Just because it looks like a duck, walks like a duck and sounds like a duck, does not mean it is duck – or a house?

Part I of the Leasehold Reform Act 1967 was designed to alter the balance between freeholders and their residential tenants, by giving the leaseholders the right to an extended lease or to compulsory acquisition of the freehold.

To be entitled to exercise his right the leaseholder must satisfy various criteria.  Before the Commonhold and Leasehold Reform Act 2002 the leaseholder had to have resided in the property for the previous two years; this meant that generally it would only have been possible to bring a claim relating to a property which was residential in nature.  Since the 2002 Act removed the residency requirement, however, the only real hurdle is the requirement that the property must be a “house”, which (pursuant to s.2(1)) ‘includes 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’.

Put simply, therefore, the property must be (i) one designed or adapted for living in, and (ii) which can reasonably be called a “house”.  Since the removal of the residency requirement, claims were made in relation to properties which were built as ‘houses’ but which had subsequently been adapted for commercial use.

In Boss Holdings Ltd v Grosvenor West End Properties [2008] 1 WLR 289, in which the leading judgment was given by Lord Neuberger, the House of Lords held that the key consideration was the physical state of the property.  The word “designed” required consideration of the property as initially built, and the purpose for which it was originally designed.  If work was subsequently done to the property, so that the original ‘design’ was changed, it was necessary to consider whether it had thus been ‘adapted’ for another purpose and, if so, what that purpose was. The overriding issue was whether the purpose, for which the property had been designed or adapted, was “for living in”.  Notably, it was not necessary for the property to be in such a physical state that it could actually be lived in.

In the Court of Appeal, in Day v Hosebay Ltd (and Howard de Walden Estates Ltd v Lexgorge Ltd (known collectively as “Hosebay”) [2010] 1 WLR 2317, Lord Neuberger MR further held that it was unlikely that the question of whether a property was a “house … reasonably so called” would be affected by the fact that it was, or was not, actually lived in.  The physical state of the property, and its external and internal physical character and appearance – and not the actual use of the property – would normally be the decisive factors.

On 10th October the Supreme Court gave judgment in Hosebay ([2012] UKSC 41) – in which the landlords challenged Court of Appeal decision which had decided that a property used solely for commercial purposes could qualify as a “house”.  In Day the property consisted of three terraced houses, originally constructed and occupied as houses but adapted to be used as a self-catering hotel.  In Howard the property was one designed and previously used as a house for a single family, but at the time the claim was made it was used solely as offices (although it maintained its physical appearance externally).

Lord Carnwath, giving the leading judgment, said that parliament clearly did not intend to extend the scope of the legislation to give tenants statutory rights in relation to properties that were used solely for non-residential purposes.  The property in Day, used solely as a self-catering hotel, was not “a house reasonably so called”.  The contrary view of the Court of Appeal turned on the external appearance of each property as a town house; that should not have been given determinative weight.

The fact that the properties might look like houses or might be referred to as houses for some purposes was insufficient to displace the fact that the use was entirely commercial.  A building solely used for offices, as in Howard, whatever its original designs or current appearance, was not a house reasonably so called.  Consequently, the view expressed in the Court of Appeal by Lord Neuberger – that a building originally designed for living in, but adapted for some other purpose, was not “designed or adapted for living in”, unless subsequently re-adapted for that purpose – is to be preferred to the view he expressed in Boss Holdings Ltd.

Thus the test is not so concerned with the physical appearance and characteristics of the property, but its actual use.  If a property has been adapted for commercial use, and is occupied for commercial purposes, it cannot be a house reasonably so called; its leaseholder cannot enjoy a right to compulsory acquisition of the freehold.  Because the relevant date is the date of the service of the notice, it may be that in order to be entitled to enjoy the right, the leaseholder can change the use of the property at that stage, so that it is used "for living in".