonhold requires the unanimous consent of the interested parties. As a result, most commonholds are likely to be established in new blocks developed as commonholds. It may be difficult to secure the consent to convert of all the lessees in existing blocks of flats, in particular if those blocks are of any size.

I have some sympathy with that view. It is arguable that, where a substantial majority are in favour of conversion, they should be able to convert. However, serious legal and managerial problems would arise in a block which was part commonhold and part leasehold. Complex legislation would be required to deal with such problems. Ultimately, I should like to see the possibility of effecting conversion without complete unanimity, but I should prefer to see commonhold

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start on a straightforward basis before we encounter the more difficult issues. That should be a matter for future legislation rather than for the present Bill.

It has also been suggested that the creation of new leaseholds should be forbidden. However, commonhold is an untried system and I think that it would be premature, at this stage at least, to make it obligatory. If, as I expect, buyers prefer commonholds to leaseholds, commonhold developments will fetch higher prices. Leasehold flats will then follow leasehold houses into oblivion. I do not believe that it is likely to be necessary to ban the creation of new leasehold properties and, as I have said, it would be premature to do so.

I wish to raise some issues as regards commonhold in Committee, but those are technical points and I do not want to discuss them now. However, a number of important matters have been left to regulations which we have not yet seen. Under Clause 17, restrictions will be made on the terms on which commonhold units can be let. I agree that some restrictions will be needed. It is certainly undesirable to recreate long leaseholds by the letting of commonhold units. Equally, however, commonhold will not be attractive unless unit-holders have a reasonable ability to rent out their flats for a period of time if, for example, they are posted abroad or elsewhere in the United Kingdom and they envisage returning to their flats once the posting is over.

The nature of restrictions on letting is commercially important and the Explanatory Notes contain a number of proposals, such as the imposition of an upper limit of seven years for a letting. The Delegated Powers and Deregulation Committee has proposed that those rules should be put on to the face of the Bill, or that we should be able to see the draft regulations before the Bill goes to another place. I do not know the Government's response to that suggestion because I understand that it has not yet been received by the Clerk to the committee. However, I believe that that recommendation has a good deal of force.

Similar problems arise as regards the regulations which will prescribe the core contents of the commonhold community statement and the memorandum and articles of commonhold associations. The Delegated Powers and Deregulation Committee stated that if the draft regulations covering these points cannot be produced during the passage of the Bill, the first set of regulations should be made subject to the affirmative resolution procedure, thus giving noble Lords an opportunity to discuss them. That is a recommendation with which I agree--not surprisingly, because I am a member of the committee.

Commonhold is an idea whose time has come. The Law Commission has been working on it for many years; indeed, for well over a decade. Very extensive consultation has been conducted and these proposals are ones which I am happy to endorse.

I turn now to the alterations to leasehold rules. I have a little less to say on that matter, although it takes up more than half the Bill. My noble friends Lady Hamwee and Lady Maddock will be mainly

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involved with this part of the Bill, which contains developments of existing law rather than creating wholly new proposals. I agree on the whole with these proposals, but I have some problems with them, some of them of some seriousness.

We strongly support the idea of tenants being able to form right-to-manage companies, even if the landlord is not at fault. My own block is self-managed. The system works well and should certainly be encouraged. But I see no reason why the landlord should be a member of a right-to-manage (RTM) company, and I see a good many reasons why the landlord should not be a member. Of course, landlords are entitled to information about what is being done by the right-to-manage company, but there are considerable dangers if landlords are entitled to be members of the RTM companies. Certainly if they are members, they should not have a vote.

Possibly the rights of landlords to enforce obligations against RTM companies should be restricted to cases in which breaches by the RTM company cause damage to the landlord's reversionary interest. That is on the analogy of the Leasehold Property (Repairs) Act 1938, which was useful and prevented abuse of the landlord's position.

Conversely, should not commercial tenants in a block--for example, the tenants of shops on the ground floor--be entitled to be members of the RTM company, instead of its being made up only of residential tenants?

I am also concerned about the proposal that if an RTM company enfranchises and becomes a right-to-enfranchise company, an RTE company, any member of the RTM company who does not want to participate in the enfranchisement will have to give up membership and the right to participate in the management. I can see that it is more complicated if we have to have separate RTE companies and RTM companies in the same block, but I believe that it is not impossibly so. I also believe that it is seriously wrong to exclude someone from management simply because he or she is unable or unwilling to contribute to the cost of enfranchisement and therefore to be a member of the RTE company.

I am also somewhat concerned about the proposal to abolish the residence test. Rights under enfranchisement legislation confer considerable financial benefits on lessees. That is wholly justified in the case of residents, because having to pay the full market cost might threaten them with the loss of their homes. But I see no justification for giving the same benefits to non-residents buying as investors or speculators. It could be argued that the residence test should be excluded from collective enfranchisement, because it is desirable to encourage collective enfranchisement and that would make it somewhat easier, but I see no case for excluding a residence test for a lease extension for an individual flat.

We then come to the question of marriage value, which is a contentious issue. We take the view that it should be eliminated from the valuation payable to the landlord. Marriage value is largely due to the fact that

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the lessee, the tenant, is a special purchaser who is willing to pay more than market value. But the fact that the lessee is willing to pay more than market value is due to the weakness of the lessee's position, because if he or she does not buy it will be necessary to find somewhere else to live, resulting in considerable practical awkwardness.

There is somewhat less objection to payment for marriage value in cases of collective enfranchisement, in particular because there the marriage value is likely to be relatively small. But where an individual leaseholder receives an extended lease, there is no marriage; indeed, there is the opposite, because the length of the separation is likely to be prolonged. Under the 1993 Act the landlord is entitled to compensation for diminution of the value of his interest in the flat and in the rest of the block if that is affected by the grant of the new lease. That seems fair enough, but why should the landlord be entitled to marriage value when there is no marriage? It increases the amount of capital the lessee has to find and makes the claim for an extended lease more difficult to exercise.

I have a few further points on the Bill. A number of previous proposals which appeared in particular in the consultation paper published last August do not reappear. They include a requirement for landlords to keep service charges in client accounts; tenants' right of access to accounting information; and extended powers for the courts to vary unsatisfactory leases. All these seem to be points with a good deal to be said for them, and I should like an explanation of why they are not included in this Bill and whether it is intended that in due course they will be brought forward in a separate Bill.

Finally, an issue of considerable importance is the fact that the Bill will increase the workload and importance of the leasehold valuation tribunals. It is also desirable that the LVTs should be one-stop shops on leasehold issues. The existing division of jurisdiction between the LVTs and the county courts should be ended. I understand that the Government may not feel that it is appropriate for that to be included in this Bill, but will the Minister assure us that the LVTs will be given the funds and support needed to do the job properly?

Will the Minister also be prepared to consider that legal aid should be available in the LVTs, as it is now in the lands tribunals, to which appeals can be taken from the LVTs? There are very serious problems with the absence of a level playing field in the LVTs, particularly with regard to the owners of large blocks of flats, who may be able to afford to use the most expensive and experienced advocates to argue their cases against tenants. They can pick on one tenant, who will then set a precedent for the rest of the block. In the absence of legal aid, the tenant may have to appear in person, being unable to afford any kind of legal assistance, and he or she then faces a very unlevel playing field indeed.

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Having made those various points, I should repeat what I said at the beginning, which is that we think that, subject to the criticisms which I have made and a number of other more technical ones which I have not raised, the Bill is a very good step forward, which we welcome, although we think it is some way short of being perfect.

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