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This appeal concerned what is capable of constituting a “house” for the purposes of the right to enfranchise or acquire an extended lease contained in the Leasehold Reform Act 1967.

“The word “house” is one of the 200 most frequently used words in the English language, and one of the 20 most frequently used nouns” : so began the judgment of Lewison LJ in Magnohard v Cadogan [2012] EWCA Civ 594. The Judge might have added that “house” is also a word with a great many different meanings and it must be doubted whether using such an elastic term as a central concept in a property statute was a wise choice.

But that was what Parliament chose to do when enacting the Leasehold Reform Act 1967, which confers on long lessees of “houses” the right to “enfranchise” i.e. to acquire the freehold of the house or (in more limited circumstances) the right to acquire an extended lease of it. The appeals in Hosebay and Lexgorge were the latest (and probably not the last) in a line of appeals where the Courts have grappled with the question of “What is a house?”. S 2(1) of the 1967 Act defines a house as:

“. . . 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.”

Interestingly, in the Act as passed in 1967 there was no prohibition at all on business tenancies from qualifying for rights to enfranchise.

The potential application of the Act to business tenancies, and the difficulty in identifying the limits of the “house” concept, were both ameliorated by a requirement that the claimant lessee reside in the premises for a period of 5 years prior to making the claim. However, that requirement was (save for leases which were business tenancies) abolished entirely with effect from 26 July 2002 by the Commonhold & Leasehold Reform Act 2002. Unfortunately, the draftsman defined business tenancies by reference to Part II of the Landlord and Tenant Act 1954, and evidently did not appreciate how easy it is to avoid the application of the “business tenancy” concept simply by arranging matters (e.g. by grant of a sub-lease) such that any business is carried on by an entity other than the tenant.

Thus the scene was set for a flood of claims by company tenants and commercial enterprises and for claims to buildings which were either not obviously “designed or adapted for living in” or which one might have thought were not reasonably called a “house”. The appeals in Hosebay and Lexgorge represent the leading edge of a tsunami of further claims which are in abeyance pending the judgment.

Facts

Hosebay concerned a terrace of three terrace properties in South Kensington, London which were originally constructed, and first occupied, as large houses. Each of them was let on a long lease which described the demised premises as “the messuage or dwellinghouse”. All three leases referred to residential user to a greater or lesser extent. The properties were sub-divided into a large number of “rooms with self-catering facilities” which Hosebay Ltd lawfully sublet to an associated company which in turn provided short term accommodation to tourists and visitors toLondon. The Judge described it as “a self-catering hotel”.

Hosebay served notices on its landlord to acquire the freeholds of the three properties. Its claim to be entitled to acquire the freeholds was denied on the basis that the properties were not “houses” because they were (a) not “designed or adapted for living in”, and (b) not a “house reasonably so called” in light of the current use. Additionally, the landlord contended that Hosebay Ltd was a business tenant.

HHJ Marshall QC at first instance found in favour of Hosebay on the business tenancy point because the sub-letting scheme was valid and effective such that Hosebay Ltd did not occupy the properties for the purposes of Part II of the 1954 Act. There was no appeal on that issue. The Judge also concluded that the properties were houses within the meaning of s 2 of the 1967 Act.

Lexgorge concerned a property in Marylebone,London, which was built in about 1760 as a terraced house and for many years was occupied for that purpose. It was subject to a lease granted in 1952 which described the property as a “messuage or residential or professional premises”, and its use was restricted (subject to landlords’ consent) 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 ancillary use in connection with other parts of the demised premises.

Since about 1961, through to the date of the notice of claim and beyond, all four upper floors were in fact used as offices, although the degree of physical adaptation of the upper two floors to office use was minimal and indeed by the date of trial they had been returned to residential use.

It was conceded (perhaps unwisely, according to Lord Carnwath’s judgment in the Supreme Court) that the property met the “designed or adapted for living in” part of the s 2 test. The issue before the judge was whether the property was a “house . . . reasonably so called”. HHJ Dight held that despite the fact that all the property was being used for office purposes at the date of the notice, and the fact that, under the lease, around half the internal area of the property could not be used other than for office purposes, nevertheless the property was reasonably called a house.

The Court of Appeal decision

The Court of Appeal reluctantly upheld both Judges, and dismissed the appeals.

The Court of Appeal reviewed a number of authorities on the meaning of “house”, including Lake v Bennett [1970] 1 Q.B. 663, Tandon v Trustees of Spurgeons Homes [1982] AC 755, Boss Holdings Ltd v Grosvenor West End Properties Ltd [2008] 1 WLR 289 and (most recently) Grosvenor Estates Ltd v Prospect Estates Ltd [2009] WLR 1313 (where the emphasis was placed on the permitted user rather than the physical state of the property).

The Court of Appeal held that the whether a building is a “house . . . reasonably so called” depends, at least in the main, by reference to its physical appearance and character. Such an analysis accorded with the natural meaning of those words, the other provisions of s 2(1), and the analysis in Boss Holdings . The decision in Prospect Estates was criticised for lack of rigour in its analysis, and held to be limited to those cases where residential use was excluded or limited to a very small proportion of the building.

In respect of Hosebay itself, the properties were found to be designed for living in and, despite adaptation, bore the same external appearance (and a very similar internal appearance) to the properties as originally designed. Moore-Bick LJ observed that the properties (and rooms therein) could equally have students living in them for the duration of their degree courses. The Court held that they qualified as “adapted for living in” despite the fact that the actual use by tourists was too transient to qualify as such. Moreover, the leases referred to residential use. Lord Neuberger MR concluded that, “. . . it seems clear that a five-storey building constructed as a house, but converted internally into five self-contained flats, would, at least absent any special factors, be a “house …reasonably so called”.

In Lexgorge, the Court held that the fact that the whole of the property was used for office purposes at the date of the notice did not assist the landlord because the reasoning in Prospect Estates only applies where both the permitted use and the actual use of the building concerned exclude residential use or limit it to a very small proportion of the building. In this case, the lease concerned residential use in relation to the top two floors and the fact they were used as office space did not affect that conclusion

Magnohard

Recently, another claim also reached the Court of Appeal, in Magnohard v Cadogan [2012] EWCA Civ 594. That concerned a large purpose-built mansion block of 8 flats (with 3 small retail units on the ground floor) at 1 Sloane Gardens, London. It had never been used as anything other than flats. The landlord denied the validity of the tenant’s claim on the ground that although plainly the property was largely designed or adapted for living in, nevertheless a purpose-built block of flats was not reasonably called a house. This claim came before HHJ Marshall QC, the same Judge who had decided Hosebay, and this time the claim failed. The Judge agreed that a mansion block could not reasonably be called a house. The Court of Appeal upheld the Judge, and indicated that the issue was suitable for a further appeal to the Supreme Court. However, following an oral hearing before three Justices of the Supreme Court, permission to appeal to the Supreme Court was refused on 5 July 2012.

With the benefit of hindsight, the refusal of permission to appeal in Magnohard was a distant rumble of thunder presaging what was to come in Hosebay.

The Supreme Court decision

The Supreme Court unanimously allowed the appeal in both Hosebay and Lexgorge and ruled the claims of the tenants under the 1967 Act to be ineffective. The lead judgment was given by Lord Carnwath, with whom the other members of the Court agreed.

Lord Carnwath began with a review of the admissible background material to the 2002 amendments, and concluded that there was no indication that parliament intended, when abolishing the residence test, to extend rights of enfranchisement, to “buildings used for purely non-residential purposes” (para [5]). He held that the Court should avoid so far as possible an interpretation which has the effect of conferring rights beyond those which Parliament intended (para [6]).

Having considered the s 2(1) definition, Lord Carnwath observed that the two parts – “designed or adapted for living in” and “reasonably so-called” were “complementary and overlapping” (para [9]).

Like the Court of Appeal, Lord Carnwath reviewed the existing authorities. Unlike the Court of Appeal, he was not bound to follow the decision of the House of Lords in Tandon or to apply it without qualification. The judgment of Lord Roskill in Tandon is described in the leading textbook Hague on Leasehold Enfranchisement, as “authoritative”, and it has stood as the principal guidance since 1982. Lord Carnwath however, described Lord Roskill’s speech as “not without difficulty”; emphasised that it “needs to be read in its factual context” and said that “although expressed as propositions of law, they do not in my view offer much assistance as such, at least beyond the facts of the [Tandon] case”.

Lord Carnwath also placed a significant gloss on the more recent House of Lords decision in Boss Holdings. He held that in the part of the definition which reads “was designed or is adapted” the word “adapted” means nothing more than “made suitable”. Lord Carnwath went on:

“Where a building is in active and settled use for a particular purpose, the likelihood is that it has undergone at least some physical adaptation to make it suitable for that purpose. That in most cases can be taken as the use for which it is currently “adapted”, and in most cases it will be unnecessary to look further.” (para [35])

What this passage seem to imply at a forensic level is a reversal of the onus of the proof. It seems that if a building is used for commercial purposes, it will be enough for the landlord to establish that use as a ground for defeating a claim. In order to succeed in a claim, it will be necessary for the tenant to prove that despite the commercial use, nevertheless the building remains adapted for residential use. Boss Holdings itself concerned a building which was unoccupied and substantially stripped out, such that it was incapable of occupation. Lord Carnwath made clear that the actual decision – that the property remained designed or adapted for living in – was correct, but it seems that the reasoning is in future to be confined to cases where a formerly residential building is in disuse and no subsequent non-residential use has commenced (para [36]).

Lord Carnwath largely rehabilitated the Court of Appeal’s decision in Grosvenor Estates Ltd v Prospect Estates Ltd [2009] WLR 1313, a case which Lord Neuberger MR (as he then was) had distinguished into oblivion in his judgment in Hosebay. Lord Carnwath indicated that Prospect was correct in concentrating on the actual user and should not, as lord Neuberger MR had held, be limited to cases where residential use was wholly or largely prohibited by the lease terms.

Having substantially altered the legal landscape, Lord Carnwath turned back to the facts of the appeals which were before the Court.  The Supreme Court’s decision on the facts of Hosebay and Lexgorge turns entirely on the “reasonably so-called” part of the test.  The decision concentrates on use, rather than the physical state or external appearance of the property.  It was held that the buildings in Hosebay and Lexgorge were not houses “reasonably so-called” because they were used entirely for commercial purposes at the dates of the claim notices.  It is as simple as that.  In Hosebay, it was held that a building used as “a self-catering hotel” could not reasonably be called a house (para [43]).  In Lexgorge, a building wholly used for offices is similarly not reasonably called a house (para [45]).

So simple is the reasoning and so plain the answer on the facts of Hosebay and Lexgorge that Lord Carnwath did not reach a concluded view on whether the “rooms with self-catering facilities” in Hosebay were “designed or adapted for living in”.

Where does this leave the law?

If the intention was to staunch the flow of appeals on the “what is a house” issue, then it must be questionable as to whether Hosebay will do so.  Once the Supreme Court had determined that actual use was the decisive factor, Hosebay and Lexgorge became extreme cases on their facts.  In each case, there was 100% “commercial” use at the date of the claim.  Lord Carnwath was no doubt quite deliberate when he expressed the Lexgorge decision as turning on the fact that it concerned “a building wholly used for offices” (emphasis added).  But in many other cases, the building will be in mixed use.  The Court did not offer any guidance as to how much weight the issue of user carries in mixed use cases.  Given the criticisms made of the reasoning in Tandon, which was a mixed use case, it is arguable that “all bets are off” and that the outcome of mixed use cases is more uncertain now than at any time since Tandon was decided in 1982.

It is also unclear how the concept that user is the most important factor in the “reasonably so-called” test stands alongside the Supreme Court’s refusal to entertain an appeal in Magnohard.  The Magnohard decision turns on the physical nature of the building as a purpose-built block of flats; its user was more than 90% residential.  Presumably, user is not the only basis for saying that a building is not reasonably called a house, and the “use factor” comes into play where the building might otherwise reasonably be called a house, as was the situation in Hosebay and Lexgorge but not in Magnohard.

There will inevitably be those in the market, presently using premises wholly or in part for commercial use, who will look at the Hosebay decision and decide to cease all use before making a claim. Hosebay would not appear to have any application in such a case, and is not clear how far Boss Holdings will apply in such a case or what degree of adaptation away from the original design will no longer count as being for living in.  Nor is it clear whether bedsit type units, as in Hosebay, count as being “for living in”.

To conclude: it is clear that a building which is wholly used for commercial purposes is not reasonably called a “house” and cannot be enfranchised under the Leasehold Reform Act 1967.  Beyond that, it may be thought that the answer to the question “what is a house?” remains as elusive as ever.