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Lord Goodhart moved Amendment No. 121:

The noble Lord said: In speaking to Amendment No. 121, I shall speak also to Amendments Nos. 122 to 124. It is a variant on the amendment just debated and moved by the noble Lord, Lord Kingsland, and it is directed to the same purpose: to bring the responsibility for management closer to those who are in occupation, though it does not do so by any means completely.

The amendment changes the definition of a long lease for the purposes of the right to manage from a lease for more than 21 years to a lease for more than seven years. The question is: who should exercise the right to manage as members of an RTM company? There is a conflict of interest to some extent between the lessees under short leases and those under long leases, the occupiers as against the reversionaries. Short lease holders are obviously more concerned with the maintenance of current services and, to some extent, with the current standard of decoration. Long leaseholders will naturally be more concerned with the structure of the building.

One of the purposes of the right to manage is, or at any rate ought to be, to ensure that the maintenance is in the hands of those who either live there themselves or have some fairly close connection with the property and are not merely very long-term investors. People who live on the premises have much more contact with each other than absentee leaseholders. They are much more likely, for example, to turn up to meetings of the RTM company and to be willing to take on the responsibilities of being a director of the RTM company.

Surely, we do not want members of an RTM company to be absentee landlords. I accept that the right to manage should not be the responsibility of rack-rent tenants for short terms. In many parts of London, certainly in large parts of Kensington, the tenants under such tenancies are young people, highly mobile, moving in and out and with no real interest in the maintenance of the property.

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The long lease for the RTM purposes does not need to be the same length as the long lease for enfranchisement purposes. We believe that the definition of a long lease should be reduced to the shortest length at which it can reasonably be said that the members have something more than a merely transient interest in the property. That is why we have selected a lease which lasts for more than seven years. That, again, as we know is a significant dividing line because of the switch in the responsibilities for maintaining various installations under the statutory law from the landlord to the tenant.

If a 99-year lease is subject to a sub-lease for 10 years, we believe that the sub-lessee rather than the head lessee should be the member of the RTM company and that there is a balance to be struck between short and long leaseholders. We also believe that drawing the dividing line at seven years, as we propose, is the best place at which to strike that balance. I beg to move.

5.15 p.m.

Lord Jacobs: I rise to support the amendment tabled by my noble friend. I have a feeling that it mainly applies to residential properties in London. On some of the larger estates the leases are divided between what under present law are long leases, a significant number of 20-year leases and a number of rack-rent leases. Effectively, some of the major estates have managed to arrive at a position where perhaps one-third of the tenants are on long leases as presently defined; one-third are on about 20-year leases; and the remaining one-third are on rental leases. From the point of view of management, people who have 20-year leases seem to regard themselves as living in long leases--there is no difference from their point of view.

While seven years is not proposed as a level for enfranchisement, it may be different for management. The people have been living in the property for more than seven years, which is a reasonable time, whether under a seven or eight-year rental lease--or a nine-year rental lease which I happen to know exists--or under a 20-year lease for which they have paid a capital sum, or under a longer lease. Under all those circumstances they should not be denied the right to manage. I therefore strongly support the amendment.

Baroness Hamwee: I want to ask the Minister about the wording of Clause 73(2)(b). Clause 73 explains what leases are long leases and paragraph (b) provides that it is for a term fixed by law, and so on, and adds in parenthesis:

    "(but it is not a lease by sub-demise from one which is not a long lease).

We seem already to have dealt with that under Clause 72(4)(a). The Minister now has 10 minutes to think of an answer.

[The Sitting was suspended for a Division in the House from 5.18 to 5.28 p.m.]

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Baroness Hamwee: I am not capable of a smooth resumption. Before we adjourned for the Division, I was asking the Minister to explain the necessity for the words in parenthesis in Clause 73(2)(b). My reason for asking is not because I am so concerned about the repetition of the provision which appears in Clause 72(4)(a), but in case by repeating the words there is an implication that the provision and the application of Clause 72 differs from Clause 73(2)(b) as compared with the rest of Clause 73. I should have thought that Clause 73(2) is subject to Clause 72 as well as to Clause 74.

Lord Kingsland: The noble Lord, Lord Goodhart, said that he thought that the amendment goes some way to achieving the objective I sought to achieve in Amendment No. 118. However, I fear that the costs that it will impose will outweigh any benefits that are gleaned.

The effect of this amendment would be to devastate what remains of the short leasehold market. It assumes that the rental market consists only of short-term lettings where the rent is paid on a periodic basis.

There is a ready market for properties for which people are prepared to pay to occupy for a limited number of years but where they would prefer to pay a lump sum for the lease rather than an annual rental. In effect, the price paid to acquire the lease is the capitalisation of the rent. It is arguable that the ability to sell short leases provided a degree of flexibility in the residential property market, particularly in central London. It requires an income of around 50,000 a year to obtain a mortgage on a flat, virtual freehold--that is to say, a 999-year lease--valued at 150,000. I estimate that a 35-year lease for the same flat would be worth about 90,000, which would require an income of 30,000 to obtain a mortgage. The value of a 21-year lease would be lower still, and therefore more affordable to those on slightly above average incomes.

Most freeholders have ceased to sell leases of between 21 and 35 years since the 1993 Act, as those would be subject to enfranchisement. Freeholders have continued to grant short leases of less than 21 years but they would be unlikely to do so in future if this would contribute to their losing the management of their building.

The amendment may also have an impact on how the institutional investors view the residential investment market. The institutions are beginning to return to the residential market, concentrating mainly in the letting sector. It is essential that the institutions are not deterred from this sector at this improving time.

5.30 p.m.

Lord Jacobs: I do not agree with the noble Lord, Lord Kingsland. He is claiming that, in the rental market, people may in certain circumstances prefer to pay a capital sum rather than an annual rent, but the position is usually the other way around. The only reason we have these 20-year leases with large capital sums is as a means of raising capital for the landlord without giving the opportunity to enfranchise. That

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grew up a few years before legislation introduced by the previous government. The 20-year leases were designed just to avoid the legislation. I do not see that they have any relationship, from the tenant's point of view, as a means of living in what is notionally called a short-term rental property and paying a capital sum instead.

Lord Kingsland: Perhaps I may say that the purpose of my intervention was to indicate that the amendment of the noble Lord, Lord Goodhart, would have an adverse effect on the supply of properties, for which there is a considerable demand.

Lord Whitty: The amendment rather cuts across the Government's aim, which is primarily to give the right to manage to those who have acquired a long-term stake in the property. In other words, it is those who see themselves as more akin to the owner-occupier than to someone who is on a rack-rent. These are the people who probably would not have chosen to buy leasehold in the first place if, under English property law, buying a freehold flat had been a practical and sensible solution at that point. It is to be hoped that when the Bill comes to full fruition the successors of such people will become commonholders.

All leaseholders are technically tenants, irrespective of the way in which they have paid for their lease. It is quite difficult to draw a completely logical line between those who are would-be owner-occupiers and those who are would-be renters. Any test is subject to the criticism that a few people fall on the wrong side of the line. The Government came to the 21-year option, which seemed to give about the right level of balance and which, as the noble Lord, Lord Jacobs, said, is the point at which the right to enfranchise exists under current legislation. I admit that the noble Lord was pointing to some detrimental effects of that but, nevertheless, there is a consistency here.

A number of people think that there should be shorter leases with the same rights as those of long leases. It is certainly true that in some circumstances a long-term renting tenant may pay more than a long leaseholder does as a lump sum, but that is not really the point. The question is: what is the balance of stake in the building itself that would justify tipping the balance towards giving them the right to manage? There is a difference of opinion between the noble Lords, Lord Jacobs and Lord Kingsland, as to the nature of the market, and in a sense both are right.

The noble Lord, Lord Kingsland, claims that, if we were to reduce the threshold for the right to manage below 21 years to seven years, that would destroy the existing market. The noble Lord, Lord Jacobs, said that to a large extent that market exists only to get round the existing enfranchisement provisions. I understand both those concerns but I must also say to both noble Lords that it is quite a limited part of the totality of the leasehold market, which probably

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applies only in central London. In most other parts of the country, would-be buyers would not be prepared to sink such large sums of capital into what is, after all, a fairly short-term interest with a rapid rate of depreciation. This sub-market is dominated by perhaps the kind of people whom the noble Lord just accused me of favouring--relatively well-heeled investors, purchasers and corporations.

Although I understand the arguments put forward by the noble Lords, Lord Goodhart and Lord Jacobs, it would distort the totality of the approach to the leasehold market as a whole if we were to change the threshold here. There is some merit in consistency between enfranchisement provisions and right-to-manage provisions and I am not convinced by what has been said in the past few minutes that we should depart from that consistency here.

As regards the question asked by the noble Baroness, Lady Hamwee--it was a good question--the clauses are more or less lifted from the 1993 Act, which is not an excuse for me not being able to give a clear explanation. However, they are different types of lease. It is probably better if I write to the noble Baroness and leave a copy of that letter in the Library for the enlightenment of other Members of the Committee. However, I resist the proposed reduction from 21 years to seven for the reasons explained.

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