When is a house not a house?

Grosvenor (Mayfair) Estate -v- Merix International Ventures Ltd and another [2017] EWCA Civ 190

Summary

Under the Leasehold Reform Act 1967 (the “Act”), a qualifying tenant may be able to compel his landlord to sell the freehold or grant a new lease for an additional 50 years.

In this case, the Court of Appeal had to consider whether a vacant property with a history of residential and office use was a “house” within the meaning of the Act.

The Court agreed with the earlier decision of the County Court that the property was indeed a “house”, meaning that the tenant could acquire the freehold. The Court refused to interfere with the initial finding on the basis that the judge had directed himself to the correct authorities.

The facts

This case relates to a large townhouse at 41 Upper Grosvenor Street, together with its mews annex. Following a period of residential use by King Peter II of Yugoslavia until shortly after the Second World War, the property had a history of mixed usage, as both offices and residential accommodation. The original external appearance and some original internal features had been retained, but with alterations to adapt it to office use. However, its most unusual feature was the fact that it had been totally unoccupied since 2000.

The tenant, Merix International Ventures Limited (“Merix”), purchased the lease for £25,850,000 in 2007. It subsequently claimed that it was entitled to acquire the freehold from the landlord, Grosvenor (Mayfair) Estate (“Grosvenor”), under the terms of the Act.

Grosvenor resisted on the basis that the property was a disused office building with ancillary residential accommodation, rather than a house.

The law

The Act specifies certain criteria that must be fulfilled if the tenant wishes to acquire the freehold or to extend his lease. First, in order to be a “qualifying tenant” under the Act, the tenant must hold a lease that was granted for a term of over twenty-one years, at a low rent. If the tenant has such a lease, and has owned it for more than two years, he is then able to serve notice on the landlord claiming the right to buy the freehold or to extend the lease.

Secondly, the Act will only apply if the building is a “house”. The Act defines a house as “any building designed or adapted for living in and reasonably so called”. This includes a house that has been divided horizontally, i.e. split into different apartments.

The breadth and vagueness of this definition have proven fertile ground for disputes over the years. However, if a tenant can satisfy it, he will be entitled to use the Act to acquire the freehold or extend his lease, whether the landlord is happy or not.

The first decision

The judge in the County Court considered the question as to whether the property was “a house” in light of precedent case law on the point.

He found that the property fell within the scope set out in the House of Lords decision in Boss Holdings Ltd v Grosvenor West End Properties Ltd [2008] and was therefore “a house” within the meaning of the Act. In turn this meant that Merix was entitled to acquire the freehold.

Grosvenor appealed the decision.

The Court of Appeal decision

The Court of Appeal upheld the County Court decision and dismissed Grosvenor’s appeal.

Grosvenor argued that the property was not a “house”, but a disused office block, because of its most recent use and internal structure. It highlighted sanitary fittings, fire doors, server room and the reception desk – all features of an office building rather than a residential one. In addition to this, there had been multiple lettings over the years that required tenants to use lower floors as offices and upper floors and mews as residential accommodation.

Grosvenor also tried to challenge the first decision by arguing that the building was not a house “reasonably so called” as required by the Act. It claimed that, as the last use of the building was for offices, that the property could not be a “house” and therefore that Merix could have no claim to the freehold.

Despite these arguments, the Court held that houses are “infinitely variable in character and function”. It was not possible simply to rely on the most recent use, as this did not necessarily determine the character and identity of the property. Admittedly alterations and adaptations might have changed the building’s current function, but the last user could not be the only relevant consideration. Even with the hallmarks of office use left behind, the building could still be a house.

The Court considered other cases on the point and found that the County Court judge had taken full account of all the guidance in the precedent case law together with his own evaluation of the facts. It agreed that he had followed the correct precedent in Boss, as the facts of the property and its history of usage were so similar – indeed, the properties were even on the same street. As the judge had taken such “an exhaustive factual analysis and … full and accurate noting of the legal principles”, the Court of Appeal therefore refused to overturn his assessment.

Our comments

The case is a useful reminder that the Court of Appeal will be reluctant to interfere with a well-reasoned judgment. Whilst it can only shed so much light on the definition under the Act, as each case will turn on its own facts, the case also highlights the fact that even a building that looks like an office can be a “house” if it has been designed or adapted for residential accommodation. The Court’s words about the chameleon nature of buildings should echo in the minds of all property professionals.

For Landlords

Freeholders who have tenants with long leases at low rents should be aware of this case. If the building has been “designed or adapted for living”, they could face an unwanted claim to sell the freehold or to extend the lease by another 50 years.

All landlords, developers and investors should assess carefully any property with residential elements or a history of residential use, even if the building is derelict or used as offices. If necessary, advice should be sought on the lawful use of the property to avoid surprises.

For Tenants

Tenants wishing to acquire their freehold or to extend their leases should be aware that a history of commercial use will not necessarily rule out the option. The function of the building can vary an infinite amount of times without changing its legal identity as a “house”. Advice should therefore be sought at the outset to see whether the Act can put them in a better position.