The question of whether a property used wholly for commercial purposes may qualify as a ‘house’ for the purposes of the legislation governing leasehold enfranchisement (i.e. the right of a tenant in certain circumstances to compulsorily acquire the freehold from their landlord) was considered by the Supreme Court this month in the case of Howard de Walden Estates Ltd v Lexgorge Ltd [2012] UKSC 41. 

When is a house not a house?

Lexgorge Ltd owned the lease of a terraced building in Marylebone, London which was originally built as a house.  The terms of the lease stipulated that the upper two floors of the building had to be used for residential purposes.  Accordingly, Lexgorge decided to serve notice on its landlord to acquire the freehold - a right given to tenants under the Leasehold Reform Act 1967.  However, on the date that Lexgorge served the requisite notice, the building was used for wholly commercial purposes.  The landlord disputed that the property constituted a "house", which the legislation required before a tenant could enfranchise the lease. 

Previous case law has determined that there are two limbs to the test of whether a property constitutes a ‘house’:

  • is the building designed or adapted for living in? and
  • is it a house reasonably so called?

This case focused on the second test - was the respondent’s building a ‘house…reasonably so called’? In other words, the building would not be treated as a house merely because it met the first limb of the test as a building designed or adapted for living in but it also had reasonably to be described as a house in ordinary terms. 

The Supreme Court held unanimously that it was not.  The fact that the building was originally designed, and once used, as a house and was for some purposes described as a house (the building was described in English Heritage’s records as a ‘terraced house’) did not detract from the fact that its use was ‘at the relevant date…entirely for commercial purposes’ and consequently could not be described as a ‘house…reasonably so called’ for the purposes of the enfranchisement rules.  It was decided that it was not the intention of Parliament that commercial property tenants should have the rights given to residential tenants. 

A key aspect of the judgement was that the building was used 'wholly for commercial purposes'. This leaves open the question as to whether mixed use premises can nevertheless be enfranchised. Unfortunately no guidance was offered as to what weight the court will give to the issue of use in future cases.

A stricter approach to enfranchisement entitlement

Prior to Lexgorge the case law on leasehold enfranchisement had established that it was not too difficult to meet the "reasonably so called" test.  However, that no longer appears to be the case and commercial tenants will need to be aware that judicial interpretation of the laws regarding leasehold enfranchisement have become stricter.  If you hoped to take advantage of the 1967 Act you can no longer rely on a wide interpretation by the court of ‘a house…reasonably so called. Tenants have to make sure that at the relevant date the primary use of the property is residential and not commercial.

Whilst the case of mixed use premises was left undecided, the underlying theme of the judgement suggests that a property with a high proportion used for commercial purposes will also fall out-with the 1967 Act provisions.  As a result, those seeking to acquire their freehold under these provisions will need to adopt long term strategies to ensure that their property, at the relevant date, is without doubt a "house".  This could mean planning for the premises to be re-converted into residential property at the relevant date to take advantage of the enfranchisement laws. However, this could prove to be a very expensive exercise!

This judgement will come as welcome news to landlords.  Prior to this decision a long string of cases had gone the tenant’s way, with the courts holding that if the property had once been a house and still looked like a house it was a house for these purposes, regardless of its current use.  After this judgement, landlords will not so easily be forced to sell their freehold interest in their properties under the leasehold enfranchisement rules.

To read the decision in Howard de Walden Estates Ltd v Lexgorge Ltd click here.