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The Lord Chancellor: My Lords, in opening this debate I omitted to disclose to your Lordships that I recently purchased a leasehold flat in central London. I rectify that omission before my noble and learned friend rises to reply.

Lord Kingsland: My Lords, I too omitted also to remind the House, as I did at Second Reading the last time this Bill came round, that I am the holder of a lease from the Honourable Society of the Middle Temple, regrettably a very short one.

6.3 p.m.

Lord Falconer of Thoroton: My Lords, my wife and I are long leaseholders of property in London.

I enter this debate with great trepidation. It is a debate that has taken place once before in relation to this Bill. But it is also a debate and a cause that has been going on for a considerable time. People both within this House and outside have been engaged in the issues which form the subject matter of this Bill for a very long time.

I mention particularly the noble Baroness, Lady Gardner of Parkes, who has been involved in debates on this issue for almost a decade. The noble Lord, Lord Jacobs, has plainly been involved in these debates for an extremely long time. In relation to people outside this House, Mira Bar-Hillel, the property correspondent of the Evening Standard, has repeatedly raised issues which have formed the subject matter both of this and earlier Bills.

I say with genuine admiration what a high quality of debate this Second Reading produced--I am sure brought about by the fact that those who have taken part have been involved in and well-informed about this matter for a long time. I much prefer the description of Members of this House who take part in debates given by the noble Earl, Lord Caithness.

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He described us--with trepidation I repeat the description--as a "cosy group of housing specialists", rather than the "nerds" as the noble Lord, Lord Goodhart, described us.

This Bill is important, not only because of the policy good that it brings, but also because it is changing the rules and the law in relation to property, which will have a significant effect for years to come. It is extremely important that we approach it in a co-operative spirit and that we, as a government, listen. If any changes can be made to improve it, we should approach them with as co-operative a spirit as possible.

I join other noble Lords in saying how delighted I was to be present when the noble Lord, Lord Best, delivered his maiden speech. It was a speech of real quality. I say three things about it. First, he brings real lustre to the Peers nominated by the committee of the noble Lord, Lord Stevenson of Coddenham. Secondly, it was a speech that looked much more broadly at the Bill, rather than simply at the detail. Thirdly, it was delivered with an impressive degree of confidence and clarity that few noble Lords have shown since they came to this House. I take my hat off to the noble Lord.

We in the Government recognise the considerable input that the Joseph Rowntree Foundation has made to the formulation of government policy and Katharine Rosenberry's work has been particularly helpful in framing the commonhold part of this Bill. On the substance of the noble Lord's maiden speech, I agree that we must provide secure and sustainable tenure arrangements for blocks of flats if they are to meet our future housing needs. The Government cannot stop neighbours falling out, but the Bill would provide a framework for democratic property management which should encourage the effective resolution of disputes and a community approach.

The noble Lord, Lord Best, raised a specific point about the provision of affordable housing in the commonhold context. It has always been the Government's intention that such housing provision should be available in commonhold developments and, as he suggests, we will take care to ensure that sustainable forms of governance are developed to take account of that.

I deal first with commonhold. In the course of this debate, commonhold met with broad approval as a matter of principle, though there were specific issues with which I should deal. I mention, first, the points made by my noble friend Lady Thornton and the noble Baroness, Lady Gardner of Parkes. We need to persuade developers, investors and landowners to use commonhold. We, as a government, expect to devote a good deal of energy to selling commonhold in the period between Royal Assent and its coming into force. We are already in touch with developers, academics, lawyers and many others with the intent of enthusing them about commonhold.

The noble Baroness, Lady Gardner of Parkes, said that we need to provide incentives to make people take up commonhold. Again, that is something we should

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and will look at. If the noble Baroness is prepared to engage with us in that regard, we will find it useful to discuss it with her.

The question of the memorandum and articles of association of commonhold properties and the commonhold association have been updated since the last occasion this Bill was going through Parliament. We should publish it, make it public and make it available to all noble Lords so that there can be detailed debate about those instruments because they are plainly of great importance as regards the organisations that will be set up.

The 100 per cent consent rule was perhaps the specific issue that caused most controversy in relation to commonhold. It is said to be a serious disadvantage to those living in long leasehold blocks who wish to convert to commonhold in due course. It could be dealt with in one of two ways. We could either allow the majority who wanted to convert to commonhold to so convert, and leave the minority who did not on some other basis. Or, subject to whatever majority we chose, the small minority who did not want it could be forced into commonhold. Perhaps I can deal with both of those scenarios.

It is possible to conceive of many schemes which would facilitate conversion with a lower proportion of consents and deal with what we have called "anomalous leaseholders". But each of the schemes has, at their heart, the same problem. Whatever we end up with would not be commonhold; it would be a scheme of unnecessary complexity detracting from some of the chief advantages of the scheme as proposed.

It is also our view that such hybrid schemes--the majority commonhold and some on another basis--are really not necessary. Those who wish to take control of their freeholds and enjoy greater security and freedom from the interference of landlords but who are unable to muster 100 per cent support can take advantage of Part 2 of the Bill. Although Part 2 stops short of delivering all the advantages of commonhold, those who take that course will derive great benefit and be able to live in an environment which can take account of the non-participants without vitiating the essence of the scheme.

The second alternative to the 100 per cent problem is the expropriated leaseholder. If we are to achieve a position in which a threshold of less than 100 per cent is allowable, it seems to us that the only alternative to the anomalous leaseholder situation is expropriation, either by way of extinguishing the existing lease and forcing the commonhold documents on the unwilling tenant or by forcing out the unwilling tenant altogether by way of what would amount to compulsory purchase. As my noble and learned friend the Lord Chancellor said, we will consider any well-founded amendment put forward by noble Lords from any part of the House. However, we would require a good deal of persuasion that the complexities and resulting expense which will inevitably attend both the conversion process and the management of the final organisation will not be out of all proportion to the

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extra benefits commonhold will bring to those who already have the prospect of enfranchisement open to them.

The noble Lord, Lord Kingsland, spotted that the Lord Chancellor was willing to consider any amendment put forward, but on the basis I have stated. He asked whether we would help in relation to such an amendment. If any noble Lord has such an amendment in mind, we would be more than willing for it to be discussed at official level and, if appropriate, at ministerial level to see whether it goes anywhere. We shall not wait for it to be tabled in Committee and then respond. We shall certainly help but please note the terms in which we say that. We are not encouraging amendments. We are dubious that any amendment would work but we shall consider any amendments put forward.

The noble Lord, Lord Kingsland, also raised the question of how one commonholder enforced rights against another. That is an interesting problem. It is a matter which we should discuss with the noble Lord in advance of Committee stage to see whether we can properly identify his concerns and whether or not special measures are needed to deal with them.

The noble Lord, Lord Goodhart, raised questions about the form of the company which might be used in relation to commonhold. His points were not restricted to the commonhold association; I believe it also applied to the right to manage company and the freehold company that exists in the right to collective enfranchisement. The noble Lord suggested that the use of limited liability partnerships should be considered in relation to blocks with 10 units or less. We are grateful to the noble Lord for his constructive suggestion. However we do not agree at present that a limited liability partnership would be an appropriate alternative vehicle for the three areas of commonhold, right to manage and right to enfranchise. Those partnerships are designed with profit-making in mind. That is far from the intention of the corporate structures provided in the Bill. We therefore consider it preferable to draw upon the substantial body of law and practice which surrounds the use of companies for collective property ownership and management.

Apart from those points, everybody in the House welcomed the introduction of commonhold. The noble Lord, Lord Monson, wondered whether it would work as well as we thought it might. We would be grateful to hear from the noble Lord on any detailed points of concern so that we can work with him to try to reduce as much as possible any problems in the working of commonhold.

The noble Lord, Lord Kingsland, also raised the issue that commonhold may not be a flying freehold. We decided not to allow commonhold to be developed on top of non-commonhold property because, although the commonhold scheme overcomes the difficulties of covenants running with the land within the scheme, it does not purport to overcome the problem outside the limit of the commonhold development. The Government recognise that work needs to be done to deal with difficulties presented by

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covenants and easements. The Law Commission has in hand a further look at the scheme of land obligations it produced some years ago which tackles that area.

However, we do not believe that the Bill is the place in which to try to iron out all the associated problems. For the time being it is necessary to ensure that commonholds are not developed in circumstances in which they would be virtually unsustainable. In due course, should the law allow it, it may be possible to make the appropriate changes.

The noble Baroness, Lady Gardner of Parkes, raised the question of whether we have included registration of commonhold in the Land Registration Bill. The answer is that it is in Clause 1 of this Bill under the heading "Freehold" because commonhold is a part of freehold.

I believe that that deals with all the substantive points on commonhold. I turn to leasehold reform. The noble Lord, Lord Jacobs, raised the point that this is a disappointing Bill. He hoped that it would go much further. We have accepted that leasehold is a fundamentally unsatisfactory form of residential tenure but we cannot simply get rid of it overnight. Commonhold is clearly the way forward for multi-unit developments. But that would not make it right to impose commonhold on all existing leaseholders, their landlord and others with interests in the property. We cannot ignore a landlord's legitimate interest or force leaseholders to buy out that interest.

Instead, the Bill will provide opportunities for the conversion of leasehold properties to commonhold if all parties consent to that. Where leaseholders do not want that or other parties are opposed, they still benefit from the greatly enhanced rights and protection afforded by the leasehold provisions of the Bill. The noble Lord, Lord Jacobs, was kind enough to say that the Bill dealt with many of the complaints he set out in the full-page advertisement he placed in The Times which he addressed to Sir George Young. Although I am sorry that we have not gone as far as he would want, I hope that he is at least grateful for the fact that we dealt with the point on which he spent all that money in that advertisement a long time ago.

I turn to a number of points raised on Part 2 of the Bill dealing with leasehold. First, I refer to concern over the abolition of the residence test. As I understood it, it was clear that the noble Earl, Lord Caithness, is still worried about that. The noble Lord, Lord Kingsland has moved from being, as he put it, intransigently opposed to it to his thinking being in a state of fluctuation. as to where precisely his thinking had got. The election allowed him a period of many weeks to consider the point and had left him in a state of uncertainty.

We wish to abolish the residence test for lease renewal to make the right available to leaseholders who bought their houses primarily for personal rather than investment reasons but who were, nonetheless, unable to meet the residence test. Examples include a leaseholder whose main home is a house in the country but who has a pied-a-terre in town; a leaseholder who is working abroad and who has bought or retained his

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house with the intention of living in it on his return, and a leaseholder who is living in the house as his main home but has leased it through a company because his landlord has a policy, specifically designed to block the right to a lease extension, of letting only to companies.

The Government understand the fear that abolishing the residence test would open the door not merely to those deserving categories of leaseholder but also to others intent on short-term speculative gain. For that reason the Bill provides an alternative requirement that the leaseholder must have held the lease for a period of at least two years before he or she can gain the right to renew it.

I turn to mixed use premises, a point raised by a number of noble Lords. It was aired at great length, quite rightly, during the previous deliberations in this House. We recognise the concerns of leaseholders who live in mixed-use buildings who would be unable to enfranchise or exercise the new right to manage. It is not our intention to create a situation where flats and premises where those rights are not available are regarded as second class. We also recognise the concerns of the commercial property industry about the effect of the current proposals on the future of mixed-use developments and urban regeneration schemes.

We are genuinely grateful to those noble Lords who spent some time devising alternative and sometimes very imaginative solutions to the problem. Unfortunately, so far we have been unable to conclude that any proposed alternative is preferable to that which is put forward in the Bill. Most of the suggested alternatives involved dividing ownership of and/or responsibility for managing the residential and commercial parts.

While such a division of responsibility may be theoretically possible, it would give rise to considerable practical difficulty and lead to costly and time-consuming disputes over who was responsible for particular matters. This would be at odds with the Bill's objectives of providing leaseholders with rights which are easy to exercise and which avoid uncertainty. Moreover, in some cases, a division of responsibility may fail to give the leaseholders any worthwhile rights.

We consider that the proposals in the Bill are reasonable and workable. However, we remain open to any alternative suggestions which give worthwhile ownership and management rights to leaseholders and will be workable in practice. I am sure that noble Lords will want to discuss the matter in Committee, but if there are any such suggestions we shall be pleased to hear them before the next stage of the Bill.

Marriage value is also an important issue and was much aired during previous debates. It is the most controversial aspect of the current arrangements for the enfranchisement of flats. Leaseholder groups have long campaigned for marriage value to be excluded from the purchase price. We do not agree that it would be right to remove marriage value from the determination of the enfranchisement price. However,

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there are certainly defects in the current provisions which need to be corrected. The right to enfranchise is a right of compulsory purchase. In order to exercise it, the leaseholders do not have to demonstrate that the freeholder is at fault in any way. Therefore, it is only fair that he would be paid the same price as he would have received from selling the freehold voluntarily.

When leaseholders buy the freehold of their block they obtain a benefit which no other purchaser would; they can grant themselves new 999-year leases without having to pay a penny for them. The value of the extra benefit is the marriage value. If their existing leases still have, say, 80 or more years left to run, these new leases will be practically worth nothing more than the existing ones. Therefore, any marriage value will be insignificant. But if the unexpired term is relatively short--say, 50 years--the difference will be substantial.

It follows that if in a sale between willing parties where the unexpired term of the leases were not very long, the leaseholders would be prepared to pay additional money for the extra benefit. But they certainly would not offer the whole amount of the marriage value. They would be well aware that they represented the freeholder's only chance of obtaining a higher price. In practice, a sale would be agreed only if the parties agreed to split the difference and, if the parties were equally willing and eager, the split would be 50:50.

The freeholder would end up with a rather higher price than he would have received from another purchaser. However--and I must emphasise the point which deals head on with that raised by the noble Lord, Lord Jacobs--the leaseholder will end up with an asset that is worth more than he paid for it. That is the protection for the leaseholder.

That is the principle behind the valuation provisions of the 1993 Act and the Government believe it to be a sound one. There is a separate procedure under Part III of the Landlord and Tenant Act 1987 whereby leaseholders can acquire the freehold where the landlord is in serious breach of the lease and likely to remain so. In those circumstances, they can do so at a price which excluded marriage value. That is because the landlord is clearly at fault and a penal regime is appropriate.

If marriage value were removed from the valuation arrangements under the 1993 Act, there would no longer be a distinction between the no-fault and default enfranchisement. In the Government's view, that would not be a defensible position. The 1993 Act provisions were based on the principles that I have described, but they were defective in two ways. First, they provided that the freeholder's share could never be less than 50 per cent but could be higher. That was unfair. Why should it be possible for the freeholder but not the leaseholder to argue for a higher share? It also led to argument between the parties, which could be protracted and expensive, about what the shares should be. Secondly, they encourage the parties into further arguments about the amount of marriage value, even when there was going to be practically none.

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This Bill in trying to deal with those points provides for the freeholder's share of any marriage value to be 50 per cent in all cases. In recent years, leasehold valuation tribunals have awarded more than 50 per cent only in two or three highly unusual situations out of hundreds of decided cases, but that has not prevented landlords from arguing for more.

The Bill also provides that where the unexpired term of each of the leases held by participating members of the company exceeds 80 years no marriage value is payable. It is intended to prevent disputes between the parties over relatively insignificant amounts of money. Our objective in these two changes is to prevent costly arguments which are disproportionate to the sums at issue.

That, in summary, is what our case is on marriage value. A number of other issues were raised but I do not believe that they are of such critical importance as those with which I have dealt. However, perhaps I may deal finally with three matters. First, the noble Lord, Lord Kingsland, asked why we did not reform the whole of leasehold law and put it into the Bill. What an excellent idea! However, it would take ages to do so and the Bill would be gigantic. While we would like to do it, we believe it far more sensible that we make only the changes we can make now and consider a Bill consolidating all the law on leases at some time in the future.

The noble Baroness, Lady Gardner of Parkes, raised concerns about the ability of the Lands Tribunal to award costs and asked whether there should be a limit on that. That is an important issue and my noble and learned friend the Lord Chancellor will be keen to write to the noble Baroness about that as soon as he is able to express a view. He is keen that we should do so in a measured way rather than me responding to it now.

Finally, the noble Baroness, Lady Gardner of Parkes, was pleased to see better termination provisions. We are grateful for her encouragement in that respect.

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My noble friends Lady Gibson and Lady Crawley emphasised how much difference the Bill makes to people. My noble friend Lady Gibson spoke of the number of telephone calls and inquiries she received while working for Nick Raynsford in Greenwich. That indicates the importance to people of the Bill. It is a most worthwhile Bill and I sensed that the House agrees with that and is keen to work in order to ensure that it is the best possible Bill. I commend it to the House.

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