The Leasehold Reform Act 1967 and Commercial Buildings 1 Comment

The Leasehold Reform Act 1967 and Commercial Buildings

Proposition:  Buyers of some commercial buildings should be aware that, although a building may be let for purely commercial use, the tenant may be entitled to acquire the freehold by enfranchisement under the Leasehold Reform Act 1967

The danger that a tenant of a commercial building may be entitled to enfranchise is confirmed by the Court of Appeal in the cases (heard together) of Day and Another V Hosebay Limited; Lexgorge Limited V Howard De Walden Estates [2010] EWCA Civ 748.  Each appeal concerned the meaning and effect of s.2(1) of the Leasehold Reform Act 1967 (“the 1967 Act”) and, in particular, the question of what constitutes a “house” for the purposes of that section.

In his judgement, Lord Neuberger MR (as he then was) set out in some detail the statutory background to the question and as the result is surprising (and as Lord Neuberger noted – see below – almost certainly not what parliament intended) it is worth repeating some of it.

S.1 of the 1967 Act enabled (and still enables) certain tenants of houses (as defined by S.2(1) of the 1967 Act – see below) under long leases to serve notice on their landlords to enfranchise – i.e. to acquire their freeholds from their landlords on supposedly fair terms.  S.1 was originally limited in its effect to relatively low value houses, let on low rents, to tenants who, at the date of their notice, resided there, and had resided there for at least 5 of the preceding 10 years, as their only or main residence.  Over the period of 35 years following the coming into force of the 1967 Act, however, various acts of parliament ultimately removed most of these restrictions, in particular the low rent limitation and the residence requirement.

The residence requirement was removed by S.138 of the Commonhold and Leasehold Reform Act 2002 (the “2002 Act”), which replaced it with a requirement of 2 years of ownership of the lease whether the tenant has been in occupation or not.

Leasehold Reform Act 2002The effect of S.138 of the 2002 Act is not only that an individual tenant can enfranchise even if he or she has never lived in the house, but that a corporate tenant can enfranchise (previously this could never happen as an artificial body could not “reside” in a house).   Another effect is that a tenant who holds a number of “houses” on long leases can at the same time enfranchise all of them (see Howard de Walden Estates Ltd V Aggio [2009] 1 AC 39 – albeit that was in relation to a statute relating to collective enfranchisement).  This obviously had serious implications for landlords and these were partially addressed by a new subsection (1B) introduced into s.1 of the 2002 Act which excluded a tenant who had the protection of Part II of the Landlord and Tenant Act 1954 (i.e. a business tenant) from being able to enfranchise.  Day however demonstrates that this provision is in practice of limited value to landlords.

So whether a building  in commercial use can be enfranchised depends upon whether it can be properly regarded as being within the definition of a “house” or “house and premises” (the enfranchisement right extends to “premises” as defined “if let with the house”).  In answering this question, it should be borne in mind that unlike S1 of the 1967 Act, S.2, which is concerned with the definition of “house” is unamended and remains in precisely the same form as it was when first enacted.

S.2(1) of the 1967 Act provides 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 the 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 the 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”

The only other section of the 1967 Act which is necessary to refer to is S.3, which explains what is meant by a “long tenancy”.  This also remains unchanged; broadly it means a tenancy granted for a term of years certain exceeding 21 years (there are certain exceptions which will rarely apply).

The nature of the properties in each of the two appeals is worth mentioning, Day v Hosebay Ltd concerned three properties in a terrace of buildings which were originally constructed, and first occupied, as houses.  Each property was let on a long lease.  Hosebay acquired all three leases in 1996 and was still the tenant at the time of the case.  Hosebay served notices under s.8 of the 1967 Act to acquire the freeholds of the three properties.

The three properties were by then being used to provide “short-term accommodation for tourists and other visitors to London” (with the exception of two rooms in building, one of which was used for office and reception purposes and the other for storage).  The Judge at first instance had to decide, first, whether each of the three buildings was a “house” within s.2(1) and, secondly, whether Hosebay was excluded from enfranchising any of the properties by s.1(1B) which – see above – excluded business tenancies.  On the first issue, the Judge rejected the landlord’s case that each of the properties was not a “house”.  The landlord’s case was based on two grounds; that each of the three properties:-

a)    was not “designed or adapted for living in” and

b)    was not a “house reasonably so called” given the use to which it was then being put.

The landlord appealed on both points.

LeaseLexgorge Limited V Howard De Walden Estates Ltd concerned a building in Marylebone originally built in about 1760 as a substantial house.  The building was for many years occupied for that purpose.  It was subject to a lease granted in 1952 for a term of around 109 years and in the lease was described as a “messuage or residential or professional premises” and its use was restricted to “self- contained flats or maisonettes on the upper two floors, professional offices on the first and ground floors, with the use of the basement being restricted to storage … and lavatory … in connection with other parts of the demised premises”.  The lease was acquired by Lexgorge Limited in 1978 and 25 years later the company served notice on the landlord to acquire the freehold.  Once again the landlord objected on the basis that the property was not a house within S.2(1).

The history of the use of the building following the grant of the lease in 1952 was not entirely clear; it appeared probable that from 1961 onwards the use of all four upper floors was as offices.  The landlords objected to that use of the upper two floors and that use ceased shortly after Lexgorge served its enfranchisement notice.  There appeared to be no doubt that the office use of the upper two floors continued until after the notice was served (although at the time of the case they were used as a maisonette).  The ground and first floors were from 1978 used as solicitors’ offices.

The only issue before the Judge was whether the property was a “house … reasonably so called”.  The Judge held that the fact that all the property was being used for office purposes at the date of the notice and that under the terms of the lease about half the internal area could not be used other than for office purposes did not prevent the property from being a “house … reasonably so called”.  Again, the landlords appealed.  The Court of Appeal considered a lot of case law concerning whether the premises constituted a “house” for the purposes of S.2(1).  The principal authority on the effect of the words “designed or adapted for living in” is the unanimous decision of the House of Lords in Boss Holdings Ltd v Grosvenor West End Properties Ltd [2008] 1 WOR 289.   Lord Neuberger quoted part of his own opinion in that case (with which the other members of the Committee agreed):-

the words “designed or adapted for living in”, as a matter of ordinary English, require one first to consider the property as it was initially built: for what purpose was it originally designed?  That is the natural meaning of the word “designed”, which is a past participle.  One then goes on to consider whether work was subsequently done to the property so that the original “design” has been changed; has it been adapted for another purpose, and if so what purpose?  When asking either question, one is ultimately concerned to decide whether the purpose for which the property has been designed or adapted, was “for living in””.

Lord Neuberger also quoted another part of his opinion in Boss dealing with the question “whether a property would be a “house” if it had been designed for living in, but has subsequently been adapted to another use”.  He said:-

“As a matter of literal language, such a property would be a house, because “designed” and “adapted” appear to be alternative qualifying requirements.  At least at first sight, such a conclusion seems surprising, so there is obvious attraction in implying a qualification that, if a property has been, and remains adapted for a purpose other than living in, the tenant cannot rely upon the fact that it was originally designed for living in. However, a term is not easily implied into a statute, and further reflection suggests that the literal meaning of the words is not as surprising as it may first appear, particularly bearing in mind the existence of the residence requirement in s.1(1) of the original Act.  It is unnecessary to decide this point, and, particularly as it was only touched on in argument, I do not think we ought to do so”.

The Court of Appeal in Day also referred to earlier decisions on the meaning of “house … reasonably so called” – they are in the judgement if anyone wishes to research them and it is not necessary to refer to them here.  Suffice it to say that the Court of Appeal ultimately agreed after careful analysis with the judges at first instance in both cases and dismissed the landlords’ appeals.

It is worth noting the Master of the Rolls comment at the conclusion of his judgement:-

I reach my conclusion with no particular enthusiasm.  The 1967 Act was originally intended to assist residential tenants occupying their houses as their only or main residence to acquire their freeholds.” And again “I rather doubt that the amendments made to s.1 in 2002 … were intended by the legislature to have this sort of effect”.

Conclusion: save in obviously inappropriate cases (eg a new purpose built office building) it would be prudent for investors acquiring commercial property to investigate the history of the property’s origins and prior use so as to the ensure that their tenants will not be able to exercise enfranchisement rights under the 1967 Act.

 

 

 

If you liked this article, please share it.

This Post Has 1 Comment

  1. raymond cooper says:

    The decision of the Court of Appeal addressed in the above post has now been reversed by the Supreme Court; Hosebay Limited v Day and Another; Lexgorge Limited v Howard de Walden Estates Limited Supreme Court 10th October 2012. The Supreme Court adopted a robust interpretation of S.2(1) of the Leasehold Reform Act 1967 based on its reading of the intention of the legislation and in effect separated the two parts of the definition of “house”; in both cases the decision of the Court was that although the buildings in question may have been “designed or adapted for living in” they were in neither case a “house reasonably so called”. That would seem to be the end of the matter and will no doubt be a great relief to landlords and in particular the London estates. However, as pointed out by Philip Freedman CBE, QC (Hon) (quoted by Jess Harrold in his Estates Gazette article on 10th October 2012) the judgement does not remove all difficulties. Mr Freedman pointed out “The Act indicates that partial use will not rule out enfranchisement, and the case does not discuss this point. It also does not address the situation where the buildings are unused at the date of the claim notice. Therefore a number of important issues surrounding enfranchisement may still be open to interpretation.”

Leave A Reply





Please fill out the required fields *