One important issue property lawyers and other advisors need to keep in mind when advising on mixed-use developments is the right of first refusal. It was introduced by Part I of the Landlord and Tenant Act 1987 and its poor drafting attracted a good deal of criticism. A major overhaul was undertaken by amendments made under the Housing Act 1996. But the basic obligation is unchanged: a landlord may not dispose of an interest in a building that contains residential flats without first offering the proposed disposal to the ‘qualifying tenants’, that is long leaseholders, and (oddly enough) any Rent Act protected tenants. An offer notice must be given to the tenants if the landlord wishes to dispose of an interest in the property by, for example, selling it.
Failure to comply with the obligations in Part I is an offence. If a landlord sells without first serving notices and the qualifying tenants are able to move swiftly, they can recover the interest disposed of for the same consideration paid for it by the new owner. Part I of the Act sets out the notices that should be given and the leaseholder’s remedies where the landlord is in default.
A recent illustration is the case of Artist Court Collective Ltd v Khan [2015] PLSCS 313, a case decided by the Central London County Court. Summarising a complicated set of facts and orders, the defendant Mr Khan was the owner of a building in London which consisted of eight flats and three shops. Having appointed an associate as his agent, a company was incorporated (with Mr Khan and his associate as directors) and he executed a trust deed transferring the title to the property to the company for the price of £225,000. The company was to hold the property on trust for Mr Khan who loaned the company the purchase price. It appears that commercial leases of the shop units were granted. No notices were served on the leaseholders.
The leaseholders then discovered what had happened (after making enquiries when one of the shops opened up as a fish and chip establishment). They formed a company to act as a nominee purchaser to exercise rights under the Act (that is the Artist Court Collective Ltd). In order, it appears, to escape his liabilities Mr Khan and his associate arranged for the freehold title to be transferred back to him for a nil consideration.
In other words there were two transaction involving a contract and the completion of a sale of the freehold and in neither case did the landlord or his advisors serve requisite notices on the leaseholders. Nor was a notice served then the trust was set up and the property transferred to it. After giving notices under the Act, the nominee purchaser brought proceedings and they succeeded. The court directed that the freehold be transferred to the leaseholder’s company for a nil consideration. Orders were also made for accounting of rents received from the commercial tenants. Earlier in the proceedings three individuals, friends of Mr Khan, intervened in the proceedings claiming leases of the shops. Final orders have been made the nominee purchaser’s claim and directions were given to allow the interveners to proceed with their claims.
All in all, a salutary tale for an owner who fails to comply with the right of first refusal.
An afterthought: is the grant of a business lease a ‘disposal’ under the Act?
James Driscoll is a writer and a solicitor
