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'(a) for the words "exercise a right of re-entry or forfeiture" substitute "enforce a landlord's charge"; and
'exercise a right of reentry or forfeiture'
It might be helpful if I set out some of the background before moving on to the details of the proposals, which go a long way towards tightening up existing arrangements. I hope that they will reassure hon. Members that the Government have listened carefully to the concerns that have been expressed, especially in Committee and on Second Reading, and have worked hard to find a way of taking matters forward and providing further safeguards.
The Government accept the widespread concerns about the forfeiture system. On Second Reading, we heard about some distressing examples of leaseholders who had fallen foul of the system. Forfeiture is a draconian penalty and many people feel that it is unfair that a leaseholder can lose their home, possibly for the non-payment of a relatively modest debt, while the landlord obtains a large windfall profit.
Some hon. Members who spoke to me about that during the discussions that took place seemed to be unaware that that is the current position and has been so for some time. The Bill includes several provisions that improve the situation, and the Government amendments and new clauses will further improve it. The Bill contains measures restricting freeholders' ability to use forfeiture and the amendments and new clauses will provide further safeguards for leaseholders. In effect, they mean that forfeiture will operate only as a sanction of last resort for leaseholders who wilfully refuse to pay money that they rightfully owe to the freeholder. We have given great thought to those measures since the Bill was debated on Second Reading and especially since it was considered in Committee. I shall give some of the background to the proposals and explain the extent to which they protect leaseholders from any continuing abuse by freeholders.
Although forfeiture has remained a sanction for freeholders, its draconian nature has meant that in practice the courts have been reluctant to grant it unless the leaseholder has failed to take advantage of opportunities to remedy matters. However, difficult cases arise, some of which have led to concerns being expressed by hon. Members on both sides of the House. Moreover, forfeiture has enabled landlords to practise a variety of abuses, including using it as a threat to extract money from vulnerable leaseholders. The Government put their mind to that problem and the amendments and new clauses deal with those issues.
In December 1999, following the Government's consultation paper on residential leasehold reform in 1998, we published a document entitled, "Leasehold Reform: the Way Forward", in which we announced that we intended to replace forfeiture with a fairer regime. Hon. Membersmostly Conservative Membershave accused us of reneging on those commitments, but that is not so. The document proposed that determination of facts would be separated from repossession proceedings; that penalties for late payment of ground rent and other administration charges would have to be reasonable; that leaseholders would have the right to challenge the reasonableness of any such charge before a leasehold
We also proposed that where the landlord obtained possession, the leaseholder should be compensated for the loss of leasehold interest after deducting moneys owed to the landlord. That remains our long-term aim. However, although the concept may seem relatively simple, legally and practically it is a complex matter. When we drafted the Bill we considered the issue carefully, but reluctantly came to the conclusion that we could not resolve all the complexities without delaying the Bill's introduction. The Bill implements all the proposals in "Leasehold Reform: the Way Forward" except, owing to practical difficulties, the proposal on deducting moneys. As the Bill extends many other benefits to leaseholders, it is right to proceed with it.
The complexities surrounding the provision of the new regime cannot be properly resolved by a single new clause such as those tabled by my hon. Friend the Member for Bolton, South-East (Dr. Iddon) or the hon. Member for Stone (Mr. Cash). Instead, we decided to focus our attention on the main abuses associated with forfeiture, including using it as a threat to extract payment and exploiting leaseholders' fear of challenging unreasonable charges or breaches of covenant that are unfounded. Hon. Members on both sides of the House cited examples of such cases that they have had to deal with in their constituencies.
Let me explain how the Bill will set about ending those abuses. The provisions are scattered throughout the Bill and we did not debate the relevant clauses in Committee, so we have not yet considered their impact. Clause 162 provides that forfeiture proceedings cannot be brought against a long leaseholder for non-payment of ground rent unless the landlord has issued a written demand and the rent has remained unpaid for more than 30 days. Regulations will prescribe the form and content of the demand and we intend that they will include a requirement clearly to spell out leaseholders' rights.
Clauses 163 and 164 prevent the commencement of forfeiture proceedings for breaches of covenantincluding the issue of notices under section 146 of the Law of Property Act 1925, which are often phrased in threatening termsunless a leasehold valuation tribunal or court has determined that a leaseholder is actually in breach of their lease and has been given a period to rectify the matter.
Clause 165 similarly prevents the commencement of proceedings for non-payment of service charges or administration charges unless a leasehold valuation tribunal or court has determined that the sums claimed are legally payable and reasonable.
Those are important measures that will dramatically reduce the scope of unscrupulous landlords in exploiting leaseholders' fears. They also deal with issues related to debt and with other breaches of covenant such as persistent antisocial behaviour or littering or dumping in communal areas. Much of the discussion of forfeiture has revolved around payment of debt, but it can also arise as a result of other breaches of covenant, so the regime must deal with those as well.
In effect, the Bill provides for a two-stage legal processfirst, to go to the tribunal to establish whether there has been a breach of the terms of the lease and, secondly, to go to the courts for approval for forfeiture.
Permanent elimination of abuses of forfeiture would require its complete abolition, as proposed in new clause 3. In considering such a measure, we must accept that managers of leasehold properties need an effective means of redress against those who fail to comply with the terms of the lease. Unfortunately, some leaseholders refuse to pay their fair share of the cost of maintaining their block or estate, no matter how reasonable those charges may be, or carry out structurally damaging repairsfor example, demolishing internal load-bearing walls or taking similar actions that damage the property interests of other leaseholders and of the freeholder. We discussed earlier the importance of ensuring that there is proper financing to pay for the maintenance of property.
One of the advantages of the leasehold system is that it provides a means of enforcing certain rules on a group of individuals living in a community, whether it be in a block of flats or on a housing estate. Simply abolishing forfeiture in the manner proposed by the hon. Member for Torbay (Mr. Sanders) in new clause 3 would seriously undermine that system. Leasehold management companies, which are unlikely to have a substantial capital reserve, are particularly vulnerable if irresponsible leaseholders fail to pay their fair share. Other leaseholders may suffer the consequences of essential repairs not being carried out through lack of funds. Ordinary civil debt recovery or injunction proceedings are lengthy and not always effective against those who are determined to avoid their responsibilities. We would need to replace forfeiture with an alternative that provided an effective enforcement mechanism, but without the same scope for abuse.
As I have said repeatedly during our consideration of the Bill, creating an alternative to forfeiture is not a simple matter. Indeed, the Law Commission has been wrestling with the problem for many years, and its work has now reached an advanced stage. It has been developing proposals to abolish forfeiture across the board. One of the major objections to forfeiture is that, in the rare cases in which a lease is forfeited, the leaseholder is left with nothing. That can be a draconian penalty. To avoid this, the Law Commission is considering the scope for providing that a long lease be assigned to a third party, and for the value of that lease to be shared out. That would remove the unfairness of the current system, in which all the value passes to the landlord. The commission is also considering the scope for imposing penalties when landlords act improperly.
Hon. Members have repeatedly expressed concern about the length of time the Law Commission has taken on this project, and have asked when we might expect to see the results. I understand that the commission plans to put forward revised proposals for consultation during late spring or early summer, with a view to preparing a draft
The hon. Member for Stone has tried to pre-empt the Law Commission's work with his new clause 19. I recognise some of the thinking behind his new clause from our consideration of possible alternatives to forfeiture, and he has no doubt borrowed from the Government's work. He has failed to achieve his goal, however, because his new clause has run into the same problems as our own work did, and into even greater ones. It leaves completely unresolved a number of practical and technical issues, which is why the Government cannot accept it.
I do not want to run through all our concerns on the new clausethat would take far too long, and I recognise that other hon. Members wish to speakbut I shall deal with just one, to demonstrate how unworkable it would be, and what chaos it would introduce into the system. Subsection (13) proposes that any surplus should be distributed in accordance with the rules of equity. Equity, as the hon. Gentleman must know, is not a set of rules but a broad legal principle, and it is far too vague to determine the basis of apportionment. Given the proven track record of many of those who abuse the forfeiture process at present, it is essential that there is no room for argument over such a fundamental issue. The hon. Gentleman completely fails to set out who would make the distribution. Should it be the landlord or the court? To be workable, any provision would have to spell out clear, unambiguous rules and procedures for all foreseeable circumstances, and specify how disputes were to be resolved.
A further weakness that the hon. Gentleman might not have realised is that the new clause applies only to forfeiture for debtsfor failure to pay money. It would have no effect on the widespread abuses relating to use of forfeiture for other breaches of leases, such as the failure to obtain consent for buildingsan issue raised in Committee by my hon. Friend the Member for Bolton, North-East (Mr. Crausby). Unlike the Government's new clause 9, which I will describe shortly, it does not prevent the use of forfeiture for small sums, so leaseholders could face the prospect of the forced sale of their homes for non-payment of small amounts if they did not respond to proceedings.
At this late stage in the Bill's progress, there is no scope for us to consider this matter further, or subsequently to introduce a revised new clause. In any case, we could not contemplate introducing such a major change to property law without full consultation with all interested parties. For example, in making any changes to property law, we would need to be satisfied that they would not affect the ability or willingness of lenders to provide mortgages.
We have discussed briefly the proposed new clause with the Council of Mortgage Lenders. Its initial response was that the proposal was far too hurried and would need detailed consideration and guidance. It was also concerned that the measure could lead to an escalation of costs, which would be added to the landlord's charge, thereby eroding mortgagees' security. That could lead to lenders being reluctant to lend a high proportion of the value on leasehold properties, which would clearly not be in the interests of current or prospective leaseholders.
I shall now move on to the Government's amendments. As I said in Committee, we have considered carefully the strength of feeling on this important issue, and the desire for further measures in the Bill to deliver better protection for leaseholders. We have proposed further safeguards for leaseholders, and I would like to explain the additional safeguards that these amendments would provide.