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Landlords toast 'common sense' Supreme Court ruling

By Paul Norman - Wednesday, October 10, 2012 10:59

The Supreme Court has ruled that occupiers of office buildings that were once houses do not have the right to buy the freehold in a move that has major ramifications for some of London’s largest landlords.

The judgment backs a long-running battle by landlords including Grosvenor, the Howard de Walden Estate and the Earl of Cadogan to overturn a decision that has been passed by the Court of Appeal.

In a statement Grosvenor said: “We welcome the Supreme Court’s decision and will be studying the detailed judgement. It is clear that it was never Parliament’s intention to extend enfranchisement rights to commercial or business tenants.”

The Supreme Court allowed appeals in the Day v Hosebay and Howard de Walden Estates v Lexgorge cases. Landlords were fighting a decision that if upheld they feared could have forced many major estates to be broken up and restructured.

The challenge arose from the Labour government’s 2002 reform of the Leasehold Reform Act, which enabled residential tenants to “enfranchise” or forcibly buy long leases at below market value price.

The government removed a key part of the legislation – introduced in 1967 to protect coal miners from being evicted by landlords – which meant a tenant must live in the property to qualify for the right to buy its freehold. Instead, ownership of a lease for two or more years became the only requirement.

However, the legal definition of what constitutes a house was not altered  and this created the contested loophole.

Tim Reid, senior associate in the real estate disputes team at Hogan Lovells, said: “To coin a phrase this is a victory for common sense. The Supreme Court was able to take a bold holistic approach and rule that legislation should consider not a building’s bricks and mortar history but analyse how a property has been adapted for use.”

Bruce Deer, head of London real estate at Eversheds, said: "This is a victory for commercial commonsense. The Court of Appeal decision essentially promoted clarity over justice by arguing that if it looks like a house it is a house. But this potentially opened the door to a whole load of windfall moves. The Supreme Court has essentially shut the door on that by saying a house is more than just a physical thing."

Reid added: "Whatever the strict, literal meaning of the words of section 2 of the Act (concerning a building "designed" or "adapted" for living in) it is clear that the legislature in 1967 had intended to redress the balance between the large landed estates (and freeholders generally) and the residential tenants who lived on the estates under depreciating leases, rather than to allow corporates and the owners of business premises to wrestle freeholds away from their landlords. The case law since 2002 was in danger of swinging the advantage towards corporate long leaseholders, contrary to that original intention and purpose.

"The 2002 Act, in removing the residence requirement, was only intended to resolve a recognised problem for tenants who own their long leases through a company (for example, for tax reasons). Companies cannot "reside" in a leasehold property, so the residence requirement was removed.

"What Lord Neuberger recognised in the Court of Appeal as an unintended consequence of the 2002 changes (which he felt unable to overcome, on a strict interpretation of s.2), was that this opened the door for corporate holders of long leases to enfranchise even though their building ("designed or adapted for living in") was in fact used or occupied by a subtenant for business purposes.

"The Supreme Court had no such difficulties in overcoming that unintended consequence, by saying that section 2 had to be read in the context of the original statutory purpose, such that if the property was adapted some time ago for commercial use and is occupied by a commercial entity or for commercial purposes, the tenant should not enjoy a right of enfranchisement."

pnorman@costar.co.uk