Date 21 September 2010
You may well have read about the landmark Court of Appeal decision made by Lord Neuberger earlier this summer in Day and another v Hosebay Ltd; Howard De Walden Estates Ltd v Lexgorge Ltd in relation to the meaning and effect of s 2(1) of the Leasehold Reform Act 1967 (“the 1967 Act”). This article explores the opportunities this decision presents for commercial tenants of certain premises and the threats for their landlords. For those of you unfamiliar with the facts and the decision it is summarised below.
The 1967 Act
This legislation enables certain tenants of houses under long leases to compel their landlord to transfer the freehold interest to them “on fair terms”. While the 1967 Act has been around for over 40 years, successive amendments mean that the effect of a number of its provisions has changed over time. However, the 1967 Act has always been expressed to apply to “houses”.
The 1967 Act defines a house as follows:
“House includes any building designed or adapted for living in and reasonably so called, notwithstanding that the building is not structurally detached, or was or is not solely designed or adapted for living in, or is divided horizontally into flats or maisonettes; and –
a) where a building is divided horizontally, the flats or other units into which it is so divided are not separate 'houses' although the building as a whole may be: and
b) where a building is divided vertically the building as a whole is not a 'house' though any of the units into which it is divided may be.”
You might therefore assume that it has no application to commercial premises, especially as leases which attract the protection of the Landlord and Tenant Act 1954 are expressly excluded. Not so, as the decision of Lord Neuberger explained.
The Facts
The case concerned 4 properties. The first three properties involved were originally constructed, and first occupied, as large houses, in South Kensington let on long leases with a restriction to residential occupation. The tenant company acquired these leasehold interests and sublet them to an associated company which used the properties as single self catering rooms for short term holiday lets to tourists (with an office, reception and storage facilities).
The fourth property was originally built as a house and the lease restricted use to residential flats on the upper two floors, professional offices on the first and ground floors, with the use of the basement being restricted to storage. The company which held the lease was owned by the solicitor who occupied the lower floor offices.
The Decision
Lord Neuberger decided that the first three properties had been designed or adapted for living in on the basis that if the original design as a house did not subsist then the effect of the most recent works of adaptation (the precise works were not discussed in the case) if they were works of adaptation, adapted those properties for living in. He then went on to decide that each was a house reasonably so called on the basis that the determining factor was the external and internal physical character and appearance. Therefore, the tenant was entitled to acquire the freehold under the 1967 Act.
In relation to the fourth building, the only question to be resolved was whether it was a house reasonably so called. He decided that it was a house bearing in mind its external and internal character and appearance and the description of the property in the lease as “messuage or residential or professional premises”. Therefore, the tenant was entitled to acquire the freehold under the 1967 Act.
Opportunities and Threats
This decision could have far reaching consequences for some sectors of the commercial market. There is no doubt that the legislation was only designed to offer residential tenants the right to buy their house from their landlord. However, it is clear that this right now goes much further and extends to tenants of mixed use properties which may not have been occupied residentially for a long time.
Looking at the main issues decided by Lord Neuberger, commercial tenants of buildings which were originally designed for living in and have not been adapted out of such use could maintain an enfranchisement claim against their landlord. Furnishings and furniture are not relevant considerations when looking at adaptation. The issue, when looking at the most recent works of adaptation, is to assess objectively whether they resulted in the property being adapted for living in. This is of course a matter of expert evidence. The use to which the building is actually put at the time a claim is made is not of great importance.
If the design/adaptation criteria are satisfied, then whether the building remains a house reasonably so called is to be determined essentially by reference to its external and internal physical character and appearance of the property. Permitted or actual user is not decisive in this unless residential use is either prohibited entirely, or restricted to a very small part of the building, and the actual use accords with that.
It is probably not of much of a surprise to you that tenants whose business is short/medium term lettings of residential rooms/apartments seem prime candidates to take advantage of this ruling and their landlords are at risk. Further, commercial tenants who sublet parts of their buildings to residential occupiers but occupy or sublet the remainder of the building for commercial use may also be in a position to pursue enfranchisement claims.
However, in the case of lettings of houses with absolute prohibitions as to residential use or limitations on residential use to a very small part of the building, the possibility of an enfranchisement claim is more limited. What constitutes a “very small part of the building” is still open for determination but it is likely that 11% residential use would not be enough to support a claim (following Prospect Estates Ltd v Grosvenor Estates Ltd [2008] EWCA Civ 1281) but 25% may be sufficient (following Tandon v Trustees of Sprugeons Homes [1982] AC 755).
If you or one of your client’s wishes to explore whether their premises are affected by this decision, either to take advantage of the opportunity to acquire the freehold of their premises or are concerned about a potential claim then please do not hesitate to contact Chris Alexander on 01727 798042 or by email at chris.alexander@salaw.com or any member of the Property team.
© SA LAW 2010
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.