Following her recent Q&A on landlord issues with section 5 notices under the Landlord and Tenant Act 1987, Peta Dollar considers some tricky tenant issues under that Act
Q I have received a section 5 notice from my landlord, offering to sell the freehold of our building to me and my fellow tenants. We are all keen to acquire the freehold, but feel the price quoted in the section 5 notice is unreasonably high. Can we force the landlord to reduce the price? Also, we believe we may have rights of collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”). Would it be better to acquire the freehold using the 1993 Act rather than responding positively to the section 5 notices?
A The Landlord and Tenant Act 1987 (“the 1987 Act”) grants to residential tenants a right of first refusal where their landlord proposes to sell their building (or make some other disposal in relation to it). However, the offer contained in the section 5 notices is effectively made on a “take it or leave it” basis – it is not open to the residential tenants, within the parameters of the 1987 Act, to renegotiate the price or, indeed, any of the other terms of the offer. Furthermore, there is no obligation on the landlord to ensure that the price specified (or any other term of the offer) is reasonable. The tenants can, of course, make an offer to the landlord to buy the freehold of the building at a lower price or on different terms – but this would be outside the scope of the 1987 Act and there would be no obligation on the landlord to accept such an offer.
The qualification requirements for residential tenants to be able to exercise rights under the 1987 Act are different from those specified under the 1993 Act for tenants to exercise the right of collective enfranchisement. However, many buildings will fall within the ambit of both the 1987 Act and the 1993 Act, in particular any block of flats (or mixed-use building) where all (or most) of the residential tenants are long leaseholders (and any commercial premises do not exceed 25% of the area of the whole building). Where their building falls within both Acts, the tenants should consider the following when deciding whether or not to proceed under the 1987 Act:
- As previously stated, buying the building under the 1987 Act will be on the terms set out in the section 5 notices and, in particular, at the price set out in the notices, whether or not that price is reasonable. However, buying the building under the 1993 Act will be on the basis set out in that Act, with the price being calculated in accordance with the statutory valuation guidelines. The price may therefore be different under the 1993 Act than under the 1987 Act, and the tenants should take advice from a specialist valuer as to the likely price under the 1993 Act before proceeding under the 1987 Act.
- Although the 1993 Act contains valuation guidelines, the price needs to be negotiated between the landlord and the tenants. The tenants’ initial notice needs to specify a price – which must not be so low as to invalidate the notice, but not be so high that there is no room for subsequent negotiation between the parties. The 1987 Act simply requires the tenants to serve an acceptance notice on the landlord, accepting the offer contained in the section 5 notices.
- The tenants will have to pay the landlord’s costs under the 1993 Act; under the 1987 Act, the landlord pays his own costs (unless the section 5 notices expressly require payment of the landlord’s costs as a principal term of the disposal).
- The timetable under the 1987 Act from service of section 5 notices to exchange of contracts is rigid and straightforward and should take about six months. Although the 1993 Act prescribes a timetable from service of the tenants’ initial notice to completion of the transfer of the freehold, in practice, collective enfranchisement can take many months, if not years, to complete.
- If some of the residential tenants are Rent Act tenants, they can participate in a purchase under the 1987 Act, but have no rights under the 1993 Act and cannot join in with the collective enfranchisement.
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Q My landlord served section 5 notices on me and my fellow tenants, and we served an acceptance notice and a nomination notice in response within the prescribed time limits. Now the landlord is refusing to send us a draft contract. What can we do?
A Nothing, unfortunately. The landlord can never be compelled to complete the disposal to the tenants and can withdraw at any time before the actual exchange of contracts. If the landlord fails to take any particular step within the timescale prescribed by the 1987 Act – such as failing to submit a draft contract within one month of service of the notice nominating the purchaser – he is deemed to have served a notice of withdrawal.
The downside for the landlord is that if he withdraws (or is deemed to withdraw), he may (depending on the date when he withdraws) have to pay abortive costs incurred by the tenants and the nominated purchaser, and he will be prevented from selling the “protected interest” (namely, the interest in the property proposed to be disposed of, as referred to in the section 5 notices, such as the freehold) for a period of 12 months. It might be worth pointing this out to the landlord in the hope that he may decide to proceed under the 1987 Act after all.
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Q My landlord managed to sell the freehold without first offering it to the tenants under the 1987 Act by granting an intervening lease to an associated company before selling the freehold. I understand that the intervening lease has now been terminated, either by surrender or merger. What can I do?
A Where the landlord making the disposal (in the original case, the sale of the freehold) is not the immediate landlord of the qualifying tenants at the time when the disposal is made, the disposal will not be caught by the 1987 Act. However, this does not mean that the building itself is outside the 1987 Act, and any disposal by the immediate landlord of the qualifying tenants will be caught by the 1987 Act. If, therefore, the intervening lease has been terminated by surrender, that was a disposal made by the immediate landlord of the qualifying tenants, and section 5 notices should have been served on the qualifying tenants before that disposal.
Under section 11A(1) of the 1987 Act, the requisite majority of qualifying tenants can serve notice on the purchaser (in this case, the freeholder, since the surrender was made to the freeholder) requiring particulars of the terms of the disposal and, if it was made by entering into a contract (in this case, an agreement to surrender), a copy of that contract. That notice can be served at any time up to four months from the date on which the tenants are informed of the disposal and their rights in relation to it.
If the surrender has actually been completed, section 12C entitles the requisite majority of qualifying tenants to serve notice on the freeholder, requiring the grant of a new lease to their nominated purchaser, the new lease being on the same terms as the surrendered lease and expiring on the same date. If the surrender has not yet been completed but an agreement to surrender has been entered into, section 12A entitles the requisite majority of qualifying tenants to serve notice on the landlord, electing that the agreement to surrender should have effect as though it had been entered into with the nominated purchaser, rather than with the freeholder (in other words, the nominated purchaser would take an assignment of the intervening lease rather than the surrender being completed).
If, however, the intervening lease has been terminated by merger, the position is not entirely satisfactory for the tenants. First, it is not clear whether or not the termination of a lease by merger is a disposal falling within the 1987 Act. The only authority on the point is the comment by HH Judge Marshall in the case of Baldwin v Jove Properties (1) Ltd [2012] PLSCS 211, when she said: “In my judgment, it is far from certain that merger, which depends, by definition, on the deliberate act (the formation of an intention) by the dual reversioner, would not be a ‘relevant disposal’ for the purposes of the Act, but the point has not been argued, and I express no firm view upon it.”
Secondly, if the lease has actually been terminated by merger, there is no mechanism within the 1987 Act to recreate the terminated lease, unlike in the case of a lease terminated by surrender.
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Read Peta Dollar’s previous Q&A on section 5 >>
Peta Dollar is a freelance lecturer, trainer and writer, and the co-author of Mixed Use and Residential Tenants’ Rights – The Landlord and Tenant Act 1987 and Leasehold Enfranchisement
