partner_down - peer holds all free leases

Hi
I am looking for help with DHCP 3.1.2. I have a failover scenario. Iam
getting "peer holds all free leases" message.

Basically, I am trying to go from 3.0.3 to 3.1.2.
I stop the 3.0.3 secondary. When the 3.0.3 gets into partner down
state I stop also that one.

Then I copy the lease file to 3.1.2 primary. I try to start it. I get
the "peer holds all free leases" error message.
I check the status of the server and it is in "partner_down" (value 4)
and the other in "unknown_state" (value 1).

I would like to ask what can be the issue?
When a lease is in free state, who can use it? (primary/secondary)
How long does it take to be used by the other one?
When a lease is in backup state, who can use it? (primary/secondary)
How long does it take to be used by the other one?
What do I have to do, to get the server to respond to discovers? Which
state do I need to force? Or how long do I need to wait?

I have quite a lot of IPs available in all subnets. I can see that
from each subnet IPs are marked only in "free" state, or "backup"
state as follows
lease 10.35.128.145 {
starts 0 2009/02/08 12:27:50;
ends 0 2009/02/08 12:29:50;
tstp 1 2009/02/09 12:57:50;
tsfp 1 2009/02/09 12:57:50;
cltt 0 2009/02/08 12:27:50;
binding state free;
hardware ethernet 76:19:37:01:1d:01;
}

lease 10.35.128.230 {
starts 2 2008/10/28 14:46:51;
tstp 2 2008/10/28 14:46:51;
tsfp 2 2008/10/28 14:46:51;
binding state backup;
}

the pool is defined as follows
subnet 10.35.128.0 netmask 255.255.224.0 {
option subnet-mask 255.255.224.0;
option broadcast-address 10.35.159.255;
option routers 10.35.128.1;
pool {
deny dynamic bootp clients;
failover peer "boot";
range 10.35.128.2 10.35.159.126;
}
}

So there should be around 8000 free IP addresses.
And I have maybe 2000 clients on the subnet. Still when I start the
server, it will not responde to discover packets.
Mar 27 04:38:35 dhcp-live-02 dhcpd: DHCPDISCOVER from 7a:ea:
01:00:e6:01 via 10.35.128.1: peer holds all free leases

My conf file on primary is as follows.
authoritative;
ddns-update-style none;
omapi-port 7911;
server-identifier dhcp-live-02;

failover peer "boot" {
primary;
address dhcp-live-02;
port 647;
peer address dhcp-live-01;
peer port 847;
max-response-delay 60;
max-unacked-updates 10;
mclt 1800;
split 128;
load balance max seconds 3;
}

include "/usr/local/etc/dhcpd.master";

Am I doing something wrong? Is the lease file of 3.0.3 not compatible
to 3.1.2? How to make it compatible?