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28 Jan 2022

Leasehold reform: Introducing a non-residential limit of 50% for individual freehold claims

For several years, practitioners have sought clarity over the question which is usually reduced to the phrase "when is a house a house?"

The Leasehold Reform Act 1967 affords a tenant of a long lease of a “house” the right to claim the freehold of that property. To most outside observers, it might seem extraordinary that there should be any debate over the concept of what class of property might constitute a “house”, and yet the definition provided in the 1967 Act has resulted in a great deal of lengthy, and expensive, litigation. Despite several high-profile cases, where it was hoped the Courts would take the opportunity to provide definitive guidance, there has still been no absolute certainty as to when an individual property in mixed use qualifies as a “house”.

The Government’s proposals (as outlined in my earlier articles – part one and two) seek to resolve that by including provision that there will be an absolutely definitive point at which a single property in mixed use will qualify for the subject of an individual freehold claim, namely that no more than 50% should be in non-residential use.

In part, this seems to have come about as a by-product of the Commission’s broader suggested reforms. The Commission puts forward the idea that the enfranchisement legislation be subject to a wholesale change that no longer distinguishes (as it does currently) between flats and houses. The new system would instead treat all properties, be they flats or houses, as a “residential unit”, with enfranchisement rights afforded to such units dependent on their nature and make-up.

Accordingly, a stand-alone individual property, which might currently be considered a “house” would qualify for an individual freehold claim, with the current age-old problem of having to determine if such a property in mixed-use is a “house” removed by simply setting a limit on the extent of the non-residential use. That limit is proposed to be set at 50%, partly to provide consistency with the limit set for collective claims, but partly to ensure that tenants of an individual property in mixed-use are not, in fact, deprived of rights they might currently enjoy.

It is worth noting here that this is a good illustration of the need for an integrated approach to all reform as a whole, rather than the current habit of cherry-picking individual aspects. Presumably, the thinking behind the introduction of such a 50% limit pre-supposes that the Government will look to implement the introduction of the concept of all properties being treated as a “residential unit”, but to date there has been no definitive announcement to that effect. Similarly, within the recommendations in the Commission’s report was reference to there being a clearer definition of business premises which would not qualify for enfranchisement rights. It would seem sensible to address that question as part and parcel of the extent to which non-residential use would preclude a claim, and yet there is no mention of that here

There is much to commend the idea of finally providing, by way of an absolute limit, practitioners and their clients with certainty as to whether a particular individual property in mixed use might qualify for a freehold claim. However, the obvious question is whether 50% is the right limit.

Whilst the trend in caselaw has been towards opening up the availability of such rights to mixed-use properties in greater non-residential use, it is far from the case that a property in 50% commercial use could be said to be a “house”. Once again, setting such a limit will increase the number of buildings to which rights to claim the freehold apply. Once again, claimant tenants are, presumably, unlikely to object, and, once again, it is not difficult to see that landlords will.

Perhaps even more pronounced than in the case of buildings qualifying for a collective claim, setting the non-residential limit at 50% in the context of an individual freehold claim, results in many properties qualifying that will feel far-removed from the concept of the tenant’s residential home.

In addition, the notion of arriving at a 50% limit in this context so as to mirror the limit set for collective claims seems unnecessarily simplistic. There is no reason why the two could not differ – practitioners and their clients could apply the test equally well if the limit for an individual freehold claim were set, for example, at 80%, regardless of the fact that that percentage might differ from that applicable to collective claims.

Set against this background, it seems that there is a greater likelihood of landlords challenging the introduction of these measures (and here this might equally apply to the setting of a non-residential limit of 50% in both collective and individual freehold claims), possibly under Human Rights legislation.

This article is the third in four part series and the next can be found below.

Part Four: Introducing mandatory leasebacks in collective enfranchisement claims

In the final article of the four part series, Real Estate Partner, Simon Kerrigan reflects on the government proposal to introduce mandatory leasebacks in collective enfranchisement claims.

Read More.