My Lords, I thank all noble Lords for their contributions, and I start by thanking especially the noble Baroness, Lady Taylor of Stevenage, for Amendment 17, which seeks to amend the description of premises that are excluded from collective enfranchisement rights, where leaseholders would otherwise qualify. I know the amendment is well intentioned, with the aim that there is flexibility to amend the description of exceptions without new primary legislation. The amendment introduces a broad power for Ministers to change fundamental elements of the structure of the regime, which are substantive areas of policy. The Government are already making changes to primary legislation by increasing the non-residential limit from 25% to 50%, following extensive consultation, which is right and proper. The powers in this amendment would affect the very core of the regime and how it is structured rather than amending mere procedural changes.
To make sure that stakeholders have certainty as to how the law will work in practice, changes to the fundamental structure of the statutory regime should
be clear and stable. Although the intention behind the amendment is noble, the Government are not able to accept it as it is not proportionate or reasonable for the proper functioning of the regime. It would be a sweeping power to change the fundamental structure of the enfranchisement regime after it has been approved by Parliament.
This amendment would introduce uncertainty into the new system, meaning that both leaseholders and landlords would need to second-guess whether changes may be made at relatively short notice, introducing volatility to the regime. This could potentially lead to undesirable outcomes, such as undermining confidence in long-term investment decisions for mixed use-premises, or lead to irregular design of floor-space in anticipation of future changes. I want to make it clear that the Law Commission has spent years considering qualifying criteria and assessed different options in its consultation process before putting forward its recommendations to increase the non-residential threshold to 50%.
The amendment could also remove rights of leaseholders or landlords in a disproportionate way and create unnecessary uncertainty and divergence likely to complicate the overall regime, with consequential effects on the behaviour of different stakeholders in different ways. Therefore, I hope that I have convinced the noble Baroness that the amendment is not proportionate, and that it is not moved.
I thank my noble friend Lord Sandhurst for Amendment 17A, which would exclude long leases held by overseas companies from being qualifying tenants for the purpose of collective enfranchisement. The Government’s aim is to improve leasehold as a tenure and address the historic imbalance of power between freeholders and leaseholders. The Bill does not confer different rights on leaseholders by how their leases are held. The Government do not think that implementing such a definition, in respect of which leaseholders have rights and which do not, is workable or desirable.
Amending the definition of a qualifying tenant for collective enfranchisement will make it harder for other leaseholders in a building to meet the numbers required to enfranchise, should they so wish. Attempting to restrict some leaseholders may well disenfranchise others, meaning that many leaseholders up and down the country could lose the opportunity to exercise their rights. Furthermore, it would remove the existing rights of some leaseholders and complicate the system overall, contrary to the aims of the Government.
I understand that the intention of the amendment may be to safeguard against circumstances in which non-resident or overseas companies do not take an active interest in the management of a building or are slow to respond. However, we expect that most multi-occupancy buildings will be managed by professional management companies on behalf of freeholders, as they are now.
I thank my noble friend again for the amendment, but I cannot accept it because it runs contrary to the aims of the Government and may restrict leaseholders’ rights. I therefore hope that he is content not to move his amendment.
I thank the right reverend Prelate the Bishop of Derby for speaking on behalf of the right reverend Prelate the Bishop of Manchester, with whom I have had a number of meetings about this issue. I am happy if the right reverend Prelate takes back the fact that I will continue that discussion if the right reverend Prelate the Bishop of Manchester so wishes.
I thank my noble friend Lord Moylan for his clause stand part notice. Clause 28 increases the non-residential limit for the collective enfranchisement claims to proceed in mixed-use buildings from 25% to 50%. The clause implements a Law Commission recommendation that has been subject to comprehensive consultation by the Law Commission and the department. I note the right reverend Prelate’s and my noble friend’s concerns, which have been raised through various consultations with freeholders and landlords.
The Bill’s impact assessment considers the impact of increasing the non-residential limit for collective enfranchisement claims, including the potential impact on freeholders, high streets and businesses. The increase to 50% strikes a fair and proportionate balance and will ensure that leaseholders are not unfairly prevented from claiming the right to manage in respect to buildings that are majority residential. It protects the freeholders and commercial leaseholders in buildings that are majority commercial. Freeholders can also protect their commercial interests by taking a leaseback of the commercial unit, securing their interest with a 999-year leaseback at a peppercorn rent.
We recognise the importance of the responsibility of building management and, as I have said, would expect that those who exercise their right to take over their buildings will employ professional managing agents—ensuring that the building is managed with the appropriate expertise, as we have heard from the noble Lord, Lord Truscott, about the issues that he is aware of.
The Government consider that this increase is proportionate, and I ask the right reverend Prelate and my noble friend to support Clause 28 standing part of the Bill.
I thank the noble Lord, Lord Thurlow, for Amendment 18, which seeks to apply a residency test to the collective enfranchisement claims in buildings with more than 25% non-residential floorspace. As we have discussed, Clause 28 amends the Leasehold Reform, Housing and Urban Development Act 1993 to increase the non-residential limit for collective enfranchisement claims from 25% to 50%.
Clause 28 implements a Law Commission recommendation that seeks to broaden access to collective enfranchisement for leaseholders living in mixed-use buildings where the non-residential elements constitute up to 50% of the floorspace. The existing qualifying criteria require leaseholders representing at least 50% of the flats in a building to participate in a collective enfranchisement claim. When combined with these existing criteria, the noble Lord’s amendment would allow claims only in mixed-use buildings with more than 25% non-residential floorspace, where at least 25% of the flats are owner-occupied.
For leaseholders in mixed-use buildings where less than 25% of the flats are owner-occupied but more than 25% of the floorspace is non-residential, this new clause would have the effect of removing all the benefit of Clause 28. This would leave leaseholders unable to collectively buy the freehold of their building because of how their neighbours chose to use their properties. It would also complicate all claims in buildings with over 25% non-residential floorspace, as participating leaseholders would be required to demonstrate that they are owner-occupiers. This could lead to claims taking longer and costing more, and would provide freeholders with another opportunity to frustrate leaseholders’ right to buy their freehold. This is counter to the Government’s aims in this area to broaden access to collective freehold ownership for all leaseholders, and to simplify, not complicate, the system leaseholders use to do so.
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The noble Lord, Lord Thurlow, asked why we were not introducing a residency test. The Government are committed to broadening access to collective enfranchisement and making it cheaper and easier for leaseholders to buy their freehold. As I have said, any residency test would complicate this system. The noble Lord also asked about compensation. Our reforms to enfranchisement valuation ensure that sufficient compensation is paid to landlords to reflect their legitimate property interests. For these reasons, I ask the noble Lord to not move his amendment, and move my own.