When is a House not a House? Leasehold Enfranchisement Update
The word “enfranchisement” is used in many contexts. Generally, it refers either to the acquisition of a freehold or an extension to the term of a long lease. Some enfranchisement relates to individual tenants. Another type is collective, involving a consortium of tenants.
The Leasehold Reform Act 1967 (as amended) gives qualifying tenants of long leases of houses two important rights, namely:
- to purchase the freehold of that house; and
- in the alternative, to the grant of a new lease for the remainder of the existing term of the tenant’s lease plus an additional 50 years.
Note that enfranchisement claims in respect of flats are governed by separate legislation, namely the Leasehold Reform, Housing and Urban Development Act 1993.
The right conferred by the 1967 Act are, of course, exercisable subject to conditions. These are set out in the 1967 Act. Over the years, these conditions have been revised. The initial requirements were strict. They included value limitations, low rent tests and a requirement for the tenant to be resident at the property. The value limit has been removed, as has the low rent test in most cases. In 2002, the residence test was replaced with a two year ownership criterion.
The removal of a residence test potentially paved the way for enfranchisement by commercial tenants and property investors. This had wide-ranging consequences. Hence the two year ownership requirement was enacted. A more limited residence test was also established in an attempt to exclude business tenants. But ways around these tests were found. The ownership test can be obviated by a purchaser of a lease asking the seller to make the claim to enfranchise and then assign this to the buyer. Business use can be separated from the lease through sub-tenancies.
Consequently, the 2002 amendments made enfranchisement available to many more tenants than originally envisaged. Institutional landlords were exposed to losing their valuable freehold properties.
This tension resulted in litigation over the meaning of the word “house” in the 1967 Act. Section 2(1) of the 1967 Act defines a house as “any building designed or adapted for living in and reasonably so called …” (emphasis added). Whether a building is a house is therefore a two stage test. There has been considerable case law on this point, culminating in two appeals to the Supreme Court, known together as Hosebay, judgment in which was handed down in late 2012.
The Hosebay case itself concerned three adjoining terraced houses in RosaryGardens on the Day Estate in South Kensington. Each was externally a townhouse but they had been joined together and divided internally into a single building containing small self-contained units. These were occupied by foreign students and tourists on short-term lets. Hosebay Ltd was not, at the time the enfranchisement claim was made, in business occupation. It had sub-leased the building to Hindmill Limited. At the original trial and in the Court of Appeal, it had been decided that each building was a “house” within the meaning of the 1967 Act, as it was “designed and adapted for living in”.
Lexgeorge, the second case heard with Hosebay, involved a townhouse, this time in Marylebone. At the date of the claim to enfranchisement, it was leased in its entirety to a firm of solicitors. As the claim progressed, part of the building was given over to residential use. Again, at first instance and at the Court of Appeal it was decided that this was a “house” within the meaning of the 1967 Act.
The Supreme Court overturned these decisions. In respect of Hosebay, it held that the building was essentially used as a “self catering hotel” which cannot be a “house reasonably so called”. Lord Carnwath, giving the lead judgment, did not consider the first aspect of the house test in detail. He did state, however, that “living in” a property must mean something more settled than simply “staying in” it. The Hosebay facts did not meet this requirement.
The Court gave similar judgment in respect of Lexgeorge. Because in that case the building in question (at the time of the claim to enfranchisement) was used wholly for offices, that could not be a “house reasonably so called”.
Hosebay provides interesting guidance in this area. The decision will certainly be welcome news to institutional landlords. The clear policy motivation behind the decision lies in seeking to close the loopholes created by successive amendments to the 1967 Act. As Lord Neuberger put it in the Court of Appeal, the case is illustrative of the “law of unintended consequences”.
As a result of Hosebay, it seems that if the building has the appearance of a house and is lived in as a residence, the s. 2(1) definition of “house” will be met. If, however, it is used wholly for business purposes it will not qualify. The case also highlights that it is the use of the building as at the date of service of notice of the tenant’s claim to enfranchisement which is determinative as to whether the building constitutes a “house”. Later changes are irrelevant. The case does not, however, assist with the vexed issue of mixed use premises (i.e. part residential, part business). Doubtless such premises will give rise to further litigation on this topic in the future.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 020 7404 0606 and ask for your usual Goodman Derrick contact.