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This appeal (from the Court of Appeal [2010] EWCA Civ 748) concerns 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.  Section 2(1) of the 1967 Act defines a house as including:

“…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.”

As originally enacted, the 1967 Act required certain criteria to be met in order for a leaseholder to be able to enfranchise their house including an obligation that he reside at the property as his only or main residence.  This was removed by the Commonhold and Leasehold Reform Act 2002, s 138 and replaced by a requirement merely that a leaseholder own the lease for two years.  There were two immediate effects to this amendment: first, a corporate body could enfranchise under the 1967 Act (a company cannot “reside” and therefore the previous residency requirement precluded corporate enfranchisement); and secondly, a leaseholder could enfranchise innumerable properties of which he held a lease for the two-year period (previously, he could only reside in one as his only or main home).  The effect of such legislation on the freehold owners of such leasehold properties as qualified for enfranchisement under the 1967 Act was obvious. The 2002 Act sought to counter this by including provision (in the form of the newly inserted s.1(1B) of the 1967 Act) that a tenant who attracted the protection of the Landlord and Tenant Act 1954, Part II (business tenancies) was excluded from the right to enfranchise.

Facts

In Day, there were three terrace properties which were originally constructed, and first occupied, as large houses in South Kensington, London. 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.

Hosebay Ltd acquired all three leases in 1996 (lawfully subletting them to an associated company which in turn provided short term accommodation to tourists and visitors to London) and subsequently served notices on its landlords to acquire the freeholds of the three properties. Its claim to be entitled to acquire the freeholds was challenged by the landlords on the basis that:

a)     the properties were not “houses” because they,

i.          were not “designed or adapted for living in”, and

ii.          were not a “house reasonably so called” in light of the use to which the properties were currently put; and

b)     Hosebay Ltd was a protected tenant under the 1954 Act.

The judge at first instance found against Day on both points concluding that the properties were houses within the meaning of s.2 of the 1967 Act and that Hosebay Ltd did not occupy the properties for the purposes of Part II of the 1954 Act as it had lawfully sublet to a different company which occupied them.  Day appealed to the Court of Appeal only in respect of the first issue.

In Lexgorge, the subject property was 48 Queen Anne Street 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 is 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 “storage … and lavatory … in connection with other parts of the demised premises”.

Lexgorge Ltd acquired the lease in 1978 and, more than 25 years later, served notice on the landlord to acquire the freehold. The landlord objected on the basis that the property was not a house within s.2(1) because, inter alia, since around 1961 the use of all four upper floors was as offices, until the landlords objected to that use of the upper two floors, and that use ceased shortly after Lexgorge served its notice seeking to enfranchise at which point it was converted to maisonettes. 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 the fact that, under the lease, around half the internal area of the property could not be used other than for office purposes did not prevent the property from being a “house reasonably so called”. The landlord appealed to the Court of Appeal.

The Court of Appeal decision

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] A.C. 755, Boss Holdings Ltd v Grosvenor West End Properties Ltd [2008] 1 W.L.R. 289, (where the House of Lords held that, when deciding whether a building had been designed or adapted for living in, one is largely concerned with the physical state of the property) and (most recently) Grosvenor Estates Ltd v Prospect Estates Ltd [2009] W.L.R. 1313 (where the emphasis was placed on the permitted user rather than the physical state of the property).

“Designed or adapted for living in”

In Day, the Court of Appeal concluded that the properties were designed or adapted for living in because:

  1. the properties were plainly originally designed for living in;
  2. in order to determine whether premises are adapted for living in, one looks at the most recent works of adaptation, and assesses objectively, whether they result in the property being adapted for living in;
  3. one looks at the effect of the works which alter the building, not furnishings or furniture which are not works of adaptation;
  4. the subjective intention of the person responsible for the works, so far as the intended use is concerned, will rarely, if ever, be of any relevance: one is concerned with how the building was adapted, not why it was adapted;
  5. the actual or intended use of the building may, however, sometimes have some relevance; and
  6. of little, if any, relevance, is the use to which the building is actually put at the date of the tenant’s notice.

In short, one looks at the physical composition and nature of the property (as designed or adapted) rather than focusing on its use or intended use when considering whether it was designed or adapted for living in.  In this case, the Court of Appeal observed that the properties (and rooms therein) could equally have students living in them for the duration of their degree courses.

House “reasonably so called”

In Day, the Court concluded 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 (above). The decision in Prospect Estates (above) was limited to those cases where residential use was excluded or limited to a very small proportion of the building.  In this case, the properties were designed for living in and, despite adaptation, bore the same external appearance (and a very similar internal appearance) to the properties as originally designed.  Moreover, the leases referred to residential use.  Lord Neuberger went so far as to observe 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, on the same issue, 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.

The landlords appealed to the Supreme Court and the case was heard on July 16-18, 2012.

Comment

The Court of Appeal noted it had reached its conclusion with no particular enthusiasm.  It was noted with some concern that the 2002 amendments were intended partly to extend the reach of the 1967 Act, and partly to defeat the device of company lettings which circumvented the statutory intention of the 1967 Act. Unfortunately, by “ditch[ing]” the residency requirement, the extension of the Act may well have gone further than the legislature intended or anticipated. Neuberger LJ noted that “… [i]t now applies to empty and substantially commercial buildings, even if nobody recently lived there or is even intending to live there… and it is open to tenants to enfranchise many properties at the same time, even if they do not live in any of those properties… If I am right on these appeals, it can extend to buildings exclusively used for business purposes.”

The Court doubted whether the amendments were supposed to be so far ranging but observed that the issue the Court was charged to decide was not what it thought the legislature would have said if it had fully appreciated the consequences of the 2002 amendment to remove the residence requirement, but what it thought that the Act meant in the light of that amendment.

It is plain that a definitive answer to the question of what constitutes a house for the purposes of the 1967 Act is needed from the Supreme Court as there are a number of cases which have slipped through the net in the meantime (e.g. Magnohard Ltd v Cadogan and others [2012] EWCA Civ 594) whilst others sensibly have been stayed.

It will be interesting to see whether the Supreme Court approaches the two limbs of the definition in these appeals separately and distinctly as appears to have happened in the lower courts.  It seems to this author that there is a real risk of conflating the distinct requirements for “designed and adapted” and “reasonably so called” when the Act contemplates both being satisfied.  If physicality is virtually determinative and a feature of both requirements, then what do we get from the use of the words “and reasonably so called” in s.2(1)?  Applying the test as currently enunciated, it is difficult to envisage a case where a property would satisfy the first limb but not the second.

That said, it appears that amending legislation is unlikely to be far off…