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Lord Lucas: It is a matter of how one regards leases of less than 50 years. They are not normal leases to the extent that one buys a leasehold as though it were a freehold. Such leases are difficult to mortgage. They are normally sold only to cash buyers and those who can raise bank finance. They are generally found on some of the London estates and in some rural areas where they are granted as part of the management strategy for looking after a farming estate.

Some leases may be granted at low rent in which they will be considered as leaseholds with the leaseholder having the greater part of the equity. Some may be essentially long term contracts at a rack rent, in which case the equity remains with the freeholder.

I understand that the noble Lord, Lord Strabolgi, does not consider that the low-rent test is perfect. These amendments are not aimed at that. The purpose of the low-rent test is to discriminate between those two types within the 21 to 50 year period. I am arguing that it is right to have the 21 to 50 year period: that that is the right structure for the future of the property market. The noble Lord may argue that we should discriminate within that in a different way. Yes, we believe in leasehold enfranchisement; and, yes, we think that the principle is right. But we do not believe that there should be one single cut-off at 21 years.

Lord Dubs: I have listened with interest to the many contributions made in the debate. Perhaps I may make a few comments.

First, the noble Lord, Lord Boardman, referred to interference with contracts. Yes, my amendment seeks to interfere with contracts: it seeks to change the legislative basis on which those contracts were originally entered into. But I suggest that all legislation on leaseholds over recent years has interfered with contracts. A great deal of the legislation in the Bill interferes with contracts. Therefore, the concept that legislation, in the sense in which the noble Lord defines it, interferes with contracts is not a new departure; and, yes, that is what my amendments will achieve.

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The noble Baroness, Lady Gardner, was surprised, given the amount of paper that we have, that there was difficulty in establishing rent values prior to 1963. Perhaps I may quote from a letter from an eminent fellow of the Royal Institution of Chartered Surveyors. As regards the working of the present system, he states:

    "I have no hesitation in saying that section 4(1) of the Leasehold Reform Act 1967 is extremely difficult to interpret in any particular case. It affects only leases starting before April 1963, so the valuer is put to proof as to the letting value of a property more than 33 years ago. Frequently I find that the County Court has serious problems in understanding the valuation aspects of a case, and more often than not, the matter goes to appeal".
He then gives examples of cases that went to court. Later he states:

    "From time to time I am instructed to advise on doubtful cases under section 4(1); only too frequently I am obliged to include words in my report such as 'I am certain that the rent at the start of the lease was indeed low within the meaning of the Act, but I am far from certain that I would be able to prove it in court'".
Finally he states:

    "The section works in a capricious manner, and in my opinion it often does prevent proper claims under the Act from getting through the qualifying process".
That is one expert. It seems to me that he speaks with some authority.

As regards the key points of difference between ourselves and the Minister, I have had a number of letters from individuals concerned with the low-rent test and the 50 year period. I shall not take up time by quoting them, but they all say clearly that there are many unfairnesses and anomalies. I am not convinced that the Minister's reasoning underlying the low-rent test is persuasive. He states that the British Property Federation provided him with six examples of rack rents on the basis of which he believes that there is a case for the low-rent test. I find that hard to accept given the evidence put forward as to the sheer difficulty of making the low-rent test work, the unfairness between one leaseholder and another, and the many anomalies. To support legislation based on six examples is not a good way forward when we have so many instances of how badly the system works.

The Minister said that as an accountant he regarded 50 years as a key figure. My understanding is that in the property market 21 years has normally been the accepted term. If someone has a lease of, say, 40 years that is a long term commitment to living in that flat. It is not a short term commitment saying, "I'm renting this for a couple of years between living in London and elsewhere". A 40-year lease, or one of that order, is a long commitment to a specific property. It seems anomalous that a Government committed to enfranchisement of leaseholders should then say that in many instances those who have the bad luck not to have been in the property for 50 years will simply not qualify. The last legislation failed to achieve its intent given the low number of instances of anyone managing to enfranchise. The present legislation will make it even more difficult.

I understand the technical point as to whether I have achieved in the amendments the rural areas exemption that I sought. I concede that technically the system

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would not work. But it would be fairly easy for me to amend Clause 98 in such a way that Schedule 8, as amended, still stands part of the Bill and, therefore, would have the desired effect.

The Minister gave us a small crumb of comfort by saying that he would look at some of the details. Perhaps he will give us a larger crumb of comfort by considering the comments made from all sides of the Committee and taking them into account at Report stage. That would enable us to proceed on an amicable basis.

Lord Lucas: I always pay great attention to what is said in this Chamber and this occasion will be no exception. I have not heard sufficient today to give me clear guidance as to the way forward that the noble Lord wishes us to take if we accept our proposal that there should be a grey area, and we are talking about how the low-rent tests should work. He may wish to make his own proposals on that matter on Report.

However, it is clear that we believe in the enfranchisement of leasehold but not the enfranchisement of people who are merely paying a rack rent. It is necessary to distinguish between the two in some way.

Lord Dubs: I do not wish to take up the time of the Committee. We have been debating these amendments for some time. The Minister will know the arguments as to what constitutes a rack rent, and why I do not accept the principle underlying his argument.

I wish to reflect on what has been said and read carefully the comments made so clearly in support of some of these amendments. I reserve the right to bring these issues back before the House on Report. I withdraw my opposition to the Question.

Clause 98 agreed to.

[Amendments Nos. 254D to 254K not moved.]

Schedule 8 agreed to.

Clause 99 [Collective enfranchisement: multiple freeholders]:

Lord Dubs moved Amendment No. 255:

Page 64, line 33, after ("enfranchisement)") insert--
("(a) in subsection (1)(b), for "10" substitute "25", and
(b) ").

The noble Lord said: I hope after the length of time spent on previous amendments we can dispose of one or two subsequent amendments in less time.

The proposition is simple. At the moment for enfranchisement to be possible in a block of flats not more than 10 per cent. of the total floor space may be taken up by non-residential activities--usually shops on the ground floor of a block. The purpose of the amendment is to increase that to 25 per cent., thereby allowing more flats to be enfranchised.

The difficulty is that flats above shops, as one sees all too often when travelling in parts of our cities, through not being able to be enfranchised, frequently fall into a dilapidated state. The figure of 10 per cent. is pretty arbitrary. I fully accept that 25 per cent. is also an arbitrary figure; but it is a better arbitrary figure than

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10 per cent. It would achieve the aim of allowing more people to be enfranchised. I cannot see any disadvantage in doing that. In the past, people who bought a flat above shops may not have been aware of the disadvantages that would follow in regard to the 10 per cent. formula. Twenty-five per cent. is a better arbitrary figure. I beg to move.

Lord Strabolgi: I support my noble friend's remarks. I shall speak very briefly. There is surely an added reason for supporting this measure. When the late Mr. Nicholas Ridley was Secretary of State for the Environment, he very much altered the rules in relation to changing domestic property into commercial property. A great deal of domestic property that had hitherto been reserved for that purpose and not changed to commercial use was allowed to be changed. Therefore there was a sort of infiltration of commercial property into what had been domestic. That is an added reason why the percentage should be increased in line with this new form of thinking.

5.15 p.m.

Lord Lucas: As the noble Lord, Lord Dubs, said, quite simply a balance has to be struck between the need to encourage commercial development and the rights of leaseholders. It is our view that the 10 per cent. rule strikes the balance in the correct place. My right honourable friend the Secretary of State for the Environment spoke eloquently at Report stage in another place about the Government's strenuous efforts to protect and enhance the position of town centres. That is where most of the flats over shops will be found and why we do not want to do anything to harm the commercial element in these developments. We do not want to place any impediments in the way of further such developments.

It has been made clear to us that many institutional investors, on whom we depend for the continued health of our commercial property market, would have severe doubts about investing in developments where there is a risk of being enfranchised. That is not unreasonable. If you run a commercial development and you particularly want to keep the property in good repair, looking good and generally a credit to the neighbourhood so that shop people are keen to have shops underneath and people are keen to shop there, you want to be in control of what happens in the whole property. To try to manage a shop property where you do not have control over what happens above it could turn out to be a complete nightmare. The property would certainly be worth a great deal less money than if you had control over the whole block. So merely from a practical point of view we want to encourage people, when they are putting shops in town centres, to build residential property above them. We feel that that is healthy for town centres and results in healthy communities. Merely from that practical point of view we do not want to include anything in the Bill that would discourage that from happening.

I appreciate that this will be a disappointment to some leaseholders who will be denied enfranchisement, although it is important to realise that if there is a significant element of commercial development in a block, the cost of enfranchisement will be greatly increased and many leaseholders would not be able to

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afford the price. With the 25 per cent. figure that the noble Lord, Lord Dubs, uses one would expect the cost of enfranchisement to be at least doubled by the commercial property--the property would represent at least half the purchase price. We think that the potential group of enfranchisers who are effectively denied by the 10 per cent. limit is much smaller than first appears.

I also stress that we are not leaving these leaseholders entirely unprotected against the possibility of encountering unscrupulous landlords and bad management. They will still in most cases be able to seek lease extensions under the 1993 Act, and the rights and safeguards against unreasonable service charges, including the additional provisions contained in the Bill, will apply to them as to all long leaseholders. This includes the protection against forfeiture proceedings and access to the leasehold valuation tribunal to seek a determination about the reasonableness of service charges and the appointment of a manager. If the freeholder decides to sell the block, the requisite figure for the residential floor space becomes 50 per cent. In those circumstances many leaseholders will have the right to buy their property.

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