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I now turn to the amendment of the noble Lord, Lord Goodhart. I was sad to see it on the Marshalled List. For much of the discussion in Committee, the noble Lord, Lord Goodhart, and I have not been that far adrift, but we go down very different paths when it comes to marriage value.
Marriage value is an accepted part of the property scene. All those involved know exactly what it means. It is an integral part of the whole of this exercise. If marriage values were to be abolished, the attitude towards the Bill would change. The comments that I have made are based on the assumption that there is a marriage value. If there is not a marriage value, it is a totally different Bill. The amendment of the noble
I hope that the Minister will have absolutely no truck with this amendment for the reasons I have given. It would be a retrograde step and any good will that has been engendered, and the effort people have made to come to compromises to try and seek a way forward, would be dissipated in one fell swoop.
Lord Monson: I was waiting to support the amendments of the noble Lord, Lord Kingsland, but he has not moved them yet. I support the noble Earl, Lord Caithness, and I support the amendments of the noble Lord, Lord Kingsland, some of which are alternatives. He said earlier that it was a human rights issue. I do not know whether he was referring to this matter in particular, but I am sure he is right.
As I said on the first day of Committee, neither I nor my family has any axe to grind at all on behalf of the freeholders. Indeed, a number of members of my extended family have done very well out of leasehold reform over the past 33 years. Surely there must be some limit to the continuing enforced transfer of value from the freeholder to the leaseholder. Not all freeholders are rich individuals. Some are charities upon whose good work tens of thousands of individuals depend every year. And not all leaseholders are of modest means. If they live in Belgravia, Chelsea, Kensington, Mayfair, Hampstead, and other parts of London, they are probably extremely rich. We are no longer talking about people of modest means in South Wales with whom the 1967 Act was designed to deal. It is a question of fairness, and certainly the Liberal Democrat amendment, and indeed the Bill as it stands, goes too far in a Robin Hood direction, as it were, of taking money from the freeholder and giving to the leaseholder.
On the specific issues which my amendments seek to address, I would have been perfectly content had the Government remained with the solution contained in their consultation document: above the 90-year barrier, no marriage value applied or the marriage value was "nil". The Government have now changed their position and we find in the Bill a term of 80 years.
Outside London, above 80 years marriage value is, indeed, treated by most leasehold valuation tribunals as nil. The situation in London, however, as the Minister well knows from the close attention he will have paid to the statistics, is quite different. It is clear beyond per adventure that marriage value does indeed exist above 80 years. I would urge the noble Lord the Minister, therefore, to return to the solution that the Government were inclined to adopt at the time of the consultation document.
I shall deal first with the question of why marriage value should be excluded. The key question is to whom it rightfully belongs. In the first place, the evidence is overwhelming: that it does not in any circumstances belong to the freeholder. The 1967 Act correctly provided that no share of marriage value should be given to the freeholder. The Duke of Westminster took his case to the European Court of Human Rights in 1986. He lost his case. The European Court said that if he were paid the correctly calculated value of his freehold, that was all he was entitled to.
Lord Jacobs: On the basis that those who ask questions usually know the answer in advance, I shall assume that it was quite likely--and I do not know--that it was only a majority decision. Being found not guilty on a majority decision, however, would always seem to be good enough.
The question is then to whom the marriage value belongs. If a tenant had been a leaseholder from the original grant of a lease, he would be entitled to full marriage value. However, those circumstances very seldom arise and there are in reality generally numerous predecessors in title who would rightly be entitled to a share of the marriage value. It would obviously be difficult, if not impossible, to share out the marriage value between all the previous tenants as well as the enfranchising tenant.
Moreover, the marriage value would not be cashable until the property was sold. I would mention that one of the great arguments--and here I have some sympathy with the 1967 Act--is about all the tenants who were able to buy their freeholds effectively and who remained in their properties. The fact that they did not pay marriage value was fine because they probably did not have the cash to do so. However, some immediately thereafter--often within days of enfranchising--sold their property and thereby caused a great deal of concern.
It is understandable for the landlord to object that the property has all gone to them. On the other hand, if marriage value had been in, as it is in the present Act, all the tenants who have remained in their property for many years would have to find the cash not only to buy the freeholder's interest--the reversionary interest--but also 50 per cent of the marriage value. It is clearly a
In the other place the Labour Member for Cleethorpes, Shona McIsaac, tabled a Private Member's Bill. That progressed but did not come to fruition. She had consultations with Ministers. In August of last year she wrote to me to say that, following consultations, she was confident that many of her suggestions would be adopted and government Ministers were very considerate towards her ideas. In her letter she wrote:
One can say many more things about this subject. I know that we are trying to progress the Bill fairly rapidly and I shall confine myself to one further remark. The Minister in the other place, Nick Raynsford, replied to a constituent who had written to him in 1995 on the question of marriage value. In his letter he said:
I end on that point. I have maintained for more than three years that the Government's intention was to make it as easy as possible for tenants to acquire their freeholds or commonhold, or at least to be enfranchised. I remain of the opinion that somewhere along the line there was a change in their decision-making. We should not overlook the fact that, although this matter is contested, they recognise that marriage value is a serious issue. At least they have opened the door by saying that for anything above 80 years marriage value should be excluded from the calculation. That will be a good thing, and I know that tenants will welcome it. But at 79 years one is back to 50 per cent. It may be that in another amendment at another time some adjustment should be made, if the abolition of marriage value is not to be accepted.
Lord Whitty: We always anticipated that this would be one of the most complicated and contentious parts of the Bill. I hope the Committee will forgive me if I go back over some of the history. Before I do so, perhaps I may comment on the amendment tabled by the noble Lord, Lord Hodgson, which seeks to extend the
The remainder of the amendments to a greater extent tend to exclude marriage value from the purchase price altogether. The noble Lord, Lord Jacobs, is right: the Government do not think that that is a sensible move. There has been some shift in position over the course of the years, which largely relates to the nature of the property with which we have been dealing.
The story of leasehold reform began with houses in 1967, as the noble Lord, Lord Monson, said. The Leasehold Reform Act particularly concerned South Wales, where there were a lot of Victorian houses which were coming to the end of their leases in difficult economic times. The 1967 Act gave leaseholders in houses of relatively modest rateable value the right to buy the freehold on what were extremely favourable terms, and with no concept of marriage value.
Later legislation extended the right to leaseholders of higher value houses but specifically on less advantageous terms. We do not wish to go back over that but it has affected the argument. We cannot use the 1967 Act to justify the exclusion of marriage value, as has been suggested. That Act related to an entirely different property environment, regime and balance of power between leaseholders and landlords and was not intended to address the kind of situation we are discussing.
Nevertheless, it has to be recognised that the right to enfranchise is a compulsory right. To exercise that right, the leaseholders do not have to demonstrate that the freeholder is at fault. It is therefore only fair that the freeholder should receive the same price that he would have obtained from selling the freehold to them voluntarily. The problem is that the effect of enfranchisement of itself changes that value.
When leaseholders collectively buy the freehold of a block of flats, they obtain a benefit which no other purchaser would. They can grant themselves, for example, new 999-year leases without having to pay a penny for them; and they can buy the freehold of a house which is no longer subject to any lease restrictions at all. The value of that benefit is usually described as the marriage value.
If their existing leases have, say, 80 or more years left to run, new longer leases will be worth little more than the existing ones, and so the marriage value in those circumstances will often be insignificant. However, if the unexpired term is relatively short, the difference would be substantial. The same is true, to a large extent, for leasehold houses.
It follows that in a sale between willing parties, where the unexpired term of the leases was not very long the leaseholders would be prepared to pay additional money for this extra benefit. However, they certainly would not offer the whole amount of the marriage value. They would be well aware that they represented the freeholder's only chance of getting a higher price than he would get from an ordinary, straightforward purchase within that form of tenure.
In practice, a sale would only be agreed if the parties agreed to split the difference. If the parties were willing and eager, we calculate that in most circumstances the difference would be the same as we are providing for here; namely, 50:50. The freeholder would end up with a rather higher price than he would have received in other circumstances, but the leaseholders would still end up with an asset which is worth more than they paid for it. In a sense, therefore, there are no victims and only gainers in this process.
The valuation arrangements for leasehold renewals on flats also include a share of marriage value. People often ask how marriage value can be said to apply in a situation where, unlike with enfranchisement, there is no joining or marriage of the two interests. It is the case that marriage value does not quite have the same meaning in the lease renewal contract. Indeed, marriage value is perhaps not the right term but it is the term that has been carried over from the other circumstance. As defined in the Act, it is the difference between the aggregate values of the landlord's and the tenant's interests as they are before the new lease is granted and as they will be after it is granted. The notion that, in one way or another, extra value is created by the transaction is common in both cases and for lease extension, as for enfranchisement, any amount of married value will tend to be extremely small if the unexpired term of the lease is still very long. Similarly, as under the right to enfranchise, the split of marriage value has been argued about in individual cases but, in most cases, we considered it sensible to go for 50:50.
One can go through even more difficult arithmetic assessments to grasp about how the lease renewal valuation provisions and the enfranchisement counterparts work, but the broad intention is the same. The leaseholder should be required to pay no more, but also no less, for the compulsory acquisition of a new lease than he would in a similar transaction between the same, but this time willing, parties.
That is the principle behind what we are still calling marriage value. In our view it is a sound one. There are defects of detail in these provisions and we are taking corrective action to address them in the Bill. Before doing so, however, it might be as well to compare the 1993 regime with the arrangements for compulsory acquisition under the Landlord and Tenant Act 1987.
Compulsory acquisition under Part III of the Landlord and Tenant 1987 Act means that, sometimes, the leaseholders will want to enfranchise mainly because of a negligent attitude to management by the freeholder. There is a separate procedure under that Act for leaseholders of flats to seek to buy their
I now turn to Clauses 123, 124, 131 and 132, which are mainly addressed by the amendments of the noble Lord, Lord Kingsland. The provisions of the 1993 Act were based on the principles that I have just described, but they were defective in two ways. First, they provided that the freeholder's share could never be less than 50 per cent but could be higher. We considered that to be unfair and we have therefore fixed the division at 50 per cent. The previous situation clearly led to arguments between the parties. A fixed sharing of the married value is more sensible and is likely to lead to a speedier process. Secondly, the 1993 Act encouraged the parties into further arguments about the amount of marriage value, even though there would obviously be practically none in those circumstances. The Government want to retain the principle of those provisions but to eliminate the scope for wasteful argument, both about the amount of the marriage value and about the split.
In practice, all but a very few divisions at the LVT tribunal--and those only in highly unusual situations--have split the value equally between the parties. That has not stopped landlords arguing for a greater share. Therefore, we consider that the marriage value should be split 50:50 in all cases.
Clause 124 provides that where the unexpired term of each of the leases held by participating members of an RTE company exceeds 80 years, no marriage value is payable. Amendments Nos. 224 and 228B would instead provide for a 90-year cut-off for enfranchisements and leasehold renewals. Amendments Nos. 224A and 228C would provide for a 100-year cut-off.
We have already heard views on the principle of the cut-off. Our objective is to prevent costly arguments that are completely disproportionate to the sums involved. The principle of cut-off is consistent with this objective, and that seems sensible to us. However, whatever cut-off is chosen, it seems likely that there will be those who will argue for a different cut-off. We accept that, on occasions, tribunals have sometimes awarded an element of marriage value where the leases have 90 or more years unexpired. But that would normally be a relatively small amount of money--perhaps less than the costs of any legal action.
It was a key principle of the 1993 Act that valuations for collective enfranchisement should be on the assumption that the Act and its consequences did not in effect exist. In practice, the operation of the Act has distorted the market or altered it so that transactions have taken place, including an element of marriage value where the unexpired terms of existing leases exceeded 80 years. This has been particularly so in some parts of the country as distinct from others. The effect has been that some very experienced and well-resourced landlords, particularly on the great London estates, have brought to bear on those transactions the best professional advice, often leaving the leaseholders somewhat "under-gunned". The Government's proposal is intended to reduce that potential advantage and restore the original objectives in 1993.
The noble Lord, Lord Williams, is not with us today. His amendments attempt to address some of these difficulties by introducing a degree of tapering of the position where the cut-off point would operate--a Cheshire cat, where the unexpired term of the lease grows shorter and the provisions gradually disappear. We have not thought it sensible to go down that road. It would greatly complicate the position. The main reason for not doing so is that in the vast majority of cases the 80 year cut-off does not suddenly occur from a huge marriage value to a nil situation. The marriage value that may be found where the term was 75 years would still be quite modest. Therefore, by the time it reached 80 plus years, the difference would not be all that dramatic.
Nonetheless, we continue to recognise that there is concern over this matter. Our provisions--a 50:50 split and the principle of splitting the marriage value--seem to us to meet the interests of both landlord and leaseholders in a prospective transaction under this part of the Bill. We recognise that there will be rough edges. The more sophisticated attempts to overcome those by changing or tapering the cut-off point will not improve the situation and are more likely to lead to substantial arguments about what will, in most cases, be very limited sums of money.
I apologise to the Committee again for speaking at some length. It is important to place on record the Government's arguments against the principle of excluding marriage value. The formula we have come up with is relatively easy to understand and provides something in terms of value to the landlord and something in terms of increasing what would otherwise be the value of the flat or property to the leaseholder. I ask the Committee to resist the amendments.
Lord Goodhart: I am obviously very unhappy that the Minister has been unable to make any movement in our direction, despite the fact that this is a change in what was until recently a government policy that was the same as that which we are now putting forward.
Perhaps I may deal first with the 1967 valuation. The element in the valuation under the 1967 Act that was most open to serious objection was not in fact the absence of marriage value, which was not in the original 1967 Act and was introduced a couple of years later, but the introduction into the computation of a wholly artificial 60 year extension of the lease. Thus the valuation of a house which was subject to a lease that was due to expire in two years' time was calculated on the basis that the lease would to expire in 62 years' time. That seemed to me at the time--and frankly seems to me still--to be very unfair. I felt that because of that provision the Duke of Westminster was unlucky to lose his application in the European Court. The 1967 valuation on the basis of this purely nominal lease has not been repeated in the case of any later confirmed rights to enfranchisement or to an extended lease and is not proposed by us now. We are looking at what is, certainly in terms of valuation, the considerably less important issue of marriage value, but it is one that nevertheless causes great concern and distress to many leaseholders faced with an obligation to pay it.
We believe that one of the roles of Government is to protect people who are in a weak bargaining position. That is why we have a great deal of consumer protection legislation for instance. Perhaps I may give an example with which I am familiar from my professional work. The Consumer Credit Act is intended to correct market inequality between parties.
There is undoubtedly inequality in these cases between the landlord and the tenant. To some extent that inequality is due to the fact that tenants are likely to be poorer than landlords, although in individual cases there are, of course, rich tenants and poor landlords. By and large, it is likely that the landlords will have access to better advice and representation, so that the valuations that are produced by the courts will be somewhat skewed in their direction.
Perhaps more important than that is the fact that many of the tenants are people who are living in the property. That is why marriage value exists, because if there was no detriment to moving out of one flat and finding another, the tenant would simply not be willing to pay more in order to buy the freehold than any other prospective purchaser. We believe that marriage value is therefore due to market inequality and to the weaker bargaining position of the tenant in occupation. For that reason, we believe that the appropriate course of action for a Government to take is to correct that inequality by eliminating its representations in terms of cash; namely, the marriage value.
We do not see that this is likely to give rise to any problems with the Human Rights Act. The European Court of Human Rights, having swallowed the camel of the 1967 basis of valuation, is, we believe, unlikely to balk at swallowing the gnat of marriage value. This is an important issue and I would regret it if, as the