LRX/19/2005

	LANDS TRIBUNAL ACT 1949
	
	LANDLORD AND TENANT – tenants’ right to manage – exclusion where more than 25% of floor area non-residential – part of premises demised together with part in commercial use and used as living accommodation – whether occupied for residential purposes – held so occupied – Commonhold and Leasehold 2002 s 72(6) and Schedule 6 para 1

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE LEASEHOLD VALUATION TRIBUNAL FOR THE LONDON RENT ASSESSMENT PANEL

BETWEEN	GAINGOLD LTD	Appellants
	and
	DEVONBRAE LTD

	and

	WHRA  RTM COMPANY LTD	Respondent

	Re:	Westchester Court
	72 Seymore Street
	London W2

	Before: The President

	Sitting at Procession House, 110 New Bridge Street, London EC4V 6JL
	on 19 September 2005

Stan Gallagher instructed by Maunder Taylor, Chartered Surveyors, by direct professional access for the appellant.
Edward Peters instructed by Guy Clapham & Co for the respondent

The following cases are referred to in this decision:

Linden v Department of Health and Social Security [1986] 1 WLR 164
Owen v Elliott (Inspector of Taxes) [1990] Ch 786

The following further cases were referred to in argument:

Chapman v Freeman [1978] 1 WLR 1298
Uratemp Ventures Ltd v Collins [2002] 1 AC 301

	DECISION
1.	The appellant is the headlessee of premises known as Westchester House, 72 Seymour Street, London W2.  On 28 May 2004 the respondent, an RTM company, gave notice to the appellant under section 79(6) of the Commonhold and Leasehold Reform Act 2002 of its claim to acquire the right to manage the premises.  On 5 July 2004 the appellant served a counter-notice under section 84(1) of the Act alleging that the respondent was not entitled to acquire the right to manage the premises because it was excluded from the right to manage under paragraph 1 of Schedule 6.  The exclusion in paragraph 1 applies to premises in which more than 25% of the internal floor is non-residential.  The respondent applied to the leasehold valuation tribunal for the London Rent Assessment Panel under section 84(3) for a determination that it was on the relevant date entitled to acquire the right to manage the premises.  The LVT determined this issue in the respondent’s favour.  It granted leave to appeal, saying that the appeal raised an important and arguable point of statutory interpretation in respect of a relatively new scheme of legislation.
2.	Winchester House is a corner property fronting Seymour Street and Edgware Road.  It was built in the early 1920s and comprises basement, ground and six upper floors.  It contains 13 purpose-built, self-contained residential apartments, a retail unit on the Edgware Road frontage and a restaurant (formerly a public house) on the apex of the block.  There is one flat on the ground floor on the Seymour Street frontage and two flats on each of the six floors above the ground floor.  The retail unit is on basement, ground and first floors.  The restaurant is on the ground floor with a basement below that contains kitchen, storage, office and cellarage and there is also a basement under the ground floor flat.  It is this part of the building that gives rise to the issue in the present case.  At the relevant date it contained five bed-sitting rooms, a communal kitchen, a bathroom, and a room used as an office.  The restaurant, the basement beneath it and the basement under the ground floor flat are held under an underlease dated 27 January 1937.  The demise was of portions of the building “known or intended to be known as ‘The Mitre Tavern’ Number 13 Edgware Road aforesaid and are situate on the basement ground floor and first floor of the said building.”  A plan attached to the lease showed bars on the ground floor, a beer cellar underneath these and above, on the first floor, a lounge.  The first floor lounge has evidently now become one, or possibly part of one, of the flats.  The plan showed the Seymour Street basement as containing a lounge, four bedrooms, a bathroom, a kitchen and a larder.  Clause 2 of the underlease contained the tenant’s covenants.  So far as material, these provide.
“(11)  Will not assign transfer underlet for any period exceeding seven years or part with the possession of the demised premises or any part thereof without the previous consent in writing of the Lessors but so that such consent shall not be unreasonably withheld…
(13)  Will not use or permit to be used the demised premises or any part thereof…as an hotel or boarding or apartment house…AND FURTHER that the Lessees shall and will keep and use or cause to be kept and used the demised premises as and for a Licensed Victualling House only with subsidiary dwelling accommodation as now planned…”
3.	Under section 72(1) of the 2002 Act the right to manage provisions in Chapter 1 of Part 2 of the 2002 Act apply to premises if –
“(a)	they consist of a self-contained building or part of a building, with or without appurtenant property,
(b)	they contain two or more flats held by qualifying tenants, and
(c)	the total number of flats held by such tenants is not less than two-thirds of the total number of flats contained in the premises.”
4.	Subsection (6) of section 72 gives effect to Schedule 6, which specifies premises that are excluded from the right to manage.  Paragraph 1, so far as material, provides.
“(1)	This Chapter does not apply to premises falling within section 72(1) if the internal floor area –
(a)	of any non-residential part, or 
(b)	(where there is more than one such part) of those parts (taken together), exceeds 25 per cent of the internal floor area of the premises (taken as a whole).
(2)	A part of premises is a non-residential part if it is neither –
(a)	occupied, or intended to be occupied, for residential purposes, nor
(b)	comprised in any common parts of the premises.
(3)	Where in the case of any such premises any part of the premises (such as, for example, a garage, parking space or storage area) is used, or intended for use, in conjunction with a particular dwelling contained in the premises (and accordingly is not comprised in the common parts of the premises), it shall be taken to be occupied, or intended to be occupied, for residential purposes...”
5.	The internal floor area of the premises taken as a whole is 2,173.88 sq m.  The shop and its basement and first floor and the restaurant and the basement immediately beneath the restaurant total 443.17 sq m, or 20.29% of the floor area.  If this is the totality of the non-residential parts of the building, the exclusion in paragraph 1(1) does not apply.  If, however, as the landlord contends, the Seymour Street basement is not occupied or intended to be occupied for residential purposes, the non-residential parts would be 557.08 sq m or 25.51%, and the exemption would apply.
6.	An agreed statement of facts records that a door at street level leading directly off Seymour Street gives access to the basement area via an internal staircase.  At the bottom of the stairs there is a hallway with two doors leading left and right.  The door to the right opens to the beer cellar, kitchen and storage for the restaurant.  The door to the left is marked “Private residents only” and leads to the residential area of the basement.  The basement rooms are entered as a dwelling in the valuation list in Council Tax band F.  The rooms are occupied as bed-sitting rooms, the accommodation is comfortable and spacious, and the occupation of the rooms appears to have a degree of permanence.  When the company’s surveyor visited the premises on 25 August 2004 he could not gain access to the basement rooms as the restaurant manager did not have any keys to the residential section of the basement.  An appointment was made for him to survey this part of the building separately from the rest a few days later.  He was given access to four of the bedrooms.  Some of the doors were unlocked by the restaurant manager, and access to the others was given by the occupants.
7.	For the landlord Mr Stan Gallagher submits that, on the facts, the basement rooms are not occupied as residential accommodation but for commercial purposes as part of the restaurant business.  He relies on the fact that the restaurant manager has the keys to some of the bedrooms and the use of one of the rooms as an office.  There is, he says, no evidence as to the identity, circumstances or tenure arrangements of the occupants of the bedrooms and, in particular, whether any of the occupants are not employees of the restaurant.  In the absence of evidence to the contrary, it can be inferred from the fact that the restaurant manager has keys to some of the bedrooms and from the user restriction in the lease, limiting the dwelling accommodation to a use subsidiary to the commercial user, that all the occupants of the bedrooms are in fact employees of the restaurant.
8.	Alternatively, says Mr Gallagher, in determining whether premises are occupied or intended to be occupied for residential purposes under paragraph 1(2)(a) it must be assumed that the occupation is lawful in the sense that it complies with applicable user covenants.  Otherwise breach of a user covenant for a short period that included the relevant date could make a building subject to the RTM when it would not have been so subject if the covenant had been observed.  The covenant requires that the residential use must be subsidiary to the public house/restaurant use.  “Subsidiary”, he submits, means ancillary, or serving to help.  Thus it must be assumed that the dwelling accommodation was being used in a way that served to help the restaurant use. 
9.	Mr Gallagher submits that in applying this statutory provision it is necessary to consider what the underlying purpose of the occupation is and to do so from the standpoint of the person who has provided this accommodation.  The broad purpose of this particular exclusion from the RTM is to distinguish between commercial and residential occupation and to exclude from the right to manage premises where the commercial element exceeds the prescribed area.  Here the underlying purpose of the occupation is the provision of accommodation to serve the restaurant business, so that the occupation is not residential in nature but commercial.  Put another way, the occupation of the premises is that of the underlessee of the restaurant, and his occupation for commercial purposes. Mr Gallagher relies on Linden v Department of Health and Social Security [1986] 1 WLR 164 for the proposition that an employer may occupy premises through its employees.
10.	For the respondent Mr Edward Peters submits that any parts of premises which are occupied or intended to be occupied by anyone for living in, as opposed to parts of premises occupied as offices, shop, workshops, warehouses, etc, will be occupied or intended to be occupied for residential purposes within the meaning of paragraph 1.  As a matter of ordinary English, “residential accommodation” means simply “living accommodation”.  Mr Peters relies on Owen v Elliott (Inspector of Taxes) [1990] Ch 786, in which the Court of Appeal held that the words “let by him as residential accommodation” in section 80(1) of the Finance Act 1980 were apt to include the short-term lettings of rooms in a guest house.  The expression “occupied for residential purposes” is, Mr Peters says, wider in scope than “residential accommodation” and would include purposes ancillary to residence and partial residential use.  The distinction in Schedule 6 is not between parts of premises which are, and parts of premises which are not, occupied as “homes”, or as “dwellings”, or as “a residence” of a particular person or category of person, or for “private” or “domestic” residential purposes.  Occupation “for residential purposes” is wider than all those concepts.  Nor is any distinction drawn in Schedule 6 between “flats” and other parts of the premises or between residential “units” and other parts of the premises, although both of these expressions are defined in section 112 and are deployed elsewhere in the RTM provision.  There is no requirement that the “parts” which are occupied for “residential purposes” must be self-contained or within a separate demise.
11.	Mr Peters submits further that occupation for the purposes of paragraph 1 does not imply a right to possession.  Occupation and possession are distinct legal concepts.  While Mr Gallagher was wrong in contending that “subsidiary” in the underlease means “ancillary” – Mr Peters says that it means “subordinate or secondary, with no implication of a functional connection to the rest of the premises – this does not, he says, matter.  Even if Mr Gallagher was right, and the basement is occupied, or must be assumed to be occupied, by employees of the restaurant, it is still occupied for residential purposes.
12.	Three matters arises for consideration in this appeal – the meaning of “occupied, or intended to be occupied, for residential purposes” in paragraph 1(2); the meaning of “subsidiary” in clause 2(13) of the underlease; and whether on the facts the exclusion in paragraph 1(1) applies.  On the first matter Mr Gallagher submits that the broad purpose of the exclusion for which paragraph 1 provides is to distinguish between commercial and residential occupation and to exclude from the right to manage premises where the commercial element exceeds the prescribed area.  It does not seem to me that this is either an accurate or a helpful analysis.  The distinction for which paragraph 1 expressly provides is between the residential and the non-residential parts of the premises, and I can see no justification for substituting “commercial” for “non-residential” as an aid to understanding its effect.  The question to be asked is whether the basement is occupied, or is intended to be occupied, for residential purposes.  If it is not, it is a non-residential part of the premises.  If part of premises is in fact used for residential purposes, those living there are appropriately referred to as occupiers or occupants (as indeed Mr Gallagher refers to those currently living in the basement) and the part of the premises can appropriately be said to be occupied for residential purposes.  I can see no justification in the provision for ignoring the occupation of these occupiers and treating as the sole occupier of the basement the person operating the restaurant business; or for reading in to the provision the qualification that it is the underlying purpose of the person providing the residential accommodation that must be treated as the determinant of whether the part is occupied for residential purposes. 
13.	I accept Mr Gallagher’s contention that “subsidiary” in clause 2(13) of the underlease means ancillary rather than of minor proportions.  The demise was of the public house premises and the basement together and under clause 2(11) it would not be possible without consent to sub-let any part of what was demised.  The plan showed the basement arranged as living accommodation with access to it from the cellar of the public house.  The clear implication is that that accommodation was seen as providing a flat for the proprietor or the manager or for employees.  When, therefore, clause 2(13) required the lessees to use “the demised premises as and for a Licensed Victualling House only with subsidiary dwelling accommodation as now planned” it was imposing a requirement that the use of dwelling accommodation should be ancillary to the public house use.
14.	I accept also Mr Gallagher’s contention that an unlawful use would have to be ignored for the purposes of applying paragraph 1, and that the use of the living accommodation in the basement must be assumed to be in accordance with the user restriction in clause 2(13).  If Mr Gallagher were right in his construction of paragraph 1, the basement, used as ancillary accommodation serving the principal restaurant use, would be a non-residential part of the premises.  But, as I have said, that suggested construction is not in my judgment correct.
15.	On the facts there is no dispute that the basement is being used as living accommodation and thus (with Mr Gallagher’s suggested construction rejected) for residential purposes within the meaning of paragraph 1(2).  It is also evidently intended to be used for these purposes.  The basement therefore does not fall to be treated as a non-residential part of the premises, and the exclusion in paragraph 1(1) does not apply.  
16.	The LVT’s decision was in my judgment correct, and the appeal must be dismissed.
Dated 22 September 2005

George Bartlett QC, President