The Leasehold Reform Act 1967 was introduced to allow residential tenants with long leases to acquire the freeholds of their properties, a process called 'enfranchisement'. In 2002 the Act was amended to remove the requirement that the tenant must occupy the property as his residence and to permit enfranchisement by companies. These changes were balanced by the introduction of an exclusion preventing tenants with protected business tenancies under the Landlord and Tenant Act 1954 from enfranchising, and also by the retention of the requirement that the property in question be a 'house'. A 'house' is defined in the Act as 'any building designed or adapted for living in' (the first requirement) and 'reasonably so called' (the second requirement).
In the recent Court of Appeal case of Day and Day v Hosebay and Howard de Walden Estates v Lexgorge, the Master of the Rolls, Lord Neuberger has held that as a result of this change, tenants of commercial premises may now be able to enfranchise. The case concerned three townhouses which had been converted into a number of self-contained residential units which were let to provide short term accommodation for tourists and other visitors to London. One of the townhouses also contained an office and a storeroom on the lower floors for reception purposes. Lord Neuberger noted that each of the units had been 'designed for living in' or 'adapted for living in', which appeared to be alternative requirements. The first requirement was therefore clearly satisfied. He also held that the buildings could also reasonably be called houses, satisfying the second requirement. The tenant was therefore entitled to enfranchise.
A small comfort for landlords are Lord Neuberger's comments that a property which was originally designed for living in could be adapted out of residential use. Presumably therefore if all five floors of a townhouse have been converted for commercial use, enfranchisement would not be possible as the property would fail the first requirement.
In reaching his decision, Lord Neuberger said that the question of whether a property may reasonably be called a house should be 'determined essentially by [its] external and internal physical character and appearance'. Lord Neuberger considered comments in previous cases which emphasised consideration of the user covenants to decide that a property was not in fact a house. Lord Neuberger recognised this principle. However, he stated that although the permitted use under the lease would be a relevant factor, it would only be of great importance if the lease prohibited residential use entirely, or restricted it to a very small part of the building and the actual use accorded with that clause. Finally, he approved earlier dicta that 'the fact that a building could reasonably be called something other than a house would not mean that it could not also reasonably be called a house'.
At first glance it may seem that this is a disastrous outcome for landlords of houses, who may find themselves in the situation where properties let to commercial tenants become 'adapted for living in', potentially enabling tenants to enfranchise and purchase the property on favourable terms.
However, although the safeguards in the Act appear weak, there are several layers of protection which operate to exclude the vast majority of commercial properties:
- in order to enfranchise, the premises must be reasonably described as a house. Cases suggest this will exclude premises where there is a total restriction against residential use;
- the premises must also be designed or adapted for living in. This is unlikely in most commercial properties particularly as Lord Neuberger states that there is scope for premises which were originally 'for living in' to be adapted out of this definition;
- finally the tenancy must not be a protected tenancy under the LTA 1954.
That being said, the combined effect of the changes to the law on enfranchisement in 2002 and the way in which this has been interpreted by the courts means that commercial landlords can no longer afford to completely ignore the effect of enfranchisement on their commercial lettings and should be pro-active in avoiding the pitfalls highlighted by this case.
The occasions where landlords should be particularly careful are where they are letting a property that could be described as a house, where those premises are capable of being lived in and where the property is let on a long letting which is not a protected tenancy under the LTA 1954.