Buildings used exclusively for business purposes cannot be considered "houses", court says

The court's judgment (16-page / 73KB PDF) will prevent the tenants of commercial properties that were originally built as houses from taking advantage of a loophole in the law, which was enacted to give residential tenants the right to purchase the freehold of the building from their landlords in certain circumstances.

The ruling was hailed as a "victory for common sense" by property law expert Melissa Thompson of Pinsent Masons, the law firm behind Out-Law.com.

"It was never the intention of the legislation that tenants using properties for business purposes should be able to compulsorily acquire their landlords' properties by relying on an obscure and frankly nonsensical interpretation of the word 'house' – a word that anyone but a property lawyer would give a traditional meaning and automatically associate with residential use," she said. "For now, this decision puts an end to the exploitation by opportunistic business tenants of a loophole in the law."

She said that not all cases would necessarily have the same outcome and that the specific facts of a different case could lead to a different court ruling.

"Given what is at stake for business tenants one would expect them to look for ways around the restrictions in future cases," she said. "The judgment does not rule this out in its entirety, but would seem to make it extremely difficult."

The Leasehold Reform Act grants residential property tenants the right in certain circumstances to compulsorily acquire the freehold, or legal ownership, of a "house" from their landlord through a process known as leasehold enfranchisement. The Act, which was introduced in 1967, defines this as including "any building designed or adapted for living in" which is "reasonably called a house".

In 2002, the Act was amended to remove a 'residence test' which prevented tenants from serving notice of their intention to purchase the freehold on their landlords unless they lived in the property. Since then, the tenant has only had to own the lease for two or more years in order to qualify.

The two cases, heard jointly by the Supreme Court, concerned converted houses in central London. One of the tenants, Hosebay, was using three buildings which were originally built as separate houses as self-catering tourist lets at the time it served notice on its landlord, Day, seeking to take over the freehold. The other tenant, Lexgorge, was using the property in dispute for office purposes at the date of its application. The Lexgorge property, which was listed as a "building of special architectural or historic interest", was described by English Heritage as a "Terraced House" in its records.

The Court of Appeal previously found in favour of both Hosebay and Lexgorge, stating that the properties in question looked like houses, were adapted for living in and had not undergone any major internal changes since they were built.

In his leading judgment, however, Lord Carnwath said that the Court of Appeal's decision was "not the result intended by Parliament" when it removed the residence requirement from the original Act.

Both parts of the statutory definition of a house "need to be read in the context of a statute which is about houses as places to live in, not about houses as pieces of architecture, or features in a street scene, or names in an address book," he said.

In the Hosebay case, the fact that the self-catering properties might "look like houses, and ... be referred to as houses for some purposes" was not "sufficient to displace the fact that their use was entirely commercial", Lord Carnwath said. The Lexgorge case could be settled "on similar grounds".

"A building wholly used for offices, whatever its original design or current appearance, is not a house reasonably so called," he said. "The fact that it was designed as a house, and is still described as a house for many purposes, including in architectural histories, is beside the point."