What is a "house" and why on earth is the highest court in the UK being asked to decide the meaning of this seemingly simple question? This was a question put to me by a summer student on the first day of the Supreme Court trial in July. The case in point is Hosebay v The Hugo Day Estate and the answer is not at all simple. The eagerly awaited judgment has now been handed down and may be one of the most important property law cases in recent history.
How did we get to this point?
To set the scene; Hosebay, the tenant, is a small family company. Through an affiliated company it operates a self contained flat-let business from three large terraced properties in a residential road in West London, Rosary Gardens. The landlord is the Hugo Day Estate, a relatively small and landed estate in the area, but when compared with neighbouring landed estates such as Howard De Walden or Grosvenor, its resources are limited.
The outward appearance of Hosebay's three properties would lead any person to say that they are houses. In fact, all three properties were originally built as houses in single family occupation. Each of the properties was let on a separate long lease with residential use provisions for terms of approximately 60 years. Over the years, the three properties were converted internally and are presently arranged as self contained flat lets which are marketed as an alternative to hotels. In other words, the properties are now run as a business. Business leases are usually excluded from enfranchisement, but Hosebay sidestepped the exclusion by granting short underleases to an affiliated company, Hindmill Limited.
Hosebay made a claim for the freehold of each the properties under the Leasehold Reform Act 1967 in April 2007. The landlord opposed the claims on the basis that in each case the relevant properties were not a "house" within the meaning of Section 2(1) of the Act, and that they were neither a "building designed or adapted for living in" nor a "house… reasonably so-called".
The legal process
As a consequence and in the absence of a compromise between landlord and tenant, a court determination was necessary and court proceedings ensued.
At first instance the matter was considered by Judge Hazel Marshall QC in the Central London County Court, herself a seasoned expert in this area of the law and author of many clear and insightful judgments in this area. The Judge had some difficulty reaching her decision in favour of the tenant because she had problems reconciling business use with the original purpose of the 1967 Act i.e. to allow owner/occupiers to protect their home and diminishing asset.
In order to reach her decision, Judge Marshall was influenced by the 2006 House of Lords decision in the case of Boss Holdings v Grosvenor Belgravia, in which Lord Neuberger used language to suggest that "once a house always a house".
Unfortunately for Hosebay, Lord Neuberger, now sitting in the Court of Appeal in this matter, took back those words and expressed some regret at "setting a hare running" with that earlier statement in Boss Holdings. He nevertheless dismissed the landlord's appeal largely because the properties were originally houses and their leases provided for residential use. Having done that he then made the point that he had some difficulty reaching that decision because of the actual use to which the property was put when the claim for the freehold was made. This comment from Lord Neuberger was significant and could have been the deciding factor in the landlord's decision to appeal to the Supreme Court.
Lord Neuberger is considered by most of the legal profession to be a leading light in the area of property/landlord and tenant law for the last 30 years and as a consequence his judgments and the principles on which they are based can usually be relied as sound authorities. The difference in this case is that he expressed some reluctance in making his decision in the Court of Appeal and that gave the landlord encouragement on which to launch a last ditch attempt to appeal to the Supreme Court.
The law which laid the foundations for present understanding starts with the Leasehold Reform Act 1967.
Section 1 of the 1967 Act entitles a tenant of a house let under a long lease (i.e. over 21 years) to serve notice on its landlord to buy the freehold. Since enactment, the ambit of Section 1 has been extended and for example, the rateable value limitation was raised and then removed and the low rent test has in the majority of cases been removed. One of the most significant amendments has been Section 138 of the 2002 Commonhold Act which effectively removed the residence condition and replaced it with a two year ownership requirement. As a consequence property investors can now seek to enfranchise. However, business tenants who occupy under a business lease protected by the Landlord and Tenant Act 1954 are excluded.
Section 2 of the 1967 Act contains the definition of a "house". Under S2(1) a property must be a) "designed or adapted for living in" and if it passes that test; b) it must "reasonably be called a house". In Hosebay the tenants were required to prove both counts a) and b) under Section 2.
The buildings (and leases under which they were demised) which the court had to consider have been described earlier. In order to understand the context in which the court considers these questions, it is necessary to understand previous cases on this point which really started with Lake v Bennett in 1970 and the law was developed further in the case of Tandon v Trustees of Spurgeon Homes in 1982. In Lake v Bennett the property involved was a three storey Victorian house with a ground floor which had been converted into a shop. At that stage in the law, the Court decided that if a building starts life as a house in single residence and then works of conversion are carried out to divide it up into self-contained units it will, at least usually, be reasonable to describe it as a house converted into flats or flat-lets. In the case of Tandon v Spurgeon the property was a two storey terraced building, again with a shop on the ground floor and a flat on the first floor. The shop and yard occupied by far the majority of the floor space of the whole. Once again, the House of Lords decided that the 1967 Act should apply to a shopkeeper living over his shop.
One of the more recent cases under the 1967 Act was Boss Holdings v Grosvenor Estates, mentioned above. In that case the property was a six storey former house in Mayfair and Boss Holdings was the tenant. Unusually in this case, the lease was granted for a period of 87½ years. The property was built as a house in the 18th century and was used for that purpose until 1942. It was then occupied by a dress making company on the lower three floors, the upper floors continued in residential use. In 2003 the tenant served notice claiming the right to buy the freehold under the 1967 Act. At the time the notice was served, any residential use had ceased some years ago and the residential upper floors had been stripped back to their outer skin. In other words, the property was not occupied as a house when the notice was served. The landlord disputed that the tenant had any rights under the 1967 Act because the property was no longer a house. This argument succeeded in the County Court and Court of Appeal. The House of Lords, then led by Lord Neuberger, had a different view. They held that the appropriate test was historic and that it was immaterial whether the property was still capable of residential occupation; the property simply had to have been either originally designed as a house or subsequently adapted for residential purposes. In other words, "once a house always a house". Subsequently, sitting in the Court of Appeal in the Hosebay matter, Lord Neuberger took back those same words and accepted that he went too far by making this suggestion.
There is one other notable similar case which has made it to the Court of Appeal recently and that is the case of Magnohard Limited v Cadogan. The property is situated on a corner opposite Sloane Square Underground Station. It is a large Victorian building originally constructed in 1888 as six large flats, a housekeeper's flat and three shops on the ground floor. The overall square footage of the building extends to 20,000 sq ft. At the date of the claim, the building had been altered so that it contained eight residential flats and three shops. In that case, the property had never been called a house and had never been in single residence. In Magnohard the court only had to consider whether the building was "a house reasonably so called". The tenants failed at first instance and in the Court of Appeal to convince the court that building was "a house reasonably so called". In that case, the internal and external character of the building played a large part in the court determining the matter as they did.
The Decision and what it means
The landlord's appeal succeeded, essentially on the basis that Hosebay's use of the property as a business on the date of the notice of claim did not qualify the properties to be "a house reasonably so called" In the leading Judgment written by Lord Carnwath, he has laid down a new test under S2(1). He said that "The two parts of the definition are in a sense "belt and braces" complementary and overlapping, but both needing to be satisfied. The first looks to the identity of the property or function of the building based on its physical characteristics. The second ties the definition to the primary meaning of "house" as a single residence , as opposed to say a hostel or a block of flats; but that in turn is qualified by the specific provision relating to houses divided horizontally. Both parts need to be read in the context of a statute which is about houses as places to live in, not about houses as pieces of architecture, or features in street scene, or names in an address book."
This means that when deciding this issue in future, the court will have to consider internal and external characteristics of the building and the tenant's use of it at the time the claim is made. In the Hosebay matter, the fact that the tenant had been using the properties as self contained flat-lets for people to "stay in" rather than for "living in" meant that the properties did not satisfy the first limb of the definition under S2(1) of the Act.
The court's more reasoned and less literal approach to the S2(1) definition means that tenants wishing to buy their freehold will now have to take more care when preparing to make their claim. They will have to ensure that the property can be characterised not only as a house, but as a home.
It is also clear that buildings such as purpose-built hotels, hostels and blocks of flats will be excluded from the S2(1) definition. There is no doubt that some tenants of unusual high value buildings will continue to litigate and test the limits of the Section 2 definition, but in the meantime we have guidance in the form of the Hosebay decision and Magnohard Limited v Cadogan case. Perhaps it is because the properties in Magnohard and Hosebay were so different that we have some clearer guidance as to what properties will now satisfy the criteria under S2(1).