Part I of the Landlord and Tenant Act 1987 is designed to give tenants of flats a right of first refusal if their immediate landlord wishes to dispose of its interest in the premises. The Act will apply, unless more than half of the premises are occupied or intended to be occupied for other than residential purposes.
Qualifying tenants have three different rights, namely: (i) to take the benefit of a contract for sale that has not yet been completed; (ii) to compel sale by a buyer and any subsequent buyers who have completed on a purchase; and (iii) where the landlord has surrendered its own lease, to compel the superior landlord to grant them a new tenancy on the same terms as the landlord’s lease.
The decision in Kensington Heights Commercial Co Ltd v Campden Hill Developments Ltd [2007] EWCA Civ 245; [2007] PLSCS 60 examines how these provisions operate in the case of a surrender and regrant that was effected to enable the freeholder to acquire a strip of land for development, for which the freeholder paid, and in turn received, a substantial sum.
The tenants served a purchase notice on the freeholder, requiring it to transfer the landlord’s lease and the capital payment to them. They also required the freeholder to comply with the legislation by copying the notice to their landlord, as the subsequent owner of the interest. They issued proceedings for an order requiring their landlord to transfer the new headlease, and the capital payment to them.
The Court of Appeal ruled that the legislation provides tenants with a right of first refusal where the immediate landlord is selling its interest in a building. The landlord had not disposed of its headleasehold interest; it had acquired a new one for a longer term. The tenants were seeking to acquire the new lease, not the old one. The court was unable to order the landlord to transfer the old lease to the tenants because it had ceased to exist, and the legislation did not empower the court to either order the landlord to transfer the new lease to the tenants or to grant them a new lease on the terms of the old one.
The case does not decide that surrenders and regrants fall outside the legislation. The Court of Appeal observed that the tenants could have served a different notice on the freeholder, requiring it to grant them a new lease on the same terms as the old one. The court did not decide whether the tenants were still in time to do so or indicate how the legislation would work in practice if they were. It held that the tenants would have to sort this out in separate proceedings against the freeholder.
The Act is often described as one of the most badly drafted pieces of modern legislation. This case highlights yet more pitfalls for tenants, landlords, investors, developers, and the practitioners who advise them.
Allyson Colby is a property law consultant
