The Leasehold Reform, Housing and Urban Development Act 1993 allows tenants of residential flats to collectively acquire the freehold of their block provided certain qualifying conditions are met. The 1993 Act specifically excludes buildings with a significant commercial element. As originally enacted the proportion of commercial to residential space had to be less than 10% for the building to qualify. Apparently the selection of 10% caused much controversy at the time that the original bill was being debated. With the introduction of the Commonhold and Leasehold Reform Act 2002 this limit was increased to 25%.

Despite the number of mixed-use buildings in the market place there have, until now, been relatively few cases that have examined exactly how this 25% ratio is calculated. In January of this year HHJ Hollis gave judgment in the case of Marine Court (St Leonards on Sea) Freeholders Ltd v Rother District Investments Ltd [2008]. This decision not only examines in detail how commercial common parts should be treated, when calculating the ratio, but it also revisits the case of Indiana Investments Ltd v Taylor [2004], one of the first reported cases that considered whether non-residential areas and common parts should be aggregated for the purposes of the 25% calculation. It is a decision that will be of significant assistance to practitioners advising on collective enfranchisement claims where there is a commercial element to the building.

The facts

The case involved an unusual art deco building called Marine Court, located on the seafront at St Leonards on Sea. The building was designed in the late 1930s to give the appearance of an ocean liner moored beside the English Channel. It is thought that it was modelled on the prestigious Queen Mary liner since it was commissioned a year after the launch of the Queen Mary in 1934. The intention of the original designer was to create something of a ‘life on the ocean waves’ for the tenants. In his decision, the judge commented that this appeared to be marred somewhat by the presence of a busy road running between the building and the shore.

The premises comprised 14 floors with 168 residential flats and, at ground level, 20 shops. Both the flats and the shops were held on long leases. One part of the building, at the eastern end, was purely commercial. It formed the ‘prow’ of the liner and was known as Hanover House. Although it was accepted that Hanover House formed part of the building for the purposes of the 1993 Act, it was in reality separate. The doorway between the two parts of the building had been locked for many years and the residential tenants had no access to any part of Hanover House. At the date of the enfranchisement claim Hanover House was being used as a furniture showroom, with offices on the upper floors.

On 30 January 2006 the tenants served a section 13 notice on the landlord seeking to acquire the freehold of the whole building. The landlord served a counter-notice disputing their entitlement. It claimed that the building did not qualify under the 1993 Act because, at the date of the notice, more than 25% of the internal floor area of the building was occupied, or intended for occupation, for commercial/non-residential use. The tenants applied to the Hastings County Court for a declaration that they were entitled to enfranchise and the issue of whether the ratio of commercial to non-commercial/residential space exceeded 25% came before HHJ Hollis as a preliminary issue.

The law

In order to qualify for a collective enfranchisement claim the building must be a self-contained building or part of a building containing a minimum of two flats. Once this hurdle has been cleared it is necessary to consider whether it falls within the exclusions set out in s4, which essentially provide that no more than 25% of the internal floor area, excluding common parts, must be for non-residential purposes. Common parts is defined in s101(1) of the 1993 Act as including the structure and exterior of that building or part of it, and any common facilities within it.

The basic test to be applied to the building in calculating the ratio under s4 is set out in a decision of HHJ Cooke in Indiana Investments Ltd v Taylor. HHJ Cooke decided that, in carrying out the proportion exercise required by s4, the area of the common parts is first deducted from the total gross internal area of the building with the balance representing the aggregate of the residential and nonresidential areas. The 25% non-residential proportion is then applied to this aggregate. It is only if the non-residential proportion of the aggregate exceeds 25% that the premises cannot be enfranchised. This essentially means that it is necessary to compare the whole of the building less all of the common parts with the whole of the building less all of the common parts and less the residential element. If the difference (ie the non-residential element) exceeds 25% the building will not qualify.

Commercial common parts

The landlord in the Marine Court case was not disputing this method. The issue that the landlord raised was whether common parts located solely in the commercial part of the building and used solely by the commercial tenants should be included in this ‘aggregate’. It argued that the common parts to which the residents did not have access were not ‘common parts’ for the purposes of the 1993 Act and were therefore part of the non-residential space.

If it was right, this would bring the nonresidential element of the building to above 25%. It specifically referred to a section of Hanover House (the ‘prow’ of the ship) and the service areas behind the shops on the ground floor that were only used by the commercial tenants. The residential occupiers had no access to these areas.

The landlord argued that the 1993 Act’s definition of common parts referred to common parts with some residential character. Since none of the residential occupiers had access to these areas, the landlord claimed they were not ‘common parts’ within the 1993 Act. In the past, Hanover House had been let on a totally separate lease and the common parts in Hanover House had been demised under this lease. Although this lease had subsequently come to an end, and the common parts were no longer demised, the landlord felt this was another reason to exclude these common commercial areas from the definition of common parts.

The tenants relied on the wording of the 1993 Act, which they felt was clear. They argued that the meaning of ‘common parts’ under the 1993 Act is any part of the building that is not let and is used in common by more than one occupier of the building. Although there were ‘residential common parts’ and ‘commercial common parts’ the Act refers to ‘any common parts of the premises’ and should include both. Section 101 also stipulates non-exhaustively that common parts ‘include any common facilities within it’.

The judge said that he had no hesitation in preferring the tenant’s argument. He ruled that communal areas do not have to be common to all of the occupiers of the building to be common parts for the purposes of the legislation, and that it would wrongly distort the ratio of commercial to residential if these areas were added to the commercial floor area. He felt that if this had been the intention of the 1993 Act, it could have been worded to exclude the common parts exclusively serving commercial areas. He referred in particular to the wording of s101, which provides that common parts include ‘any common facilities within’ the premises. He accepted that the use of the word ‘any’ included all common parts whether or not the residential tenants had use of them.

Balconies

Another issue between the parties was whether the balconies adjacent to the residential flats should be included in the measurement of the internal floor areas. If they were, this would obviously increase the residential element of the building. Many of the flats had balconies that formed part of the demise under the tenant’s lease and were included in the definition of the flat. The landlord argued that since s4 of the Act defined the internal floor area as extending ‘throughout the whole of the interior of the building’ the balconies should not form part of this area.

The building contained broadly three types of balcony, some being more enclosed than others. A few at the eastern and western ends of the building were open to the sky and to the sides. The second group on the third floor were divided from each other by high curved walls and the third category were recessed and enclosed on five sides. The judge decided that only those in the second and third category could be regarded as forming part of the interior of the building.

Conclusion

As a result of the judge’s findings, the commercial area of the building was determined at less than 25% and the enfranchisement claim could proceed. The tenants therefore managed to acquire their ocean liner. This is an important decision for landlords and tenants of mixed-use buildings where the percentage internal area in commercial use is close to 25%. It is now clear that all of the common parts, whether they are exclusively residential or exclusively commercial must be ignored from both sides of the equation. It is also clear that the balconies have to be examined on an individual basis and should only be included in the internal floor area if there is some form of inclusion around the balcony edge.