Changing from a commercial lease to a residential lease
Landlords’ rights in the face of unauthorised conversions
The conversion of commercial units into residential dwellings is becoming increasingly widespread. The case of Zash Properties Ltd v Mayworth Ltd and Landau Consulting & Investments Ltd in 2020 provides useful guidance for landlords on their legal rights where a tenant seeks to undertake such a conversion without consent.
Zash Properties Limited (“the Landlord”) was the freehold owner of a three-storey building in Streatham. The building consisted of a shop on the ground floor and two flats above.
The ground floor shop unit was let on a long commercial lease to Mayworth Limited. The lease provided that the unit could not be used for any purpose other than a shop without the consent of the landlord (not to be unreasonably withheld or delayed).
Without the Landlord’s knowledge or consent, Mayworth converted the shop unit into two residential dwellings which were marketed and let to residential tenants.
On becoming aware of the issue, the Landlord took steps to forfeit the lease by serving a notice under section 146 of the Law of Property Act 1925 and issuing possession proceedings against Mayworth.
During the course of the proceedings, the lease was assigned twice. The last of those assignments was to Landau Consulting & Investments Ltd which was left to defend the proceedings.
The key issues before the Court were:
- Whether the Landlord’s section 146 notice was valid despite the protections that apply to long leases of residential dwellings under the Commonhold and Leasehold Reform Act 2002; and,
- Whether Landau should be granted relief from forfeiture.
Validity of s146 notice
The Court decided that protections against forfeiture afforded to long leases of residential dwellings did not apply to the lease of the shop.
The protections in the Commonhold and Leasehold Reform Act 2002 applied only to “a long lease of a dwelling”. The lease of the shop did not fit this definition for two reasons.
Firstly, the original parties to the lease had not intended the lease to be a lease of a dwelling. It was intended to be a lease of a shop. The unauthorised conversion had not altered the fundamental character of the lease.
Secondly, the court held that the word dwelling was used in the singular and that the protection did not apply to leases comprised of multiple dwellings.
As a first instance decision, it is possible that the Court’s findings on the interpretation of the Commonhold and Leasehold Reform Act 2002 could be challenged in another Court or on appeal. However, the Court’s decision on these points is useful indication of how this issue is likely to be dealt with more generally.
Relief from forfeiture
The judge decided that Landau should be granted relief from forfeiture on the condition that the shop be reinstated to its original purpose.
A key factor in that decision was that if Mayworth had requested consent for the conversion, the Landlord would have been acting reasonably in refusing consent. The statutory regimes that apply to long residential leases, for instance in relation to enfranchisement and service charges, would have imposed an additional burden on the Landlord, and represented a valid reason for refusing consent. Further, the conversion works amounted to a breach of other covenants in the lease, which would also have been a valid reason to refuse.
The Court was also keen to make sure that Landau was not able to buy its way out of a forfeiture. Landau had offered to pay a sum of money to the Landlord instead of reinstating.
- A landlord will often have reasonable grounds to refuse consent for its commercial property to be converted into residential dwellings.
- Landlords should keep a close eye on their properties let on long commercial leases for any signs of unauthorised conversion. If discovered, a Landlord can serve notice under section 146 of the Law of Property Act 1925 and pursue forfeiture without regard to the additional protections afforded to long leases of residential dwellings.
- A Court may well require a tenant to reinstate the property to its original purpose where a landlord has taken enforcement action in respect of an unauthorised conversion.
- A right to forfeit a lease can be lost if enforcement action is not taken promptly, so landlords should ensure that legal advice is taken as soon as they become aware of an unauthorised conversion.
For more information please contact us.