What is a house?
The normal meaning certainly carries the idea of residential use. People live in houses, but work in offices. Or do they? A building may be used partly as a residence, partly for business. Its external appearance may give little if any indication of the use inside. Its internal layout may differ little whether it is used as an office or for living. Many of us work from home now. And aren’t we all increasingly hunched over computer terminals whether we are working, playing or running a household?
What counts as a house for the purposes of the 1967 Leasehold Reform Act is of crucial concern to the owners of freehold property and to many of their tenants who hold a lease granted for more than 21 years (even if it is coming to an end). The Act enables the tenant, subject to certain qualifications, to require the freeholder to sell the freehold of a “house” to him on terms taking into account the value of his lease a form of private compulsory purchase.
A sharp rise in such purchases may be predicted as a result of the recent Court of Appeal decisions in the conjoined cases of Day v Hosebay Limited and Howard De Walden Estates v Lexgrove. These have highlighted that even properties used substantially as offices or for other commercial purposes may be classified as houses for the purposes of the Act. As a result traditional freehold empires such as the Cadogan and Grosvenor Estates whose fiefdoms stretch over swathes of upmarket properties in the squares and terraces of central and west London may find themselves at risk of significant breakup. Many of their tenants, often themselves smaller property companies, will scent a legal and commercial opportunity.
The Act when originally promoted by a government White Paper in the 1960s aimed to provide a fairer balance between freeholders and “occupying leaseholders”. In order to qualify for the right to buy their freehold, tenants needed to occupy the house themselves as their residence. Supporters of what was called “leasehold enfranchisement” rejoiced in what they saw as a release of feudal power.
Opponents protested in vain at the infringement of private property rights.
Enfranchisement rights have since been extended to combinations of individual flat owners by the 1987 Landlord & Tenant Act (requiring the freeholder to offer the freehold to them before sale to a third party) and, more effectively, by the 1993 Leasehold Reform, Housing and Urban Development Act (enabling majorities of tenants to band together and purchase collectively). However attention was returned to the 1967 Act by amendments in the 2002 Commonhold and Leasehold Reform Act which abolished the need for the enfranchising tenant of a whole house to reside there. The only qualification in most cases now is that he should have held the lease for at least two years. Thus property-owning companies, which by their nature could never have fulfilled a residential qualification and which are quite the antithesis of the owneroccupiers apparently intended to be benefited by the original Act, may enfranchise, provided that the property concerned is a house.
Section 2(1) of the original 1967 Act, which survives the amendments intact, defines a house as including “any building designed or adapted for living in and reasonably so called” (emphasis added). The litmus test would seem to be: would the reasonable man or woman call the subject building a house?
But, as already pointed out, the word “house” is in every day language a loose concept (the House of Lords should know). What some people call a house, others might call something else. Lord Roskill, delivering the majority judgment in the 1982 case of T andon v Trustees of Spurgeons Homes, favoured a wide embrace: “As long as a building of mixed use can reasonably be called a house, it is within the statutory meaning of “house”, even though it may reasonably be called something else….If the building is designed or adapted for living in, only exceptional circumstances would justify a judge holding that it could not be reasonably called a house. They would have to be such that nobody could reasonably call the building a house.”
The judges making up the Court of Appeal determining Grosvenor Estates Limited v. Prospect Estates Limited in November 2008 seemed to have recoiled from this liberal approach. The case concerned an early Victorian terrace house in Belgravia, attached to but divided vertically from the houses on either side. It had been originally designed for residential use and still retained the appearance – internal as well as external – of a residence. Two additional storeys added to the building during its history did not detract from this appearance. However it had been let for the last fifty years or more as offices on multiple subtenancies, with only the top storey used as ancillary residential accommodation. In these circumstances the Court of Appeal refused to accept the County Court
Judge’s finding that the property could be “a house reasonably socalled”.
Lord Justice Mummery in the lead judgment concluded that “the Building was designed for living in, but, by reason of its prescribed and preponderant office use, it is impossible to say that, at the relevant date, the Building could reasonably be called a house”.
Lord Justice Goldring, concurring, dismissed the tenant’s argument that a building could reasonably be called a house “although noone can lawfully live in virtually 90% of it …. That cannot be right”.
Lady Justice Smith also stressed the percentage (88.5% in fact) of floor area being used as offices, declaring that the first instance Judge had failed to give proper weight to this factor. Had he done so, “he would have been driven to the conclusion that this building is in fact an office building and cannot reasonably be called a house”.
These judgments were greeted with relief by institutional and other landlords unhappy to be forced to part with the reversion of tenanted commercial property. It seemed that the courts would now insist upon a degree of residential occupation, albeit not of the enfranchising tenant himself, as being necessary to qualify for enfranchisement.
One could not merely divert Clapham omnibuses past a building in order to ask their, let us assume reasonable, passengers whether they would call it a “house”. The observer must look inside and, if not making a study of the lease provisions, at least be informed how the building is used.
But how much nonresidential use should lead to disqualification? Lord Justice Mummery described the building in Pro spect as having “prescribed and predominant office use”, then of having “prescribed and preponderant office use.” By prescribed he presumably meant to refer to the use required by the lease. The Shorter Oxford Dictionary defines “predominant” as “having ascendancy, power, influence or authority over others”, and “preponderant” as “surpassing in weight; heavier”; figuratively, “surpassing in influence, power or importance”.
None of the appeal judges in Prospect set out in objective terms what extent of office use of premises makes it “preponderant” or “predominant” so as to disentitle them from being called a “house”. 11.5% was not enough for the tenant in Prospect. What about 50%, or 40%, or 20%?
In any event the appeal decisions in H osebay and Lexgrove now backtrack substantially on Prospect. The lead judgement of the Master of the Rolls, Lord Neuberger, while acknowledging that the decision in Prospect was binding in principle on his court, plainly disagreed with it. He could not accept that the description of a building as a house should turn essentially on what the user covenant in its lease prescribed “ If most people were asked whether a building could reasonably be called a house, I am not convinced it would occur to them to ask about the permitted use under any lease, or that they would be influenced if told what the permitted use was”.
Hosebay concerned three properties in a terrace of buildings in South Kensington, each originally constructed as a large town house and let by a long lease (which described the premises as “the messuage or dwellinghouse”). They were now used as short term residential accommodation for tourists and other visitors to London. Lexgrove concerned similarly an original town house residence that at the relevant date was being used as offices, albeit in breach of a covenant in the lease requiring residential use of the two upper floors.
Lord Neuberger, supported by Lord Justices Lloyd and Moore Bick, concluded in each case that the premises were “houses, reasonably socalled”, confining the application of the Prospect decision to cases where both the permitted and the actual use of the building excluded residence or limited it to a very small proportion.
He went on to state that he reached this conclusion “with no particular enthusiasm”. The effect of the 2002 amendments was that individual or company tenants holding substantially commercial leasehold premises which they neither occupied nor intended to occupy could now take advantage of enfranchisement rights originally intended to benefit owner occupiers. This, he thought, “may well be an example” of the law of unintended consequences arising from statutory amendment “ However the issue we have to decide is not what we think the legislature would have said if it had fully appreciated the consequences of the primary amendment it made to the 1967 Act (removal of the residence requirement) but what we think that the Act means in the light of that amendment.”
In other words (left tactfully unexpressed by his Lordship) the appeal judges in Prospect had made their decision on what they thought the law should be he was applying the law as it regrettably is.
The current Coalition Government no doubt has graver national issues to ponder at present than further amendment of the enfranchisement legislation. Moreover tenant friendly Liberal Democrats are unlikely to enthuse over the prospect of reining back tenant rights, even if they are being exploited for essentially commercial ends. The
way seems therefore open for a flood of freehold acquisitions from the great estates in the next few years, whether the judges like it or not.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.