Following her series of articles on mixed-use and residential tenants’ rights, Peta Dollar considers some tricky issues with section 5 notices under the Landlord and Tenant Act 1987
.
Q My landlord client served section 5 notices last week, and has already received a response from each of the qualifying tenants in the building, confirming that they do not wish to accept the offer contained in the notices. Can my client now go ahead and make his proposed disposal?
A No – for two reasons. First, because the qualifying tenants are entitled to change their minds right up until the end of the period for service of an acceptance notice (which must not be less than two months from the date of service of the section 5 notices).
Even if the current qualifying tenants do not change their minds, one or more of them may sell their flat(s) during this period, and the new qualifying tenant(s) may wish to accept the offer and may persuade the other qualifying tenants to support this. Secondly, because section 6(1) of the 1987 Act prohibits the landlord from making a disposal during that period (except to a person nominated by the tenants), and section 10A(1)(b) makes any breach of that prohibition a criminal offence on the part of the landlord.
.
Q I am acting on a deal where the price stated in the section 5 notices is higher than the final agreed price between the seller and my clients for the freehold. The difference is around £5,000. Would it breach the 1987 Act if the seller agreed to make a contribution of £5,000 towards my client’s legal fees (and then my clients pay the full section 5 price on the transaction)?
A A contribution to legal fees would arguably be a “principal term” of the transaction, and so could lead to an argument that the sale is not on the same terms as those set out in the section 5 notices, assuming that there is no mention of the contribution to legal fees in the section 5 notices.
In Woodridge Ltd v Downie [1997] 2 EGLR 193, it was held that an agreement to pay the landlord’s legal costs was not a term of the disposal (this was where the tenants were stepping into the shoes of the original buyer and so did not have to pay the legal costs), but in this
case, the agreement to pay was oral and so did not satisfy section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.
Remember too that section 7(3)(a) of the 1987 Act, which restricts the terms of the disposal that the landlord is entitled to make within 12 months of the end of the “protected period” (where no acceptance notice has been served or no purchaser has been nominated within that period) refers to “consideration”, not “price” – and this payment will be part of the consideration for the sale and purchase, even if it is described as being a refund of the legal fees rather than part of the actual price itself.
.
Q My understanding is that serving a section 18 notice is very much a “belt and braces” approach to ensure that the purchaser will not lose the property to qualifying tenants who are entitled to exercise rights of first refusal. However, am I correct in saying that section 18 is not a substitute for section 5 and that section 5 notices must still be served?
A The answer to the question is: not necessarily.
A proposed purchaser can indeed serve section 18 notices in order to ascertain whether or not the landlord has served section 5 notices and, if not, whether the tenants have rights under the 1987 Act and, if so, whether they would wish to exercise those rights.
Section 18 notices are served on “the tenants of the flats contained” in the building that the landlord is proposing to dispose of, not on the qualifying tenants (section 18(1) of the 1987 Act), and a period of at least two months must be allowed for the tenants’ response.
So long as the proposed purchaser receives a negative response to the section 18 notices, the building will be treated, for the purposes of that disposal, as premises to which the 1987 Act does not apply (section 18(3)). This means that the landlord and the purchaser can proceed with the proposed disposal without first serving section 5 notices.
A negative response, in this context, means that either: (i) not more than 50% of the tenants on whom the notices were served have responded; or (ii) more than 50% of the tenants on whom the notices were served have responded, stating either that they are not entitled to be served with a section 5 notice or that they would not respond positively to a section 5 notice, if one were to be served.
.
Q My landlord client served section 5A notices on the qualifying tenants, quoting a sale price of £1m for the freehold of his building. The tenants have now served an acceptance notice, accepting this offer. However, my client has now found a purchaser who is willing to buy the building for £2m. Presumably my client can simply serve fresh section 5A notices at the higher price and ignore the acceptance notice – after all, he is no longer proposing to dispose of the building at the original £1m price.
A There is nothing in the 1987 Act that specifically prohibits the service of fresh section 5A notices at the higher price. However, this will not achieve the desired outcome. Section 6(2) of the 1987 Act states that, once an acceptance notice has been served by the requisite majority of qualifying tenants, the landlord must not dispose of the “protected interest” (namely, the interest proposed to be disposed of in the section 5 notices that have been accepted by the acceptance notice – in this case the freehold) during the “protected period” (basically two months from the end of the acceptance period) except to a person nominated by the tenants. If at the end of the protected period the tenants have not nominated a purchaser, then section 7(1)(b) permits the landlord to make the disposal to a third-party purchaser so long as the disposal is made at no lower price and on the terms set out in the section 5A notices. Obviously, this would be the best possible outcome, so far as your landlord client is concerned.
If, however, the tenants nominate a purchaser during the protected period, the landlord cannot sell the property to a third-party purchaser unless the nominated purchaser withdraws before contracts are exchanged. If the landlord withdraws or is deemed to withdraw (which will happen if he fails to proceed with the sale to the nominated purchaser), he cannot make the disposal for 12 months (section 9B(2)).
However, the 12-month “embargo” only applies to the “protected interest” – in this case, the freehold – and the landlord is free to make a disposal of any other interest in the building (subject, of course, to serving fresh section 5 notices first).
If, therefore, the landlord can agree to grant, say, a 999-year lease of the building to the third-party purchaser, then fresh section 5A notices can be served in respect of that proposed disposal and, so long as no acceptance notice is received in respect of those notices, the landlord can proceed with the grant of the lease.
Alternatively, the landlord could grant the third-party purchaser an option to purchase the freehold; as with the grant of a lease, this will not be a disposal of the “protected interest” and hence will not be subject to the 12-month “embargo”, although section 5C notices will need to be served. Assuming that the tenants do not serve an acceptance notice in relation to those section 5C notices, neither the exercise of the option nor the transfer of the freehold pursuant to that exercise will be caught by the 1987 Act.
Note that the landlord may become responsible for the abortive costs of the requisite majority of qualifying tenants (and of any nominated purchaser) unless he withdraws from the transaction (by serving notice of withdrawal) within four weeks of the start of the nomination period (that is, the period of not less than two months after the end of the acceptance period during which the tenants can nominate a purchaser to take the purchase on their behalf) (section 9B(3) of the 1987 Act). The landlord will have to consider whether it would be better to wait until the end of the nomination period (in the hope that no nomination will be made and so he can go ahead with the freehold sale at the increased price of £2m) despite the fact that he may have to pay abortive costs if a nomination is made and he has to serve a withdrawal notice later on. Section 9B(4) states that the landlord will only have to pay abortive costs incurred during the period starting with the end of the four-week period referred to above and ending with the date of service of the notice of withdrawal.
.
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
