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Lord Whitty: I believe that I am clearer about what the intention might be. I am not entirely sure, but there seems to be an internal contradiction here. If the areas are attached to the residential flats, they are part of the residential lease. If the aim is to make it easier for mixed dwellings to qualify--which, I presume it is--it could have the opposite effect. Garages and storage areas will frequently be attached to individual flats, particularly garages, and their exclusion from the calculation would go against the residential element of the building. I do not think that that was the intention, but it would be the result of the clause. It may be that there is more to the logic than I am currently following, in which case I apologise, but we may need to consider it again.

As explained by noble Lord, Lord Goodhart, in certain circumstances the intention would not be achieved by the clause.

Lord Goodhart: We have discussed the point as much as is necessary and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 112 shall stand part of the Bill?

Lord Kingsland: As Members of the Committee are aware, the clause seeks to raise the qualifying threshold of non-residential floor space that determines whether a mixed-use building can enfranchise from the current 10 per cent to 25 per cent.

Current legislation compels those who are able to enfranchise to buy the commercial element of the building. While we welcome the desire of residents for greater control over the management of their homes, we question whether they really want to take on the management of the commercial elements of the building. Commercial property management requires specialist skills, without which the value and marketability of the building as a whole may decline.

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It is possible that the commercial element of the mixed-use building will be far more valuable than the residential freehold. Indeed, it might prove difficult for the residential leaseholders to raise sufficient funds to purchase the whole building, particularly with the higher threshold--though it may be that an enfranchising company arranges to finance the purchase by a back-to-back deal with a commercial end purchaser who would be willing to buy a lease on the commercial element.

As I suggested at Second Reading, there are already indications that investors and funders are resisting proposals to develop new mixed use buildings if they include less than 25 per cent non-residential use. They are concerned that the risk of enfranchisement means that the investment will not be certain or secure. This could have serious implications for the Government's ambitions to promote mixed use buildings, especially in regeneration areas.

Lord Lea of Crondall: Some Members of the Committee believe that this clause is an absolutely fundamental reform. There are certain difficulties about the number 25 but not in the way that the noble Lord, Lord Kingsland, indicates. His proposition appears to be tantamount to saying that there should be a total exclusion zone for virtually every mixed block in the country. That may not be the position that is being advanced, but I cannot see a difference between that and this amendment.

Lord Whitty: I had thought that we were going to deal with the two amendments at the same time as we dealt with this, because they all address the same problem: how the enfranchisement process could operate in mixed use dwellings.

The clause provides for a 25 per cent instead of a 10 per cent threshold, which we believe is too low. That would unfairly prevent too many leaseholders from enfranchising. The 25 per cent leasehold will protect the landlord where the commercial unit is the majority interest in the building--we have already been over this ground at some length--in that a 25 per cent commercial content equals approximately half the value of the building to the landlord. However, where the leaseholders hold the majority interest and the commercial basis is less than 25 per cent, it is only right that those leaseholders should in all circumstances be able collectively to buy out the landlord.

The Government are aware of the suggestion that to raise the enfranchisement threshold could discourage some desirable mixed use development, which would be a cause for concern. However, it is not at all clear that that is likely to be the effect. The motivation for deleting this clause is different; it is to provide a means whereby the legitimate desire of several thousand leaseholders would be excluded from the Bill. That is not our intention, except in the limited circumstances where the residential element is of significantly less value to the landlord than half the value of the property.

Therefore, we do not wish to see this clause deleted. It would revert to the 10 per cent, which, as the noble Lord, Lord Lea, suggests, means that almost every

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leaseholder in a mixed use block would be excluded from the rights under the Bill. That would be a severe limitation on what is promised to leaseholders under the Bill. In certain circumstances there is some recognition of the landlord's rights by the 25 per cent figure, and to revert to 10 per cent would not be helpful.

5.15 p.m.

Lord Kingsland: I am sad but not surprised to hear the observations of the Minister. However, if either Amendment No. 199 or Amendment No. 222 finds favour with the Minister, at Report stage I shall not repeat my objection to Clause 112.

Clause 112 agreed to.

The Earl of Caithness moved Amendment No. 199:

    After Clause 112, insert the following new clause--

(" .--(1) In any property where there is a non-residential element, the landlord may serve a counter-notice.
(2) The landlord in such a case shall be obliged to offer a 999 year lease of all the residential areas to the RTE company.
(3) Notwithstanding such a lease, the RTE company will have full rights to manage the residential area.
(4) The 999 year lease shall include suitable mutually enforceable covenants which may be specified in regulations.").

The noble Earl said: My noble friend Lord Kingsland made some very good points in the debate on whether Clause 112 stand part about the difficulties of commercial and residential management in the same block. My concern is slightly different. I am perhaps a little more lenient towards the Government in accepting 25 per cent, but my real concern here is that it will act as a distinct disincentive to investment in mixed residential/commercial schemes. I go further and say that it would also act as a disincentive for development of those schemes which I know both parties have been keen to encourage. As a Minister, I remember that the government were keen to see mixed use development, and that has been continued by the present Government.

My solution, which I hope is acceptable, is the separation of management as between the residential and commercial sectors with mutual enforcing covenants and insurance between both parties. That does not stop the enfranchisement, except that the leaseholders would apply collectively for a 999-year lease and have the right to manage the residential parts. The owner of the development would retain the freehold of both the residential and commercial elements and the freeholder would be responsible for the management of the commercial element. That gives the effective separation that is necessary in managing blocks of this type, while allowing the tenants their right to enfranchise in the best possible way.

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I hope that this commends itself to the noble Lord, Lord Lea, as I entirely take his point. I am trying to find a middle road so that we do not lose the investment and development markets for mixed use properties. I beg to move.

Lord Goodhart: Our Amendment No. 222 is grouped with Amendment No. 199 and is not inconsistent with it. Broadly speaking, one has no objection to Amendment No. 199, although it is arguable that once one has a 999-year lease who holds the freehold and who holds the lease does not make an enormous difference.

Section 36 of the 1993 Act entitles the landlord to call for a 999-year leaseback of the unit comprised in the enfranchised premises which is not let to a qualifying tenant. It can, therefore, apply not only to commercial shop or office premises but also to a rented flat, which is directly rented and not the subject of an intervening long lease. Our new clause is a mirror image of that. It assumes that the RTE company which wants to enfranchise does not want to take on the shops, and that gives the RTE company the right to require the landlord to take a 999-year lease in the same way as the landlord can require a lease under the 1993 Act. Again, it seems to us that this right should operate both ways so that the RTE company can take on a property if it wants to without having to take on the parts of the property which it does not wish to manage or own.

Lord Lea of Crondall: This is an opportune moment to say that those of us who have been worried from the start about the difficulty of disentangling residential from non-residential parts are very appreciative of the efforts made by the noble Earl, Lord Caithness, in putting forward the amendment, which is most ingenious.

The element to which I draw attention is that the RTE company would have full rights to manage the residential area. That has been thought to be very difficult in previous constructions because of a number of problems, including common parts. In this part of the Bill, which is to do with enfranchisement but concerns the right to manage, we would solve the problem by transferring the lease while still having the freeholder principle and the right to manage for the residential parts.

Is that how it would work? Am I correct in saying that we would still need to have some consequential discussions about the definition of common parts and where the 25 per cent cut-off applies? I take it that it would still apply. It has a good deal to commend it. I should be interested to know whether my noble friend the Minister sees some merit in the amendment.

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