The Supreme Court recently gave judgment on appeal in the cases of Day and another v Hosebay Limited [2012] EWCA Civ 748 and Howard de Walden Estates Limited v Lexgorge Limited [2012] UKSC 41 known collectively as "Hosebay" on the issue of whether properties used wholly for commercial purposes may qualify as a "house" for the purposes of the Leasehold Reform Act 1967 (the "Act"). In 2002 there was a change to the enfranchisement legislation and the residence requirement was removed to recognise the fact that tenants often own their leases through a company which by definition could not "reside" at the property.

This change, however, brought new issues to the fore. Tenants who owned leases of buildings that were formerly houses, but had been converted for commercial use, realised that they might be able to acquire the freehold of the building by using the enfranchisement legislation. Commercial landlords grew concerned that they stood to lose valuable freeholds to commercial tenants and investors, rather than to the residential tenants that the Act had been introduced to protect.

The Hosebay case concerned three buildings in central London originally built as separate houses in a Victorian terrace. Hosebay's leases contained a restriction that the houses were to be used for residential purposes, but on the date Hosebay served notice to acquire the freehold under the Act the houses were being used wholly as a self-catering hotel. Lexgorge held a lease of a five storey building in central London, also originally built as a house. The lease restricted the use of the upper two floors of the building to residential flats. On the date Lexgorge served its notice to acquire the freehold the building was used wholly as offices. In the lower court, the judge concluded, in both cases, that the buildings were "houses" for the purpose of the Act and the Court of Appeal upheld those decisions, albeit reluctantly.

The Supreme Court had to decide if the buildings were "designed or adapted for living in" and whether they were houses "reasonably so called". In deciding the issues the Supreme Court adopted a pragmatic and sensible approach to these questions. They decided to consider the Act in the context of its original purpose, rather than try to decide what the legislation would have said had Parliament known of the consequences.

It was held by the Supreme Court, in both cases, that neither property constituted a "house" for the purposes of the Act. It decides unanimously, in both cases, that the buildings were not houses"reasonably so called". In Hosebay it was because when the notice was served, notwithstanding the appearance of the buildings or that they were referred to as houses for some purposes, their use was entirely commercial. In Lexgorge the building was also not a house"reasonably so called" because it was used wholly as offices.

Prior to these judgments, the large estates in central London were facing many enfranchisement claims under the Act from tenants of buildings in commercial use. Clearly this concern will be somewhat relieved by the decision of the Supreme Court.

Where a building was originally designed or adapted for living in, the permitted use under the terms of a subsequent lease and the actual use at the date of a claim are relevant in determining whether the Act applies. Many buildings were designed or adapted for residential use, but that is no longer their use. They could, however, revert to their original use prior to service of a notice under the Act to purchase the freehold, so these judgments do not necessarily herald the avoidance of all claims in the future where a property is in commercial use. Great care should be taken by landlords at the drafting stage of a lease as well as when a notice is received to ensure that the Act does not enable a commercial tenant to buy their freehold.