News On The Block

The recent case of Hosebay Limited v Hugo Benjamin Day and Lady Hilary Maureen Greenslade Day (2009) is the latest judicial offering on the thorny issue of what constitutes house under the Leasehold Reform Act 1967 (the Act).

The case demonstrates the unintended consequences of recent changes to the Act which entitles lessees to acquire the freeholds of their houses under certain conditions.  Up until 2002, when the law was amended, it was a condition of enfranchisement that the claimant satisfied a residence condition.  This was replaced with a more straightforward two year ownership test, save in very limited cases, the immediate effect of which was to allow company tenants to enfranchise.  However, this beguilingly simple change to the law created more problems than it sought to solve.

The Hosebay case concerned three buildings on the Day Estate in South Kensington, each of which had originally been designed as a house.  Hosebay acquired the leases of each property in 1996 and used the buildings to provide short term accommodation for tourists and visitors to London.  Hosebay referred to the accommodation as serviced apartments although the judge in the case preferred the definition of "rooms with self-catering facilities" or "a self-catering hotel".  

Prior to making the claim, Hosebay granted three underleases to Hindmill Limited, a company it had formed solely for that purpose. The effect of this was to ensure Hosebay was not occupying the properties under a business tenancy and, in consequence, was required to satisfy a residence condition - one of the limited circumstances when the condition still applied.

Hosebay then served notice on its landlord, the Day Estate, to acquire the freeholds.  The landlord raised two grounds of objection. First, that the property was not a "house" within the meaning of the Act. Secondly, that the leases granted to Hindmill Limited were part of a sham arrangement and ineffective.

To qualify as a house under the Act, the property must be "designed or adapted for living in" and, if so, amount to "a house reasonably so called".  Up until the abolition of the residence test, this caused few problems but has been the subject of recent judicial debate in the widely reported cases of Boss Holdings v Grosvenor West End Properties Limited (2008) and Prospect Holdings Limited v Grosvenor Estate Belgravia (2009).

In Boss Holdings the House of Lords focussed on the words "designed or adapted for living in" and concluded that a building would qualify as a house if it was either originally designed as this or subsequently adapted to that purpose.  In that case, the property had been constructed as a house and the Court felt its status remained unchanged, despite the fact the residential parts were uninhabitable when the claim was made.

The Court of Appeal in the Prospect case looked at what amounted to "a house reasonably so called" and considered that the proportion of residential to commercial use, together with the permitted use of the property under the terms of the lease, were relevant factors. This was so even if the external parts of the property unquestionably resembled a house.   

Hosebay argued that Boss Holdings and Prospect applied; the original design of each building as a house coupled with its permitted use as residential accommodation determined the issue. The Day Estate countered that Boss Holdings had left open one crucial issue - whether a building originally designed as a house could lose that quality if it were converted to something else later in its life.  In this case, the buildings were used as temporary lodgings for visitors to London.  The impermanent nature of the accommodation meant the properties were not adapted for "living in" but merely for "staying in".

Unfortunately for the landlord, the judge did not agree.  She concluded, reluctantly, that while a property originally designed as a house can lose that quality if it is later adapted to something else that did not apply in this case.  It was not the use of the buildings as temporary accommodation that mattered but their physical characteristics and the internal layout.  In this instance, the buildings remained appropriate for living in, despite the internal parts consisting of several small bedsits on each floor.

The judge then went on to consider Prospect and commented that only "exceptional circumstances" would cause her to conclude the buildings were not houses reasonably so called. Unlike the property in the Prospect case, there was no restriction on using the buildings for residential accommodation; to the contrary, the permitted use under the leases was for that very purpose.  

To the delight of Hosebay, the judge decided the buildings were houses and qualified under the Act, irrespective of the commercial use of the premises.  The decision turned on the physical appearance of the building and not, as the landlord contended, its use.

Turning then to the business tenancy issue, the judge concluded that the transactions in question were not a sham. The grant of the underleases to Hindmill Limited was no doubt artificial and intended to avoid the legislation but that did not make them ineffective. The two companies had intended to enter into the relationship of landlord and tenant and their motivation for doing so was not relevant to the issue. Hosebay was therefore entitled to acquire the freeholds at the time of their notice.

The Hosebay case shows that an innovative commercial tenant can exploit legislation originally designed to protect long leaseholders of houses facing eviction.  The removal of the residence condition has had some unexpected consequences and brought into the enfranchisement arena a new genre of claimant - ambitious, commercial organisations intent on pushing the legislative parameters ever further.  Whether this was the intention of Parliament remains to be seen but doubtless the debate is set to continue.