Lord Howard of Rising:

Moved by Lord Howard of Rising

9: After Clause 28, insert the following new Clause—“Residence condition where a claim is made in reliance on section 28 of this Act(1) Section 13 of the LRHUDA 1993 is amended as follows—(a) in subsection (2)(a)(ii), omit “and”;(b) in subsection (2)(b), at end insert “and—(c) in a claim to which the High Non-Residential Floor Area Condition applies, not less than one half of the qualifying tenants by whom the notice is given must satisfy the Residence Condition.”;(c) after subsection (11), insert—“(11A) In this section—(a) the “High Non-Residential Floor Area Condition” applies if— (i) the specified premises are not excluded from the right to enfranchise by section 4(1), and(ii) the internal floor area percentage assessed in accordance with section 4(1)(b) is more than 25 per cent, and(b) the Residence Condition applies if the qualifying tenant or, where there are joint tenants who comprise the qualifying tenant, one of those joint tenants, occupies their flat as their only or principal home at the relevant date.””Member's explanatory statementThis Amendment ensures that, in a case where a building has more than 25% of commercial floor space, the right of collective enfranchisement will not apply unless at least 50% of the participating tenants are occupying home owners.

My Lords, Amendment 9 in my name would ensure that, when a building has more than 25% of commercial floorspace, the right of collective enfranchisement will not apply unless at least 50% of the participating tenants are occupying home owners. At present, for leaseholders of flats to be able to compulsorily acquire the freehold interest in a building, the amount of commercial floor area must not exceed 25%. Increasing the threshold to 50% in conjunction with compulsory lease-backs and below-market compensation will have a number of unintended consequences. This change will lead to the increased fragmentation of high streets and city centres, eroding the ability of property owners—including charities and, importantly, local authorities providing essential public services—to actively manage places.

The loss of contiguous ownership will erode the incentive that property companies have to invest beyond the buildings themselves for the needs of communities, to create attractive neighbourhoods and support broad demographics. It will also discourage investment and lead to less residential in new buildings as landlords take defensive steps to limit the impact. More broadly, it must be recognised that mixed-use buildings pose a greater management challenge than purely residential ones. Freeholders ultimately need to be active and responsive property managers, not only managing issues such as fire and building safety but responding to requests for alterations and improvements and any redevelopment of the commercial elements of the building, its common parts and residential elements. For mixed-use buildings to operate effectively, property owners must balance the continued commercial attractiveness of the offices or retail within the building with the residential occupiers’ quiet enjoyment of their homes and the attractiveness of the wider neighbourhood.

From the perspective of a freeholder looking to actively manage the commercial units within enfranchised mixed-use buildings, the key issue that arises is that the enfranchised leaseholders are held in a corporate structure, such as an offshore entity, company or trust. As many leaseholders have encountered in seeking to hold freeholders to account for building remedial works, it can be incredibly challenging to identify the ultimate decision-maker and secure consent to even modest alterations. As part of the reform, the Bill should mitigate this by introducing an additional requirement that to be a qualifying leaseholder they should be required to satisfy a residential test.

As we know, a high proportion of leasehold properties are owned by investors, including from overseas. Where leaseholders who live in their properties are likely to have regard for their surrounding neighbourhood and what happens in their building—as we have seen from other matters relevant to building management—this is not always true of investors. It is not just a case of ensuring the effective management of individual buildings but of protecting high streets of significant economic importance from being fragmented, particularly in London’s central activity zone, where we know that a high proportion of residential properties are held by investors.

The amendment would seek to pre-empt these challenges by requiring a resident test to ensure that leaseholders seeking to acquire a freehold live in the building as their main residence. It would give some assurance that they will be contactable and responsive, avoiding the negative impacts of zombie freeholders. I beg to move.

I thank my noble friend Lord Howard of Rising for Amendment 9 on enfranchisement claims in mixed-use buildings. Establishing residency and occupation is, as I understand, difficult. It can change quickly over time and can easily be manipulated. That could lead to the validity of claims being challenged successfully, years after they have been acquired. A residency test would remove the existing rights of some leaseholders and complicate the system overall, counter to the Bill’s aims, and lead to an uptick in disputes and litigation. Attempting to restrict one leaseholder in another building may well disfranchise the others. Therefore, I am afraid that we oppose the introduction of new residency tests. With the greatest respect, I kindly ask my noble friend to withdraw his amendment.

I am not sure that what the Minister said would not apply even if my Amendment did not pass. Does he have a comment on that?

With respect to my noble friend, I thought I addressed the points. Introducing this measure would introduce a huge number of complications to the Bill.

Yes, but complications exist now, and therefore it is unnecessary to go as far as the new Bill does. That having being said, I beg leave to withdraw the Amendment.

Amendment 9 withdrawn.

Schedule 4: determining and sharing the market value