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The Earl of Caithness moved Amendment No. 63:

The noble Earl said: My Lords, in moving Amendment No. 63, I shall speak also to Amendments Nos. 76, 77, 79, 88 and 89.

With these amendments we return to the question of the residency test. I hope the noble Lord, Lord McIntosh of Haringey, will listen to the principle behind the amendments very much in the way that his noble and learned friend Lord Falconer did when responding to Amendment No. 39 which was proposed by my noble friend Lord Kingsland. It is the principles behind the amendments rather than the amendments themselves that are of import.

As the Minister will recall, I raised this matter at Second Reading and would have spoken to it at length in Committee had I been present. This is an important matter. The Government are in grave danger of falling into the trap mentioned by the noble and learned Lord, Lord Falconer, in relation to Amendment No. 27, when he said that he did not want to destroy one imbalance while creating another. That is what is happening with the Bill. It is what I also call the "law of unintended consequences"—the devil that haunts every government. I remember suffering from it. The noble Lord, Lord McIntosh, used to raise points and say that such-and-such would happen. I did not believe him at the time—sometimes he was right and sometimes he was wrong. I can now say the same to him on this issue.

The Bill as drafted takes away the residency test. A consequence of that is that anyone buying a lease of a flat or house as an investment, such as using a buy-to-let mortgage, for example, will qualify for enfranchisement. That means that the Bill gives one investor a right compulsorily to purchase over another investor's investment and a means to enforce the right against the latter's will. That is a substantial change from the current position of a residency test, which is a one-to-one between the lessee and the freeholder.

I know and sympathise with those situations where companies have been involved, because a company cannot enfranchise and certain landlords have only let to companies. That has encouraged a proliferation of companies, not only because that is the only way in which a lease could be obtained; but it has also been used as tax havens and for investment purposes by people who have no wish to live in the property.

Under the heading of "companies" therefore we have the "deserving" cases and what I would call the "non-deserving" cases. I am sure it is not beyond the wit of the Government to devise a scheme whereby a

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person who is genuinely resident—living in the property but having to live there under the auspices of a company because that is the only way he or she could obtain the property in the first place—should be entitled to enfranchise, and separate that situation away from the pure investor who holds the property as an overseas tax break or for some other investment purpose. That is not the kind of person one seeks to encourage to use the enfranchisement provisions.

That leads me on to the more serious consequences. Let us imagine the situation of a traditional house in London which would qualify under the 1967 Act for enfranchisement. That house is let to a head lessee who has sublet the flats—let us say there are six of them—on a co-terminus basis, so there is no reversionary interest to speak of to the head lessee. The Bill has granted that head lessee the right compulsorily to purchase the freehold. But he is not living there; he is using the house as an investment. We are therefore transposing one landlord for another. The intermediary head lessee now becomes the landlord.

It is worse than that. When the head lessee acquires the right to enfranchise, the landlord does not receive any marriage value. The marriage value is automatically taken at the extension of a lease or when there is a sale to a tenant. So it is the current head lessee—who may not be a desirable person at the best of times—who is the beneficiary.

We have produced some figures on this point. What is happening is that the current freeholder's interest is being cut in half—by 50 per cent—and the head lessee's interest is increasing by over 1,000 per cent. So we are taking away something from the traditional freeholder and giving it to the head lessee. That is grossly inequitable. What is worse, if the Government were compulsorily acquiring the freehold, they would have to do it on considerably more generous terms than the head lessee has to do it. Therefore, we are in a position where to solve one cause of discontent one would create an area of huge discontent.

Who are the owners of such traditional houses in London? It is true that some are the old landlords who have owned parts of London for a long time and who might or might not be liked by the Labour Party. However, there are also charities which own blocks of such houses. As a result of the Bill, one charity I know will have £30 million wiped off its balance sheet. A widow who inherited the property and did not understand the management might not bring in a management agent but a head lessee. That person would be deprived of what they should have. Pensions and other income for the Church of England come from such traditional investments: the Church would be deprived of its asset.

We have a serious problem here. Perhaps I may repeat to the noble Lord, Lord McIntosh, that the amendments I have tabled do not necessarily address my specific concerns. However, they have given me the opportunity to voice them. These are real concerns which, if not remedied, will result in a case in the European Court. The Government are creating a massive injustice. I believe that that is unintentional.

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The Bill has taken a long time to reach this stage. One of the unintended consequences, of which I am glad, is that this matter has now been brought to light. I beg to move.

Lord Williams of Elvel: My Lords, my name is attached to some of the amendments in this group. That is a result of lack of vigilance on my part and possibly of a muddle between myself and the noble Earl. I would not like it to be thought that I am against the abolition of the residence test. I am in favour of the Government's view on that issue. Therefore, in some respects, the noble Earl and I will have to part company.

Nevertheless, having removed my name from his amendments, I believe that the noble Earl makes two serious points. This matter needs study by the Government. I hope that my noble friend will not simply brush the issue aside and say, "No, the Government have taken this view and that is the end of it". As the noble Earl mentioned, the unintended consequences could be rather dramatic.

Lord Goodhart: My Lords, my position is similar to that of the noble Lord, Lord Williams of Elvel. As regards the residence test, we were approached by the British Property Federation which made a persuasive case. The federation argued strongly that the residence qualification should be retained. I admit that I came close to being persuaded. However, ultimately I decided that its case fell just short—I consulted my noble friends—primarily because anybody who holds a property which is subject to a long lease which has a residence qualification will be aware that that property is vulnerable to enfranchisement or an extended lease by a purchaser of the lease who then proceeds to reside there. There may be a limited "hope" value as a result of the possibility that someone buying the lease may never occupy the property. However, frankly, that will not add significantly to the value of the property. Therefore, anybody who holds the reversion to a lease which is capable of extension or enfranchisement will be aware that the property which is held is vulnerable and the reversion is worth no more than its market value.

Ultimately, it did not seem to me that the disadvantages of the residence qualification to the freeholder were sufficient to overrule the advantages, indicated by the Government in previous debates in favour of removing the residence test and simply substituting in certain circumstances a requirement of two years' ownership of the lease.

However, I have also seen documents on the subject of the division of the marriage value between a freeholder and a long leaseholder when the long lease is subject to leases which are capable of enfranchisement or extension. There is a real and serious problem here. We are opposed to the principle of marriage value altogether. However, we believe that if there is to be a marriage value, the way in which the Bill in its present form divides that marriage value in the circumstances mentioned by the noble Earl, Lord Caithness, between the freeholder and the long

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leaseholder is highly unsatisfactory and will simply transfer a substantial amount of money from the freeholder to the long leaseholder. On that aspect I am happy to support the noble Earl, Lord Caithness.

Baroness Gardner of Parkes: My Lords, like other speakers who followed the noble Earl, Lord Caithness, I have mixed views. I did not intend to speak on this matter. However, I was approached by the Leasehold Reform Professional Committee, which is in favour of the residence test being abolished. I said that I could not speak on that matter because I would benefit from it if it happened. I believe I have told your Lordships' House before that I purchased a flat for my old age, which I do not occupy. The committee asked me whether I would declare that matter and speak on the amendment.

The noble Earl, Lord Caithness, raised a number of important points. I was concerned by his comment that the only way that people are able to get a lease and get into a flat is to buy the lease in a company name. I am aware of the fact that certain property owners will not now sell or give a lease to anyone unless it is bought in a company name. That is a specific process by which they intend to prevent the person having any right to enfranchise. Such property owners are forcing people to take the property in company names only. Therefore, it is important to them that this change should not be made.

The noble Earl mentioned that charities own properties, which is true. Not long after the 1993 Act was passed, the Smith Charities decided to dispose of all their properties. Although the law required them to offer the properties to their tenants, they did not do so. Notice was served, which was short notice. Tenants were not given the right amount of notice, and it was done when everyone was away on holiday. Fortunately, the tenants were alert enough to take action and, in many cases, obtained the right to buy the properties. Certainly, charities act just like any other major landlord in that way.

The noble Earl also mentioned major estates in the capital and elsewhere. Here again we must be careful. As I shall mention later when we discuss the leasehold valuation tribunal, if the major estates are prepared to enfranchise one's freehold but then one is stuck with an estate management scheme which is so onerous that one is worse off than before one was a freeholder, that is not, in the real spirit, selling a freehold.

A valid point was made by the noble Earl and we must ensure that something is done about it. I refer to the situation he described in which a head lessee would replace a landlord. That seems to me wrong and not at all in the spirit of what was decided or what is intended. The abolition of a residence test is meant to help people. For example, in the block in which my flat is situated it may be that because there are other people in a similar situation to me we cannot enfranchise because there are too many of us who do not live there. I know for a fact that some people who are posted or who live abroad let their flats. People wish to see the abolition of the residence test. The noble

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Lord, Lord Williams of Elvel, made that clear, as did the noble Lord, Lord Goodhart. I do not believe that anyone wishes a situation to be created whereby a head lessee acquires the rights of the existing landlord. The example was quoted of four flats in a block and the person entitled to be enfranchised being the head lessee. That is not what I believed was going to happen. I understood that on the abolition of the residence test each of the four people in the block of flats would have a right to a share of the freehold. It would be a total distortion of the Government's intention if what I fear should happen.

The noble Earl, Lord Caithness, has brought out a number of important points. It is good to abolish the residence test from the point of view of helping people to enfranchise their freehold, but the Government must look at what can be done to avoid the other consequences which have been described as being very possible.

7 p.m.

Lord Monson: My Lords, the noble Earl, Lord Caithness, has described a state of affairs whereby charitable beneficiaries will effectively be robbed for the benefit of extremely clever and rich people. Surely, that must be unacceptable to noble Lords in all quarters of the House.

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