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Nov 2014

Breakthrough in acquiring the freehold of commercial premises

The recent case of Mount Eden Land Ltd v Bolsover Investments Ltd has marked a significant breakthrough for developers seeking to convert office space into residential housing. Landlords of commercial blocks are not permitted to stop conversion works by arguing that the conversion might one day lead to residential tenants acquiring rights to purchase the building through enfranchisement.

What is Leasehold Enfranchisement?

Enfranchisement is the process by which certain residential tenants with long leases can exercise a legal right to join together and purchase the freehold of their premises as a collective. Enfranchisement can allow the tenants in a building to purchase the whole of the building they let, even if the Landlord does not want to sell it.  

Normally Landlords of commercial buildings do not have to worry about being forced to sell, as commercial tenants do not have the same rights to enfranchise as residential ones. Mount Eden highlighted that commercial Landlords might want to prevent commercial tenants from trying to develop office buildings into residential blocks, because having residential tenants instead of commercial ones might one day lead to those tenants forcing the sale of the building through enfranchisement.

The Facts

In Mount Eden the commercial tenant requested the consent of the Landlord to make alterations to the office premises which they occupied. The tenant was considering developing the office block into a block of 16 or 17 residential flats. The lease said that the Landlord could not “unreasonably” refuse to allow works to be carried out at the building, but there was no restriction on changing the use of the building to be residential rather than commercial.

The Landlord refused on the basis that the alterations may be a prelude to collective enfranchisement. The Landlord argued that a claim to enfranchisement in the future would deprive the Landlord of the freehold, even though they had tried to let it to commercial tenants, where there was no such risk. The High Court held that the Landlord could not refuse consent on this ground alone.

This case highlights that in determining whether a Landlord will be acting unreasonably in refusing consent to alterations depends on the individual circumstances and will be a question of fact in each case.

The case could provide a breakthrough for developers looking to convert commercial space into new homes. On the other side of the coin the case is a warning for commercial Landlords who are acquiring new tenants and want to avoid the risks faced by the Landlord in Mount Eden. A good commercial property lawyer can draft a commercial lease to ensure the Landlord has control over changes of use from the outset.

Contact: Gemma Hawthorne or Yildiz Betez

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