New Clause 1 — Collective enfranchisement by leaseholders

Part of Orders of the Day – in the House of Commons at 6:30 pm on 29th April 2008.

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Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee 6:30 pm, 29th April 2008

I hope that I can cast some light on what is a complex problem, as I have discovered recently. I have to thank Mr. Gauke for bringing it to my attention and causing me to look back at what has been going on during the past five years.

As far as I can tell, the issue is not defective legislation but the difficulty in putting into effect provisions that allow right-to-enfranchise legislation to be commenced. I hope that I will be able to explain at least in passing—I do not feel qualified to go into great detail as the matter is being dealt with by the Department for Communities and Local Government—at least some of the issues. I thank the hon. Gentleman for bringing the matter to the attention of the Committee; he has done the right thing.

We have considered the proposed new clause to amend section 74 of the Finance Act 2003, which deals with stamp duty land tax treatment of collective enfranchisement. The hon. Gentleman was right to set out the background, including the fact that section 4A of the Leasehold Reform, Housing and Urban Development Act 1993, which was introduced by the Commonhold and Leasehold Reform Act 2002, defined and made provision for what was known as a right-to-enfranchise company. The provisions sought to resolve a problem whereby qualifying leaseholders were being deliberately excluded from purchasing a share of the freehold by other leaseholders. Under the right-to-enfranchise provisions, leaseholders proposing an application for collective enfranchisement must first form a company, which then makes an application and becomes the new owner of the freehold. Under the RTE company provisions, all leaseholders—and this is the point, I think—must be invited to take part in the application to prevent the exclusion of qualifying leaseholders.

Section 74 of the Finance Act 2003 was designed to ensure that when an RTE company purchased a freehold, the rate of stamp duty land tax was set by the value of the aggregate consideration divided by the number of flats in respect of which the right of collective enfranchisement had been exercised. As hon. Members have said, that would bring the rate of stamp duty land tax broadly into line with the rate that would have been charged had each share of the freehold been purchased separately.

As Opposition Members have pointed out, section 74 of the 2003 Act has not yet taken effect because section 4A of the 1993 Act, on which it depends, has still to be commenced. A number of practical difficulties have emerged that require further work and consideration. The issues involved are not directly relevant to the Finance Bill, and I can outline them, and their effect on what is proposed by the new clause, only briefly. The main difficulty in implementing the provisions in section 4A of the 1993 Act has been how to resolve disputes that may arise concerning the fair apportionment of costs of acquiring the freehold and the expenses of the RTE process among participating members. Failure to resolve that practical difficulty could allow members of the RTE company to offer unfair terms to particular leaseholders in order to exclude them from participating.

It had originally been envisaged that RTE company members could agree on how such costs would be apportioned and that normal company law mechanisms would be available to enforce those agreements and determine any disputes arising. However, legal advice received indicated that there were a number of problems with that approach. First, company law mechanisms could not be used to determine the terms upon which tenants were able to participate in an enfranchisement action. Those had to be settled outside of the mechanisms and such terms should be clear to tenants at the outset of the process when they decided to become members of the company that would purchase the freehold on their behalf. That matter is currently being worked on.

Moreover, human rights issues arise because the right to enfranchise is a civil right, which means that in the event of a dispute about such rights, the person concerned would have a right to go to court if there were no mechanism under the legislation for resolving such disputes. It is a matter of attempting to work out in detail how such mechanisms can be put in place, but not by using existing company law, unfortunately; it seems that it will not be available for such use. I understand that it is work on those issues that has caused the problem. RTE commencement lies at the end of a long process, which has involved 12 consultation papers on the 2002 Act, and 18 sets of associated regulations to bring most of the rest of it into effect in phases. I suspect, although I do not know for certain, that the most difficult bit has been left until last because it is causing such difficulties. I am told that it is being worked on with commitment, and it is hoped that the matter will be resolved.

The Government believe that it would be wrong to amend section 74 of the Finance Act 2003 to break the link with the RTE company at this stage. Further investigation has been done to explore whether the RTE provisions can be made to work. If they can, that would be preferable to a different kind of fix, for the reasons hinted at by Mr. Breed.

The Government will do further work on consideration of the best way to resolve these complex issues, including whether a clause in next year's Finance Bill is necessary. The Government have received only a handful of representations on the matter, and the Treasury and HMRC have received none on section 74 of the 2003 Act. I thank the hon. Member for South-West Hertfordshire for bringing it to my attention, however. I am now more aware of the matter than I would have been. Given that I have explained some of the difficulties and said that we may be willing to consider a change to next year's Finance Bill—once we have seen how the Department for Communities and Local Government has wrestled with the problems—I hope that he will not press the motion to a vote.

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mick angel
Posted on 30 Apr 2008 12:23 pm (Report this annotation)

Angela Eagle is proposing that a beauracratic mess continue even after the admission that the legislation is causing problems. For what reason she'd prefer this state of affairs to continue I cannot guess.

As the particular law on RTE and tax liability is currently written it does seem "defective" in that it is woolly, illogical, confusing and unjust *many* years after it was supposed to be introduced. The decision not to proceed with fixing the problematic clause in good time is hugely disappointing.

That labour ministers are forced to bluster and reject simple changes that would fix a clearly broken law (which even they admit is broken) indicates how truly incompetent and base the current government has become.