What's a house?

The Court of Appeal has determined what constitutes a ‘house' for the purposes of exercising the right to buy a freehold under the Leasehold Reform Act 1967. As Natasha Rees reports, this question may soon be considered by the House of Lords

Two appeals relating to a tenant's right to enfranchise under the Leasehold Reform Act 1967 were heard together on 21 March 2006 by the Court of Appeal. Both appeals concerned a tenant's right to acquire the freehold of their property. The first was by a company, Boss Holdings Ltd and the second by a major antiques dealer, Mallett & Son (Antiques) Ltd. Boss was seeking to acquire the freehold of 21 Upper Grosvenor Street, a six-storey mixed-use building, which at the date of the notices was in a dilapidated state. Mallett was seeking to acquire the freehold of Bourdon House located just off Berkeley Square, which was formerly the residence of the second Duke of Westminster and which, until the end of last year was used as Antique Showrooms ([2006] 13 EG 140 (CS)).

Under the law

Under the 1967 Act, a leaseholder of a property is entitled to acquire the freehold if certain conditions are met at the date that the notice of claim is served. Since the Commonhold and Leasehold Reform Act 2002 came into force in July 2002, a tenant is no longer required to have resided in the property for three years as a condition of acquiring the freehold, except in certain limited circumstances. In other words, the test of residence was replaced by a test of ownership. A consequence of this is that company tenants who previously could not occupy properties for the purposes of the Act, have become entitled to enfranchise. As a result, Boss and Mallett, who had owned their respective long leases for over two years, only had to establish that the property was a 'house' at the date of the notice of claim in order to acquire the freehold.

Under s 2(1), a house is defined as including any building 'designed or adapted for living in and reasonably so called'. Essentially, this is a two-stage test. It is necessary to decide whether the building is 'designed or adapted for living in' and then, if it passes that test, to consider whether it is 'a house reasonably so called'. The Court of Appeal decided that neither building was 'designed or adapted for living in'. Both claims therefore fell at the first hurdle.

The tenants had argued that since there is no longer a residence requirement and, since a building in mixed use can be a 'house', the correct test to apply at the first hurdle was a historical two-stage test: namely, was the building at some time in the past designed and adapted for living in and, if the answer to that was yes, had it retained that configuration or had it been adapted or converted into something else?

The Court of Appeal rejected this argument and decided that the test was a simple one. It was necessary to consider the physical state of the property and its purpose at the date of the Notice of Claim. If the property was manifestly adapted for commercial use at the date of the Notice of Claim, it would fail the test. In Mallett, the Court of Appeal felt that the fact that there had been substantial alterations to the property since 1957 meant that it was manifestly adapted for commercial use at the date of the Notice of Claim and therefore it failed the test. In Boss, the Court of Appeal decided that the property, since it was in a near derelict condition and could not be occupied, also failed the test. Both claims were dismissed and leave to appeal was refused.

The Court of Appeal decision is of great significance to the numerous commercial tenants who, since the abolition of the residence test, are now potentially entitled to enfranchise when previously they couldn't. The question of whether the property is a 'house at the date of the notice is now a key issue. According to the Court of Appeal, the property has to be manifestly adapted for residential use at the date of the Notice of Claim. Although the test appears to be simple, it is quite hard to determine when the property does not have to be occupied. For commercial tenants of mixed-use buildings that have fallen into disrepair the decision means that, in order to qualify, they will have to carry out works to put their building back into repair before the Notice of Claim is served. One downside is that it is very unlikely that the tenant will be able to class these works as improvements when the property comes to be valued on enfranchisement. This means that the tenant may, therefore, find themselves paying for the cost of the works twice. It is anomalies like this that highlight the problem with the current law and which suggest that it is an issue that should be considered by the House of Lords.

What's next?

On 18 July 2006, Mallett was granted leave to appeal to the House of Lords and a petition of appeal was lodged on 1 August 2006. However, Mallett had by this time reached a decision to sell Bourdon House and, following the completion of the sale in December 2006, the appeal was withdrawn. Boss did not originally apply for leave to appeal to the House of Lords however, it is understood that it has now applied for leave to appeal out of time. The outcome of the application is not yet known.

If Boss is granted leave to appeal, the House of Lords will be able to consider an important issue that has arisen as a result of the abolition of the residence test. They may uphold the decision of the Court of Appeal. However, if they agree with the tenant that use should not be confused with design or adaptation and that a house will remain a house unless the design of the property has been changed to something else, then their decision could lead to a significant increase in the number of enfranchisement claims by commercial tenants.