Luther Vandross sang: “A house is not a home” and, in two connected cases, the Court of Appeal agreed. The decisions in Day v Hosebay Ltd and Howard De Walden Estates Ltd v Lexgorge Ltd 1 confirmed that companies which hold long leases of former residential houses can, in the right circumstances, buy the freehold to those buildings even though they have long since been converted for commercial use.
The right to enfranchise
The Leasehold Enfranchisement Act 1967 was enacted to solve a perceived inequality between residential tenants and their landlords: a problem felt most acutely in London. The majority of freeholds were owned by a minority of wealthy landowners, with most residents thus being obliged to pay large premiums to those freeholders in return for long leases which, by their very nature, would eventually expire and need renewal (again at a large premium).
The 1967 Act enabled the owners of long2 residential leases of houses to purchase the freehold of that house or acquire a lease extension as of right (“enfranchisement”), with the premium for the purchase being calculated using a statutory mechanism. The scheme was intended to empower residential tenants and wrestle freeholds away from the property owning minority and was not intended to be used in connection with commercial property. As originally enacted, to avoid abuse of the system, the Act required qualifying tenants to have owned and lived in the property for a requisite period of years before being able to exercise their right to enfranchise.
However, over the years, the 1967 Act has been amended and many of the qualifying criteria (including a “low rent” test and valuation criteria) have been relaxed or abandoned altogether. Recognising that many leaseholders owned their homes through companies, the 1967 Act was amended to permit corporate bodies, as well as private individuals, to exercise the right to enfranchise. As a matter of necessity, this meant abolition of the “residence” requirement as companies cannot “reside” in a property within the ordinary sense of the word.
There have nevertheless remained certain obstacles under the 1967 Act that were understood to prevent corporate investors and commercial occupiers from enjoying the right to enfranchise under the 1967 Act. Amongst these are:
- that someone who enjoys rights of renewal under Part II of the Landlord and Tenant Act 1954 (by virtue of being a business tenant) cannot also enjoy rights of enfranchisement under the 1967 Act; and
- that only a tenant of a “house” can enfranchise under the 1967 Act.
In the recent cases of Hosebay and Lexgorge, however,
the Court of Appeal found it only too easy to decide that these two conditions could not prevent two corporate leaseholders from exercising the right to enfranchise, notwithstanding that the buildings in question were being used at the time for commercial purposes: as tourist accommodation and offices respectively.
The exclusion of 1954 Act tenants
Pursuant to the Landlord and Tenant Act 1954, a company which occupies leasehold premises for the purpose of its business has (unless the right has been excluded by consent using a statutory process) a right on expiry of the lease to call on its landlord to grant a new lease. The 1967 Act states that any tenant who enjoys such a right cannot also enjoy a right to enfranchise. The intention of this provision was to prevent commercial occupiers (retailers and businesses) from exercising a right intended for residential occupiers alone.
For many commercial tenants, this would be the end of the road. However, that is not the case for commercial investors or companies which have sublet the whole of their leasehold premises and therefore no longer occupy them for business purposes.
A company which owns a headlease, but has sublet the premises and is not in business occupation, does not qualify for renewal rights under the 1954 Act. It will be that company’s business subtenant which – being in occupation – will enjoy renewal rights under the 1954 Act. As a consequence, that subtenant will not be able to claim a right of enfranchisement under the 1967 Act, so the right to enfranchise will rest with the company which owns the headlease, provided the condition of “house” is met.
What is a house?
So we come to the heart of the matter in the Hosebay and Lexgorge cases and the issue that – until now – seemed to be a considerable obstacle to enfranchisement by commercial leaseholders: if the lease is a business lease, or if the premises are occupied for business purposes, surely that prevents the premises from being a “house” for the purpose of an enfranchisement claim?
Since its enactment there has been considerable judicial debate as to the meaning of “house” under section 2 of the 1967 Act. Until now, much of the debate has centred on whether a whole terrace of houses, or a house and mews together, or two neighbouring dwellings adapted over time into a single family home could each be called a “house.” In most of those cases, however, the “house” in question (no matter what its physical appearance) was used as a single home.
Section 2 provides that:
“… ‘house’ includes any building designed or adapted for living in and reasonably so called, notwithstanding that the building is not structurally detached, or was or is not solely designed or adapted for living in…”
The properties in question
In Hosebay, the property at the heart of the case was a terrace of buildings, each originally constructed as a large house. At the time of Hosebay’s enfranchisement application, it owned all the properties under separate long leases, paying a low rent. The properties were sublet in their entirety to an associated company called Hindmill Limited, which ran the business of “short term accommodation for tourists”, providing fresh linen and cleaning services to paying visitors. The premises had been adapted for the purpose, with each individual room containing all services necessary for occupation by an individual or a small number of temporary residents.
Hosebay was found not to enjoy renewal rights under the 1954 Act because (somewhat artificially) business occupation had been handed to the trading company, Hindmill Limited.
In Lexgorge, the property in question was a single five storey terraced house on Queen Anne Street, Marylebone. The long low-rent lease prescribed the use as: self-contained flats on the upper two floors; with professional offices on the first and ground floors; and storage in the basement. At the time of Lexgorge’s enfranchisement application, it was estimated that the main four floors had been used as offices since 1961 (although at the time of the application the offices were not occupied by Lexgorge itself, so it had not acquired any right of renewal under the 1954 Act). Shortly after the application was made, the landlord objected (in accordance with the terms of the lease) to the use of the upper floors as offices and Lexgorge duly converted them back into a maisonette before the date of trial.
A house reasonably-so-called
Hearing both cases together, the Court of Appeal affirmed the following points:
- the leading authorities in connection with the meaning of the word “house” had established that a building qualifies as a “house” within the meaning of section 2 of the 1967 Act if it is “reasonably so called.”
- the fact that a building can reasonably be called something other than a house does not mean it could not also reasonably be called a house;
- the words “designed or adapted for living in” emphasise the need, at least in part, to enquire into the purpose for which the property was originally built (even if it has subsequently been adapted for another use) and whether the property (however originally designed) has gone through a physical adaptation for residential purposes.
- whether originally designed for living in or subsequently adapted for living in, it will be sufficient for the purposes of section 2 that the property satisfies one or other of the criteria, rather than both. In the case of a property which has been physically adapted, however, the most recent adaptation must have been adaptation for living in.
Reiterating the words of Mummery LJ in the case of Prospect Estates Limited v Grosvenor Estates Belgravia 3, however, the Court of Appeal emphasised that one must take account of all relevant circumstances when deciding whether a building is a house reasonably so called, including actual use of the premises and any restriction in the lease itself as to how the tenant is permitted to use the property.
In the case of Hosebay’s terrace of tourist rooms, the Court of Appeal decided that the buildings had clearly been “adapted” since their original construction, but that (notwithstanding that they were adapted from their original townhouse layout to a warren of bedsits) the adaptation was still one “for living in.” In the case of Lexgorge’s offices and maisonette, the landlord conceded that there had been little, if any, adaptation to the layout of the building since its original construction as a single family home with servants’ quarters. The upper floor maisonette had scarcely changed since construction. The landlord thus had to argue that use of all four of the main floors as offices on the day of the tenant’s notice deprived the building of the character of a house.
In his judgment, Lord Neuberger MR emphasised that the test is an objective one having regard to the actual construction or most recent adaptation of the building and not: (1) the intention of the landlord or leaseholder (which may or may not accord with the physical appearance of the building); (2) the specific use being put to the building on the day of the tenant’s enfranchisement application; or even (3) the user permitted under the terms of the lease. These factors may sometimes be relevant, but are by no means decisive. In the leading case of Tandon v Trustees of Spurgeons Homes 4, only 25% of the property in question was being used for residential purposes, but it was held to be a house within the meaning of the 1967 Act.
As the property in Hosebay had both been originally constructed for, and subsequently adapted for living in (albeit in very different ways), the Court of Appeal had little difficulty in finding that it was a house reasonably so called, and that Hosebay Limited could therefore acquire the freehold under the 1967 Act.
The decision in respect of the Lexgorge property was perhaps more significant, as it dealt with a property which, although designed for living in, was being used in its entirety for commercial purposes as an office. The conclusion, however, was unequivocal: that the premises are actually being used in part or in whole for commercial purposes is largely irrelevant if the premises were clearly designed or physically adapted for living in, unless (in addition to that actual commercial use) the lease expressly prohibits residential use in the building as a whole, or restricts it to a very small part of the building.
Key points to look out for in a property
When reviewing a portfolio and considering whether there are any leasehold properties ripe for enfranchisement, commercial leaseholders and investors should consider the following factors, which are listed in order of their importance (following the Hosebay and Lexgorge decisions):
- does the building have the external and internal appearance of a house? What was the purpose of the building’s original design or (as the case may be) most recent physical adaptation? is the property equipped for residential use (whether or not it is being used in that way) with, for example, the necessary plumbing, heating and other facilities?
- are the premises let under a long lease?
- finally (but by no means determinatively) what is the current use, how does the lease describe the building and what is the use permitted under the lease?
Even where the property and lease appear to fall within the ambit of the Hosebay and Lexgorge decisions, there will be questions for the leaseholder as to the financial benefits to be derived from enfranchisement. Swapping a depreciating asset (the lease) for something more permanent (the freehold) seems to add value for the investor and tenant, but the premiums can be high. If the landlord resists the claim the cost of litigation could also be considerable. Whilst Luther Vandross sang that it’s “Never too much” the first step in the process towards buying the freehold should always be to seek advice from an expert enfranchisement valuer.
Landlords seeking to resist enfranchisement claims from their tenants have been dealt a further blow by the Court of Appeal in the case of Cadogan and another v Panagopoulos 5 and another; this time in a claim for collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993.
Under the collective enfranchisement legislation set out in the 1993 Act, tenants of flats are together entitled to buy the freehold of their building if: (amongst other criteria) (1) the total number of flats held by qualifying tenants is not less than two thirds of the total number of flats contained in the premises; and (2) at least half of the qualifying tenants join in the application. If entitled to enfranchise, the tenants are also entitled to acquire such common parts “as are reasonably necessary for the proper management of those common parts” and “common parts” includes “common facilities.”
In 2006, 51 Cadogan Square comprised five flats, each of which was held on a long lease at low rents. There was an additional caretaker flat in the basement. The leases of the five flats contained either a right to caretaker services or the right to call for caretaker services to be provided.
Three of the five leaseholders served notice on Cadogan to buy the freehold. Between 2007 and 2008, Cadogan sought to thwart the application by granting a lease and then a long lease of the caretaker’s flat. If lawful, the effect would have been to raise the number of qualifying leases to six and deprive the three would-be applicants of the majority they needed in order to enfranchise.
In accordance with the spirit of the 1993 Act and without too much difficulty, the Court of Appeal found in favour of the three leaseholders. The leases of the five flats granted the leaseholders a legal right to the service of a caretaker and the caretaker’s flat should be treated as integral to that service. Although also a “flat”, it fell within the definition of a “common facility”, which the enfranchising tenants were entitled to acquire as part of the application they had started in 2006.