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5.38 pm

Mr. Adrian Sanders (Torbay): I declare an interest as a freeholder receiving ground rent.

John Stuart Mill described the leasehold landlord as

and Gladstone spoke of ground rents as "great unearned increments". When introducing his unsuccessful leasehold enfranchisement Bill in 1884, Lord Randolph Churchill asked

It was in response to such informed 19th century distaste for what has been described as "urban farming" that in 1883 the first Leasehold Enfranchisement Association was formed. More than 100 years on, with more than 16 Acts passed to try to remedy the situation, the Government, who have a big majority and a long history of opposition to leasehold, are asking the House to support a Bill that will give continued life to that feudal form of tenure. Regrettable as that is, the Bill at least seeks to improve the situation, although for many leaseholders the abolition of leasehold was the very least that they expected from the Government.

The Bill is not the measure that many leaseholders were expecting. Some, such as those represented by the Leasehold Enfranchisement Association, would prefer the Bill to be defeated. It is certainly not a Bill that a Liberal Democrat Government would propose to the House because it does not go nearly far enough. Many improvements are necessary, and some of them were mentioned by the hon. Members for Stone (Mr. Cash), speaking for the Conservative Opposition, and for Rother Valley (Mr. Barron). Liberal Democrat Members strongly favour the introduction of commonhold and a further stage of leasehold reform.

We welcome the principle of commonhold. Freehold ownership of flats is impracticable and long leaseholds also present serious problems, especially the difficulty of obtaining mortgage finance when the outstanding term of a lease falls below 30 or 40 years. Various forms of collective ownership have been developed in other parts of the world, the most relevant of which perhaps are those in the USA and Australia. They have undoubtedly worked there and there is no reason whatever why they could not work here. We therefore warmly welcome the introduction of commonhold.

The hon. Member for Rother Valley referred to Lord Goodhart, who mentioned a number of problems with the Bill in the other place, notably the 100 per cent. consent of all interested parties provision. Those interested parties are not just the leaseholders, but the freeholders and the chargees. If any one of them is opposed to changing the management of the property, they have the right of veto; that is not right. If that provision remains in the Bill, the great majority of commonhold is likely to be on new build. It is perfectly possible to devise a workable scheme in which a small minority of leaseholders, perhaps no more than 20 per cent, refuse to give consent. That would

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involve the commonhold association acquiring the freehold and simply leaving the leases of non-consenting parties outside the commonhold scheme until they expire.

There are no formal structures for voting in the Bill. Is that to be part of the commonhold association's rules and regulations? Rules are needed on quorums, the conduct of meetings and the method of voting, but we have yet to see any of those details in print. There is no power in the Bill to divide commonholds to encourage diversity of use and investment, which was referred to by the hon. Member for Stone. The contribution that that could make to economic regeneration schemes and the creation of housing should not be underestimated. The Government talk about joined-up thinking, so surely they acknowledge the need for more diverse housing provision for economic regeneration, which we hear about from many branches of government. The Bill could preclude good things in that direction if it remains unamended.

Another serious problem with commonhold is the recovery of arrears of service charges and other liabilities due to the commonhold association from unit-holders. At present, with leaseholders, the threat of forfeiture is usually enough to secure payment. However, if forfeiture is not available—in the case of unit-holders, it is not—that is not possible. It is true that a charging order can be obtained for arrears, but that involves an application to the court, which is likely to take some time. Of course, existing charges on the property take precedence over a charging order. That could mean serious cash-flow problems for commonhold associations, even if they eventually get their money back. Prompt payment is vital but will not occur without effective mechanisms for securing it. We would like arrears of service charges to be treated as priority debt, so that if mortgagees sell commonhold units, they must pay off the arrears before reimbursing themselves.

The question of the best corporate structure for commonhold associations has been mentioned. The Government propose a company limited by guarantee. Some critics have objected that the structure is too formal and complicated. We accept that there must undoubtedly be a corporate structure for commonhold associations, but believe that the structure and administration of limited liability partnerships under the Limited Liability Partnerships Act 2000 is likely to be a good deal simpler. For commonhold associations with no more than 10 members, a limited liability partnership could well be more appropriate than a company limited by guarantee.

Limited liability partnerships are a novel form of incorporation. It may be premature to provide them as an alternative at present, but the Government should at least include powers in the Bill to enable the introduction of a limited liability partnership at a later date if it appears likely to benefit small commonhold associations. That point applies also to the right-to-manage and right- to-enfranchise companies as well as to the commonhold associations.

On leasehold reform, we support the principle of extending the right to manage to enable tenants to form a right-to-manage company without having to prove mismanagement by the landlord. The matter has been a bone of contention for many years. When a property is well managed, lessees are probably unlikely to want to take over the management themselves, but the need to prove

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mismanagement has deterred lessees from claiming the right to manage where management has been unsatisfactory or incompetent rather than grossly oppressive.

The Bill gives landlords an automatic right to be members of a right-to-manage company. Such companies should represent tenants and be able to deal at arm's length with the landlord. We accept that when the landlord is also the occupier of a flat it may be reasonable that he should be a member of the right-to-manage company, but allowing non-resident landlords the right to be members of the company gives them an unjustified advantage.

We also believe that the Government have not dealt properly with the position of management contracts subsisting at the time when management is taken over by a right-to-manage company. There was a confused debate on the matter in Committee in the other place. It appears that the Government assume that existing management contracts will be terminated on the taking over of management by a right-to-manage company, although that is a matter of general law rather than the consequence of any provision in the Bill. That may be technically correct, but if so, it seems to us to be undesirable. Management contracts may be held with a cleaning company for the cleaning of the common parts of the building or with a gardener for looking after the garden. The basic principle should be that such contracts should continue with the substitution of the right-to-manage company for the landlord. That rule should be adopted in the Bill, subject to the right of the right-to-manage company to terminate contracts in cases in which, for example, the landlord has given a contract to a friend or relative who is providing services at an excessive cost.

We welcome the provision that extends the right of collective enfranchisement. It extends the right to join in such enfranchisement to a number of leaseholders who did not have it previously, but there is one defect of fundamental importance. The Bill does not require the automatic transfer of membership of a right-to- enfranchise company on the assignment of a lease. That seems to us to be essential if the purpose of the right-to-enfranchise company—to give leaseholders the right to participate in ownership—is to be achieved. We see a right-to-enfranchise company as an embryo commonhold association. If the leaseholder can sell his or her lease, but retain an interest in an RTE company, we will simply recreate the problem that the legislation was designed to remedy. In other words, we will create a new set of absentee landlords.

The only issue that raises a conflict of principle between the Liberal Democrats and the Government is the inclusion of marriage value in the computation of the price to be paid to the landlord on enfranchisement and on the extension of a lease.

The basic price to be paid is what the freeholder loses—that means the market value of the reversion being required by the leaseholder or an RTE company, or the reduction in the market value of the reversion as a result of the grant of an extended lease.

We have no quibble with that principle. We are not pressing for the extension of the artificially reduced value that was originally provided for in the Leasehold Reform Act 1967. That provision could well be contrary to the Human Rights Act 1998, although the case of the Duke of Westminster indicated that at the time it was thought not to be. However, the market value paid to the

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freeholder is increased on the basis that the leaseholder is a special purchaser and will be willing to pay more than someone buying the freehold as an investor. That concept is fundamentally unfair. Leaseholders are in a weak bargaining position in that notional market. Unless they buy the freehold, or obtain an extended lease, they will face inconvenience, disturbance and the distress of having to move home. It is wrong in principle that the freeholder should be allowed to take advantage of that weakness in the bargaining position of the leaseholder.

Marriage value should be eliminated from the equation. The leaseholder should have to pay what the investor would pay for the property and no more. We will fight throughout the proceedings on the Bill for the abolition of the marriage value.

The Bill as it stands is a step forward, but it is an enormous disappointment and could be a great deal better.

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