When is a house not a house?
The Hosebay grand finale
Day Estate v Hosebay Ltd (2010) and Howard de Walden Estates Ltd v Lexgorge Ltd (2010)
For those of us that have pondered whether a self-catering hotel or an office could also be a house, we have been in good company. In the widely reported conjoined case of Day v Hosebay and Howard de Walden Estates Ltd v Lexgorge (2012), the Supreme Court has concluded that commercially used buildings will not qualify as houses for the purposes of an enfranchisement claim under the Leasehold Reform Act 1967.
The 1967 Act gives the tenant of a house which he holds under a long lease the right to compulsorily acquire the freehold of the house from his landlord, provided he has owned the lease for two years, the building qualifies and subject to certain other conditions being met.
What amounts to a house (in statutory terms) is a beguilingly simple question and many of us will have a clear idea of this. However, the 1967 Act adopts a far more flexible definition stating that a house can include "...any building designed or adapted for living in and reasonably so called".
Identifying the limits of this definition did not cause the courts too much trouble until 2002 when the government abolished the requirement to reside in the property as a precursor to making a claim for the freehold (commonly known as the residence test). This was to address a perceived unfairness on second home owners and company tenants precluded from enfranchisement rights but nonetheless susceptible to losing their homes at the end of the lease term.
In place of the residence test, the legislation introduced a general exclusion of business tenancies meaning any lease that attracted a right to renewal under the Landlord and Tenant Act 1954.
However, this hurdle was easily surmounted by commercial tenants. By subletting their property to a third party (and therefore no longer occupying it for a business purpose) it was possible to take the lease out of the protection of the 1954 Act. This loophole gave rise to a plethora of enfranchisement claims by commercial tenants, including Hosebay Limited, owning leases of former residential properties used for a current business purpose. This led to a greater focus on the physical aspects of the property and whether it fitted the statutory, if not common sense, interpretation of "a house".
In both the case of Hosebay and Lexgorge, the buildings in question were subject to claims for the freehold under the 1967 Act. Hosebay concerned the three buildings in South Kensington each constructed as separate houses but later converted into serviced apartments providing short term accommodation. Lexgorge related to a building in Marylebone that was also originally built as a house but had been used for commercial purposes from 1961 to the date of the freehold claim.
The question that faced the Supreme Court was whether or not these buildings were "houses" under the 1967 Act, that is, whether they were designed or adapted for living in and a house reasonably so called. In Hosebay, the freeholder asserted that the buildings failed both these tests while in Lexgorge, Howard de Walden considered its office use meant it was not reasonable to call the building a house.
Importantly, in both Hosebay and Lexgorge the buildings were originally constructed as houses. They retained the external appearance of a house and in the case of Lexgorge two internal floors remained unchanged from their original design as residential accommodation. However, at the time the claims for the freehold were made, all buildings were in 100% commercial use. With compelling logic, the landlords' position was that such use meant that the buildings could not possibly be "houses" within the 1967 Act.
The landlords had already lost in the County Court and Court of Appeal, both concluding (albeit reluctantly) that the buildings were "houses" within the 1967 Act. This was so despite their commercial use and that accordingly the tenants' freehold claims could proceed.
However, the landlords' persistence paid off. The Supreme Court judgement was handed down on 10 October 2012 unanimously allowing both appeals and determining that buildings used entirely for commercial purposes, regardless of their original design or current appearance, cannot be houses for the purposes of the 1967 Act.
The Supreme Court's reasoning in each case was the same; that the buildings in question were not houses "reasonably so called". As a result, it was not necessary to decide whether the Hosebay buildings were "designed or adapted for living in".
The judgment has been greeted with universal relief by landlords owning similar buildings vulnerable to enfranchisement claims by commercial tenants.
So what have we actually learned from Hosebay and Lexgorge? The question of whether a building is a house "reasonably so called" relates more to a house being a place to live than a piece of architecture. Total commercial use of a leasehold building will also deprive a tenant of the right to enfranchise under the 1967 Act.
However, there has been no guidance by the Supreme Court on how to treat mixed-use buildings, comprising both residential and commercial. Whether these buildings will continue to qualify under the 1967 Act is a question that has been left unanswered. It therefore seems that the long standing epic of the meaning of a house is set to continue. Watch this space for the next chapter!
(Damian Greenish acted for the Day Estate).
George Coleman, Solicitor
Residential Estate Property Practice
email [email protected]
tel 020 7591 3315