In a bold and sensible decision, the Supreme Court has overturned the Court of Appeal rulings in Day v Hosebay and Howard de Walden Estates v Lexgorge and clarified which properties can be enfranchised under the Leasehold Reform Act 1967.
Commenting on the decision, which has far-reaching implications for both landlords and tenants, Tim Reid, Senior Associate in Hogan Lovells' real estate team, said:
"It has been confirmed that if a property was adapted some time ago for commercial use and is occupied by a commercial entity or for commercial purposes rather than as a residence, it cannot reasonably be called a house."
The 1967 Leasehold Reform Act was intended to redress the balance between freehold property owners and their residential tenants; empowering leaseholders to extend their leases or buy the freehold from their landlord, rather than watching the term and value of their investment diminish over time.
Changes in property law in 2002 took away the need for the applicant tenant to be resident in the house. The change recognised the fact that many occupiers held their leases through a company (for tax or other reasons) which, by definition, could not "reside" in the house.
Following the removal of the residence requirement, the only real hurdle to enfranchisement was the condition that the subject property be designed or adapted for living in and could reasonably be called a "house". What was not clear was whether this caught houses which had subsequently been converted for non-residential use.
The uncertainty led to applications by, amongst others, Hosebay and Lexgorge to wrestle away from the freeholders properties which had been used or adapted for some time for commercial use (as offices or hotels, for example).
The Supreme Court has overcome this ambiguity by saying that the Act must be read in the context of its original statutory purpose. This means that if a property has been converted for commercial use and is occupied by a commercial entity or for commercial purposes, it cannot reasonably be called a house. Tenants of such properties should not therefore enjoy a right of enfranchisement under the 1967 Act. Enfranchisement should be reserved for properties which bear the physical characteristics of a house and are also used and occupied for residential purposes.