Hosebay Ltd v Day and another

Leasehold Reform Act 1967 – Enfranchisement of house – Terraced Victorian properties – Rooms furnished and let on short-term basis as holiday accommodation – Section 2(1) of 1967 Act – Whether designed or adapted for living in – Whether claimant occupying under business tenancy – Claimant seeking declaration of entitlement to acquire freehold – Claim allowedThe claimant, a company wholly owned by M, held long leases of three Victorian terraced properties in South Kensington, London SW7, of which the defendants were the freeholders. Each property comprised a basement, raised ground floor, three upper floors and a mezzanine/attic. The claimant let self-catering rooms in the properties as short-term accommodation for tourists and other visitors to London. Although that was contrary to the user covenants in the leases, similar uses had continued for many years before the claimant acquired the leases in 1996. Non-domestic rates were paid in respect of each property and each operated under an established use, registered by the local planning authority, for the provision of short-term accommodation of one to 90 days. Bed linen was changed for each guest and tourist information literature was provided in the rooms; accommodation bookings were generally made by airlines or travel agents.In 2006 or 2007, M set up another company, which took underleases of the three properties together with a transfer of the assets and undertakings of the letting business. In April 2007, the claimant served notices, under section 8 of the Leasehold Reform Act 1967, to acquire the freehold of each property under the provisions of that Act.The defendants disputed the claimant’s entitlement on the grounds that: (i) the properties were not a “house” within the definition of the Act, since the building, although originally “designed” for living in within the meaning of the Act, had lost its quality as a house by being adapted for another use; and (ii) the leases were business tenancies protected by Part II of the Landlord and Tenant Act 1954 and were therefore excluded from the operation of the 1967 Act unless the tenant was resident at the property, which the claimant, as a limited company, could not be. The latter contention was dependent on the defendants’ assertion that the business operations at the properties remained those of the claimant. The claimant applied to the court, under CPR 8, for declarations that it was entitled to acquire the freehold of each of the three properties.Held: The claim was allowed. (1) Section 2(1) of the 1967 Act imposed a dual test for determining whether a building was a house, both elements of which had to be satisfied at the date of service of the tenant’s notice. Under the test, the building had to be designed or adapted for living in and a house “reasonably so-called”. The first limb of the definition was intended to set out the general characteristic of a house, while the second limited that by excepting buildings that although designed or adapted for living in could not reasonably be called a “house”. The meaning of section 2(1) had to be judged in the context of the 1967 Act as originally enacted, despite the later abrogation of the residence requirement by the Commonhold and Leasehold Reform Act 2002, such that the words “living in” and “house reasonably so-called” would take their meaning from a context that included the residence test.(2) With regard to the first limb, the words “living in” connoted occupation with some degree of permanence, not merely transient occupation. They required the use of the property as a home rather than merely a convenient place to meet an immediate human need for shelter and sleep: Boss Holdings Ltd v Grosvenor West End Properties Ltd [2008] UKHK 5; [2008] 1 EGLR 5; [2008] 15 EG 174 applied. Although the removal of the residence requirement meant that the applicant was not required to meet a personal qualifying condition, that did not affect the nature of the property that would qualify for the exercise of rights under the 1967 Act; the property still had to be a residence or a home.Moreover, the test was not a simple alternative test of original design or current adaptation: Boss Holdings considered. The processes of the Act focused on the position at the time a notice was served. A building that had originally been designed for living in could lose that status by subsequent works that sufficiently changed its character. The Act envisaged that a building that was originally a qualifying “house” could become disqualified by a sufficient, subsequent change of physical character.In the instant case, the use of the subject buildings was tantamount to that of a hotel. The buildings had been adapted for that purpose and the occupation and use of them did not involve “living in” them in the required sense. However, the adaptations that had been carried out to the fabric of the buildings, although altering the original design, had not rendered the configuration of the buildings inappropriate or unusable for living in as bed sits. The furnishing only had that effect; the definition in the Act was not concerned with the equipping or furnishing of the building but only with the design or adaptation or the building, in the sense of its intrinsic construction and layout and the use or purpose at which that was aimed, when viewed objectively. The qualifying feature of the definition was design or adaptation that was sensibly capable of use as a home or residence. Notwithstanding the changes made to the fabric of each subject building, and the use to which each was being put, it was, either by its original design or adaptation, “designed or adapted for living in” within the meaning of the Act.(3) As to the second limb of section 2(1), it would take exceptional circumstances before the court would find, where a property was found to be “adapted for living in”, it was not a house reasonably so-called: Tandon v Trustees of Spurgeons Homes [1982] 2 EGLR 73; (1982) 263 EG 349 applied. There were no exceptional circumstances in the instant case. Taking into account the terms of the leases requiring residential use, the fact that the buildings each looked like a house and retained the physical features and that each was capable of being used lawfully for living in, it was reasonable to call each of the buildings a “house” within the second limb of the test: Prospect Estates Ltd v Grosvenor Estates Ltd [2008] EWCA Civ 1281; [2009] 1 EGLR 47; [2009] 02 EG 86 distinguished. Consequently, each building was a “house” capable of being the subject of an enfranchisement claim under the 1967 Act.(4) The 1967 Act was not intended to benefit business operations or pure investors, and that was discernible in the retention of a residence requirement for a house that was held on a business tenancy to which Part II of the 1954 Act applied. Had it not been for the transactions between the claimant and its sister company, the claimant would have been in occupation of the premises for the purposes of a business carried on by it, such that Part II of the 1954 Act would have applied. However, the occupation of the sister company was not to be treated as occupation by the claimant under section 42(2) of the 1954 Act, since that provision applied only where one company in a group held the property and another group company occupied it as licensee by reason of its relationship as an associated company. It did not apply where, as here, there was a formally constituted relationship of landlord and tenant between the two associated companies and the occupying company did so in right of its subtenancy. The transactions in the instant case were not a sham because they were intended to take effect exactly according to their terms and there was no pretence or secrecy was involved. The fact that they were entered into only for the purpose of enabling the claimant to acquire the freehold did not prevent them from being effective. The transactions had been sufficiently implemented to achieve the relevant position. The sister company occupied the premises and operated the business in the premises in its own name under the tenancy agreements granted to it. Consequently, the claimant was, at the time of service of its section 8 notices, entitled to acquire the relevant freeholds.Anthony Radevsky (instructed by Boodle Hatfield) appeared for the claimant; Edwin Johnson QC (instructed by Pemberton Greenish) appeared for the defendants.Sally Dobson, barrister