Who has the “right of first refusal” under the Landlord and Tenant Act 1987?
In March 1987 there were estimated to be half a million flats in England and Wales with private sector landlords. About two-thirds of these flats were held on long leaseholds and the remaining one-third (or so) were tenancies under the Rent Act 1977. These tenants had hitherto been excluded from enfranchisement and “right-to-buy” legislation, introduced by Labour and Conservative governments respectively.
Long leaseholders of flats (rather than houses) were excluded from the Leasehold Reform Act 1967 and all private sector tenants (whether of flats or of houses) were excluded from the “right-to-buy” provisions of the Housing Act 1980. Yet the position of such tenants faced with unscrupulous landlords had been well documented, most notably by the Report of the Nugee Committee (“The Committee of Inquiry on the Management of Privately Owned Blocks of Flats”).
The Landlord and Tenant Act 1987 implements the main recommendations of that report and, in some respects, goes further. It introduces a “right of first refusal” for private sector tenants and also makes it easier for such tenants to apply to the courts to appoint a manager if the landlord is in breach of his obligations. As a last resort, the Act allows private sector tenants to take the initiative and to acquire their landlord’s interest against his will where the appointment of a manager would either not be an adequate remedy or has already been imposed as a remedy for the previous three years (or more). Finally, the Act introduces a procedure for amending defectively drafted leases, and also increases the rights of tenants in respect of information to be given to them, and in respect of service charges, insurance and managing agents.
In this short article, it is possible to review only some of the aspects of the new right of first refusal.
Relevant disposal
This right is, of course, less than a full “right-to-buy” because the initiative lies with the landlord to dispose of all or some of his rights, not with his tenants to acquire any of those rights compulsorily. Nevertheless, a very wide definition has been given to the idea of a “relevant disposal”, so that almost any free-market transaction involving the landlord and the premises in question will impose upon him the duty to comply with the 1987 Act before he proceeds to complete that transaction or enters into a binding contract with a third party.
Naturally enough, certain transactions are excluded from this wide definition. Among the excluded categories are compulsory purchase transactions; gifts to members of the landlord’s family or to charity; disposals pursuant to a court order (family law); disposals by a corporate landlord to an associated company; and disposals under the landlord’s will or on his intestacy. (The full list is a long one.) It should be noted that a disposal from a corporate landlord to its liquidator or from an individual landlord to his trustee-in-bankruptcy are both excluded from the definition of a “relevant disposal”. However, a disposal by the liquidator or by the trustee-in-bankruptcy will not be outside the scope of the Act.
Qualifying tenants
Not all private sector tenants benefit from the new right of first refusal. First, the premises must contain two or more flats held by “qualifying tenants”, and these flats taken together must exceed (in terms of internal floor area) any part (or parts) of the premises which are not occupied (or intended to be occupied) for residential purposes. Thus, a very large shop (whether occupied or empty) with two small flats built over it, owned by the same landlord, may fall outside the scope of the right of first refusal. Second, a tenant only has rights under these new provisions if he is a “qualifying tenant”. A tenant will not be a “qualifying tenant” if he is a shorthold tenant, a business tenant, a service tenant, an assured tenant or an assured agricultural occupier.
There is also a provision (in section 3(2) of the Act) to prevent a person from being a qualifying tenant if he is the tenant of more than one flat under a single agreement or the tenant of a single flat together with any of the common parts of the building. Likewise, if he is the tenant of two or more flats under separate agreements he will be disqualified from being a “qualifying tenant” (of any of them) once he has accumulated more than 50% of the total number of flats in the building. These are, in part, anti-avoidance provisions to prevent a single tenant from either frustrating or outvoting the rights of the other tenants. They are also provisions which have the effect of making any subtenants (of individual flats) the true “qualifying tenants” once the superior tenant has fallen outside that definition.
The purpose of this provision becomes clearer when it is borne in mind that the right of first refusal:
(1) does not arise unless qualifying tenants hold more than 50% of the flats in the building; and
(2) can be exercised only if more than 50% of the qualifying votes are in favour of it.
If, therefore, a landlord could reduce the number of tenants by consolidating several flats into one tenancy he might take the whole building outside the scope of the Act, and if a tenant could accumulate more than half the tenancies in any particular building, he would be able to determine the outcome of any vote by his own decision alone.
Subtenants
The position of subtenants is covered by section 3(4) of the 1987 Act, which is a fine example of legislative precision and economy of words.
The subsection states that “a tenant of a flat whose landlord is a qualifying tenant of that flat is not to be regarded as being a qualifying tenant of that flat”. This means, for example, that when a tenant of a flat has granted a subtenancy of that flat, the tenant who granted that subtenancy (or his successor) is to be regarded as the “qualifying tenant”, not the subtenant who took that subtenancy from him.
However, if the tenant who granted the subtenancy was the tenant of that flat and one or more other flats in the same building all held under the same agreement, then the subtenant will be the “qualifying tenant” because, in these circumstances, the tenant will not be a “qualifying tenant” at all. But if a tenant has several separate flats (but not a majority of the flats) in the same building, each held under a separate agreement, he will remain the “qualifying tenant” of each of the flats (therefore obtaining more than one vote) even if he sublets the flats individually. If, however, he once acquires more than 50% of the tenancies in the building, he will cease to be a qualifying tenant in any of those flats and his subtenants will then become qualifying tenants in his place.
Caution should be exercised in applying these principles to small blocks of flats or converted houses. If (for example) a converted house contains three separate flats, the acquisition of two of those flats by the same tenant will take the whole building outside the ambit of the “right of first refusal” unless that tenant sublets one or both of those flats.
