Leasehold Enfranchisement Opportunity for Commercial Tenants

A commercial property tenant with a long lease may be able to acquire the freehold of their building.  A company that occupies a house may still be able to buy the property under enfranchisement rules, even if it is not a being used as a “house”.  The result could potentially have a huge impact on enfranchisement claims.

The recent Court of Appeal case (Day v Hosebay and others 01.07.10), has decided a property not used as a residence can sometimes still constitute a “house” for the purposes of enfranchisement, giving the leaseholder a right to buy it.  This assumes that the other requirements under the Leasehold Reform Act 1967 are met.

The act allows tenants of houses with leases of more than 21 years to acquire their freeholds.  In 2002, the law was changed so that it was no longer necessary for the house in question to be occupied by a resident.

Now, a company is therefore allowed to buy it, as well as a tenant who for instance has never lived there. The only specified requirements are that the house has been owned for two years by the tenant serving the notice to enfranchise and that the tenancy was not seen as a business tenancy within the meaning of the Landlord and Tenant Act 1954.  The Lease contract will therefore require examination.

This gave commercial tenants that had occupied property for non-residential reasons a chance to acquire the freehold if they could show the building they occupied was a “house”. The 1967 act defines a house as “any building designed or adapted for living in and reasonably so-called”.

Landlords appealed two cases in relation to properties in commercial use that had been held to be houses. The first related to properties that were constructed and once occupied as large houses, but had since been converted into bedsits for tourists. The second was built as a house but, at the time that the tenant wanted to enfranchise, was being used as offices.

The court held that a building used as an office can still reasonably be called a house.  It clarified that the terms of the lease are generally irrelevant, unless they entirely prevent the possibility of residential use or restrict it to a very small part of the building.

Landlords now have a high hurdle to jump in arguing that a residentially designed building can no longer reasonably be called a house. It noted that the two leases in question actually described the buildings as houses and they kept their original external appearances.

Most importantly, the court made it clear that landlords cannot rely on the fact that buildings are now being used for other purposes to argue that they cannot be called a house. A building built as a house, but internally converted into offices, can reasonably be called a “house used as offices” in most circumstances, as it was the current physical state of the property that really mattered.

Providing the tenant is not himself occupying and carrying on a business, it is clearly open for commercial tenants to seek to enfranchise properties that can still reasonably be regarded as a house and their leases do not prohibit any such use.  In one of the cases the building was occupied for a commercial use by a subsidiary company of the head lessor, possibly to comply with the rules, but the Judge ruled this irrelevant to the right to enfranchise.

28th October 2010