Leasehold enfranchisement of business premises

One case not covered in this month’s CPI Update, but which is attracting considerable interest in the property press, and the practical issues of which will be considered more fully in the February issue of the CPI Update, is the county court case of Hosebay Ltd v Day [2009] PLSCS 318. It is only a county court case, so it does not have the status of a binding precedent. However, the arguments aired in this case can be played out in many other business properties up and down the country, and the considered opinion of HHJ Hazel Marshall QC is worth analysing.The case queries whether a building that was originally designed as a house, but which has been converted to business use – in this case, self–catering rooms to provide short–term accommodation for visitors to London - remains a house for the purposes of enfranchisement under the Leasehold Reform Act 1967.

Much excitement was caused by Lord Neuberger in Boss Holdings Ltd v Grosvenor West End Properties Ltd [2008] UKHL 5 who had surmised whether a building that started its life as a house, but which had now been adapted entirely for use as something else (e.g. office accommodation) remained a house for enfranchisement purposes. 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 [original] residence requirement in section 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.”

This excitement was tempered a little by the Court of Appeal in Grosvenor Estates Ltd v Prospect Estates Ltd [2008] EWCA Civ 1281. In that case, only 11.5% of the floor area of a building was permitted by the lease to be used for residential purposes, while the remaining floors could only be used as business or professional offices. The Court of Appeal held that the question of whether a building was a house, reasonably so-called, depended upon a range of relevant circumstances, and in this case, giving due weight to the restrictions on use contained in the lease, the actual uses to which the building was put, and the relevant proportions of floor areas so used, the court felt it was no longer reasonable to call this building a house.

We commented in the CPI Update at the time of the Prospect case that, because amendments made to the Leasehold Reform Act 1967 in 2002 had not contemplated the possibility of corporate tenants not occupying their “houses”, but sub-letting them for business purposes, a loophole had arisen. While a tenant, since 2002, no longer needs to occupy its leasehold “house” as a residence in order to qualify for enfranchisement, a tenant whose lease is caught by Part II of the LTA 1954 must: but a business tenant who has sub-let its “house” is no longer caught by Part II, and so all that is required is that the building qualifies as a house (reasonably so-called). In Hosebay, the loophole was deliberately and successfully exploited. The property, although used for business purposes, was adapted for living in, and could, in the particular circumstances of the building in question, reasonably be viewed as a house.

Recently, partners at a law firm, who were converting the partnership into an LLP were considering whether to assign the firm’s long lease into the LLP, or to sub-let to the LLP and retain the head-lease. One of the partners saw an opportunity to expand the pension fund. The firm occupied an old Victorian “house”. By sub-letting the property, the tenant-partners would find themselves holding a long lease of a house; the head-lease would no longer have the protection of the 1954 Act; therefore the partners could enfranchise, and capture the freehold of the building to add to the pension fund. Neuberger’s comments in the Boss case had given the partners hope, but the decision in the Prospect case, as considered in Hosebay, may have dimmed their chances. A building clearly occupied as offices does not seem to remain as a house (reasonably so-called). However, you might still like to chance your arm before Neuberger in the Court of Appeal? He appeared in Boss to be on your side.

Detailed consideration of the Hosebay case appears on the web. For example, click on:

“A design for living” by Natasha Rees, Forsters LLP; and

“That which we can call a house” by Sandi Murdoch, honorary professor at Reading University.