The Lord Chancellor (Lord Irvine of Lairg)
My Lords, I beg to move that this Bill be now read a second time.The position of those who own long leasehold residential property in England and Wales leaves much to be desired. Not only do they own a wasting asset that declines in value with the years and may eventually become unsaleable, but many leasehold tenants have a wide range of grievances. These include high service charges, absentee landlords who allow the common parts of a block of flats to fall into serious disrepair and landlords who may exploit their position when it is alleged that a tenant has broken the terms of the lease. Yet, for many people, owning the freeholds of their homes is not an option. They have to be tenants. This is because of a technical rule of law. Obligations in relation to land, whether made between landlord and tenant or between neighbours, are called covenants. A covenant is either a positive obligation to do something, such as to repair a property or to maintain support, or is restrictive, such as an undertaking not to cause a nuisance. When a freehold property is sold, the buyer is generally bound by the restrictive obligations attaching to it but not the positive ones. This means that it is impossible to have freehold flats, because it is essential that any owner of a flat should be under positive obligations to other owners in the block, to provide support for other properties, to maintain the common parts and so on. By contrast, the greatest strength of leasehold property is that, on the sale of a lease, the buyer normally takes the property subject to positive and restrictive obligations alike, making leasehold the only system which can work in a building where there are several owners and shared parts and restricting owners of flats to leasehold ownership, with all the drawbacks to which I have just referred. The Government believe that the only way to overcome this unsatisfactory state of affairs is to bring forward a scheme which will combine the security of freehold ownership with the management potential of positive covenants which could be made to apply to successive owners of an interdependent property. The Government consider that to achieve this end they need specific and detailed provisions that lay down the essentials of the scheme proposed. It is our intention to leave open the wider question of whether and to what extent it should be possible to make the burden of positive covenants binding on buyers of freehold land more generally. That question was first considered in 1965 when the Committee on Positive Covenants Affecting Land, chaired by the noble and learned Lord, Lord Wilberforce, reported to Parliament. It is presently under review by the Law Commission. The Government arrived in office with two related commitments: first, to introduce such a scheme, called commonhold, under which occupiers would own their individual units outright and, through an association, own and manage the common parts collectively; and, secondly, to make further radical reforms to the leasehold system, and in particular to make it easier for leaseholders to obtain the right to manage their developments, to make it easier to buy the freehold of their homes and to provide better redress against abuses by landlords or their managing agents. The Bill is intended to deliver these commitments. The first part of the Bill would introduce commonhold. That will introduce to England and Wales a concept similar to the condominium or strata title legislation familiar in many other countries. The idea was first seriously mooted here in 1987 when a working group chaired by Mr Trevor Aldridge, then a law Commissioner, reported on a commonhold scheme for freehold flats. Our immediate predecessors in government twice consulted on draft commonhold Bills, in 1990 and again in 1996, but on neither occasion did they succeed in bringing proposals to Parliament. This Government have pushed forward with commonhold, versions of which operate successfully throughout much of the rest of the world. I do not expect this first part of the Bill at least to be the subject of controversy either in this House or in another place, as I believe that the commonhold concept is worthy of, and will receive, wide acceptance. Although commonhold has been widely described as a new way to own flats, and of course that is the most likely use for it, it is also available for any development where the occupants owe duties to one another related to their proximity to one another and to the need to manage and maintain common parts of a development. So it would be as useful a scheme for a business park or a large out-of-town shopping centre as it would be for mansion flats in Kensington or suburban housing estates. It could be employed for something as mundane as a shared car park. A commonhold will consist of two elements: units, which will be owned by individual unit-holders, and common parts, which will be owned by a commonhold association. The commonhold association is to be a private company limited by guarantee, whose members will be the unit-holders. The Bill provides for its constitution and for the mechanics of voting for various purposes and places on it a duty to manage the development. The details of its memorandum and articles of association will be set out in regulations. The Bill provides for the production of a commonhold community statement, or CCS, which is a combination of plans and of rules of management. Together with the memorandum and articles of the association, it forms the central governing document of the development. Rules governing use and maintenance of units should be set down in the CCS. We will develop a standard form of CCS allowing enough flexibility to take into account the wide range of possible developments, which might range between a small block of flats up to—though this may be some way off—a whole "new town". The standardisation of documentation is one of the most important features of commonhold and one of its main justifications. No longer will every development and owner within it be at the mercy of a more or less competent draftsman putting a lease together. It will not matter whether one buys into a commonhold in Newcastle or Newhaven; the basic rules will be the same. Certain fundamental matters are set out on the face of the Bill. There are, for instance, provisions for the enforcement of the rules of the development and for the raising of commonhold assessments, which will be the equivalent of service charges, the maintenance of reserve funds and other basic matters relating to the essence of the scheme. Much of the detail of the commonhold scheme in its day-to-day operation will be in regulations, particularly the registration process and the contents of both the CCS and the memorandum and articles of the commonhold association. This means that should any changes to matters of detail in the scheme be needed, they can be made quickly. I summarise now the proposed measures in Part II of the Bill. The Bill introduces a new right for leaseholders of flats to manage their building without having to prove shortcomings by the landlord or pay compensation. Leaseholders generally have a much larger investment in a block of flats than the landlord. It is therefore right that leaseholders should be able to take responsibility for managing this investment. This new right would give leaseholders the chance to make a better job of managing the property. Its very existence would encourage landlords to give their leaseholders better value for money. The rules are as simple as possible to minimise the scope for challenges. They are similar to the proposed new rules for collective enfranchisement. To ensure clear allocation of responsibility, democratic management and effective dispute resolution, the right would be exercised by a company with a prescribed constitution suitable for residential property management. All leaseholders would have the right to join. As it is a "no fault" right, we need safeguards for the landlord's legitimate interests and have tried to strike a fair and workable balance. Other rights are available if leaseholders wish to remove all responsibility from the landlord. The Bill makes a number of changes to the right of collective enfranchisement for flats. We propose to simplify the eligibility rules, which have proved unnecessarily restrictive. The Bill would abolish the residence test and remove the requirement for two thirds of the leaseholders in a block to participate. It would raise the proportion of the building that can be occupied for non-residential purposes from 10 per cent to 25 per cent and remove the low-rent test where it still applies. It would also restrict the existing exemption for resident landlords. Leaseholders would have to use a company with a prescribed constitution similar to that proposed for the right to manage and commonhold. This would ensure democratic management and an effective mechanism for resolving disputes. It would also help leaseholders to progress from the right to manage to enfranchisement and then finally to commonhold. All long leaseholders would have a right to join. At present, leaseholders can be unfairly excluded once the required majority has been achieved. We share leaseholders' concerns about the cost of enfranchisement but also recognise landlords' legitimate interests. We consider they are entitled to a fair market price, including a share of any marriage value. However, disputes over the price can result in leaseholders incurring costs which amount to as much as the price itself. We intend to reduce the scope for costly arguments. The Bill will amend the right of individual leaseholders of flats to buy a new longer lease. Many of the changes reflect those proposed for collective enfranchisement. It would remove the existing three-year residence requirement to help leaseholders who occupy their flat as a second home or sub-let it. To prevent short-term windfall gains by speculators, leaseholders would need to hold a long lease for two years before being able to exercise the right. The Bill will provide new rights for leaseholders of houses who have extended their leases under the Leasehold Reform Act 1967. They would be able to buy the freehold after the extended lease has commenced and be entitled to remain under an assured tenancy when the extended lease expires. The Bill would make a number of changes to leaseholders' existing rights to strengthen their protection against unreasonable charges. These changes are plainly needed. There is evidence of widespread abuse by bad landlords. The Bill will amend the definition of "service charge" under the Landlord and Tenant Act 1985 to cover improvements where these are payable under the terms of the lease. It will also give leaseholders new protection against unreasonable administration charges. I stress that these provisions would not enable a landlord to make charges for improvements or administration unless the lease allows them to be made. The Bill would extend existing requirements to consult leaseholders on proposed works or services. The Bill provides that ground rent is payable only when demanded. If paid within 30 days, the landlord would be prevented from making additional charges or starting proceedings. The Bill will introduce new restrictions on the use of forfeiture. Landlords are able to threaten forfeiture, often on spurious or non-existent grounds, to persuade leaseholders to pay unreasonable charges. Landlords would be prohibited from commencing forfeiture proceedings for any contested breach of covenant unless a leasehold valuation tribunal or court had determined that a breach had actually occurred. The Bill will make a number of changes to the leasehold valuation tribunals, to improve their effectiveness and speed up dispute resolution. These changes will considerably enhance leaseholders' rights. They will redress the unfair balance between landlords and leaseholders but at the same time respect landlords' legitimate rights. With the proposals for commonhold, they will implement the Government's commitments and put us on course for a system of land tenure which is more appropriate for our new century. Consultation has shown a broad consensus in support of these proposals. But there are inevitably differences of opinion on particular aspects. Some leaseholders have complained that they do not go far enough. I have to say that some of their expectations are unrealistic. What we have sought to do—no doubt we shall discuss it in our subsequent debates—is to strike a fair balance. Our proposals are aimed at resolving the main difficulties facing leaseholders in a way which I hope your Lordships will in due course agree is fair and balanced. I commend them to your Lordships. Moved, That the Bill be now read a second time.— (The Lord Chancellor.)
My Lords, I am most grateful to the noble and learned Lord the Lord Chancellor for his clear exposition of the Bill, for the helpful Explanatory Notes and for the extensive consultation going back to August of last year, although it was a pity that the document happened to be published at the peak of the holiday period.I believe that the noble and learned Lord has universal support for what he has put before us today. However, the ownership of property, the partial ownership of property and the non-ownership of property are highly emotive subjects. They are in many ways related to security and money. Over periods of time we have tried to improve the lot of one or the other, believing that we are a property owning democracy. We had the 1954 Act, the 1967 Act, the 1985 Act, the 1987 Act, the 1989 Act, the 1993 Act, the 1996 Act—it is almost like lottery numbers—and now we have the 2001 Bill. In principle, what is in the Bill appears to be widely acceptable. However, it reminds me a little of a great ponderous ship, steaming down the Solent, full of good intentions and worrying about the wash that may come behind. Today, it is not my job to go into the details, but to express some worry about whether the Bill will reach the statute book properly amended and with all matters considered and discussed at length. We are rather short of time, unless we are to hear from the noble and learned Lord that there is no intention of having an election for a number of months. But it is right to bring the Bill before the House and the three areas of activity—commonhold, the leasehold of flats and the leasehold of houses—are of vital importance. We all accept the principles of commonhold but the implementation of it is difficult. For new buildings, it presents no problems provided that the developers and the financiers can be encouraged to see the wisdom of adopting it. For existing buildings, the requirement to have the approval of everyone becomes difficult when one takes into account the European Convention on Human Rights and matters of that kind. We must assume that the commonhold proposals are for the longer term but they need to be sold and presented. They are understandable, but when we come to the financing of these ingredients it may be another matter. Banks are very happy to finance individuals with mortgages. But have noble Lords tried to get a bank to finance a property through a company when there are tenants? I want to give an example of my own situation. I am no longer a tenant. For 40 years I was a tenant of great estates in London. After the passing of the recent Act, with considerable support from all round, I became a head lessor. I managed to enfranchise. It was a most enlightening five-year experience. There were only seven of us, but each one needed a solicitor. We needed a solicitor for the company which we formed, which was not limited by guarantee—we were slightly ahead of the noble and learned Lord. We needed a solicitor for the vendor of the freehold and another solicitor as well and we eventually needed a whole range of valuations. Finally, in order to make it work, we had to serve a collective enfranchisement notice on the landlord, who was perfectly happy to have it served on him; but if it had not been served on him, there would have been some doubt as to whether he would get roll-over relief on the sale. My point is that, first, we have property law and, secondly, we have taxation. We are talking about money. The legislation introduced some time ago by my noble friend Lord Strathclyde caused me considerable pain. All kinds of people were saying how wonderful landlords were. I shall give the House one example of—
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.
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 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, hut, 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.
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, 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 w see the possibility of effecting conversion without complete unanimity, but I should prefer to see commonhold 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 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 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. 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.