Jonathan Seitler QC guides practitioners through the law relating to tenants’ rights of first refusal under the Landlord and Tenant Act 1987 – one of the few property statutes carrying criminal sanctions
Landlord and tenant checklist: the 1987 Act
- When do tenants’ rights of first refusal arise?
- To what premises?
- To which landlords?
- To which tenants?
- To which disposals?
- What does the landlord have to do to comply?
- What must be in an offer notice?
- What must tenants do in response, to exercise their right of first refusal?
- What happens if, following receipt of an acceptance notice, the landlord decides not to sell?
- What are the penalties for a landlord’s non-compliance?
When do rights of first refusal arise?
Under the Landlord and Tenant Act 1987 (as substantially amended by the Housing Act 1996) (“the Act”), when the landlord of flats wants to make a “relevant disposal” of its interest in the “premises”, the “qualifying tenants” of those flats must be served with an “offer notice” giving them the right to pre-empt the disposal. They can either accept the offer, in which case the disposal must be to the nominee of the qualifying tenants, or reject it, in which case the disposal can be to whoever the landlord wanted to sell the premises initially, on the same terms as the offer notice. It is a criminal offence for the landlord to deny the tenants their right of first refusal, making the stakes unusually high for a landlord.
To what premises does the Act apply?
It applies when two or more flats, comprising the whole or part of a building, are held by qualifying tenants; those qualifying tenants hold more than half the number of flats in the premises; and more than half the internal floor area is given over to residential use, the floor area of common parts being disregarded. A flat is a separate set of premises forming part of a building, whether or not on one floor, that is divided horizontally from another part of that same building and is constructed or adapted for the purposes of a dwelling. A “building” is not specifically defined in the Act: a row of terraced flats would probably constitute a separate building from another such row if the two such buildings have space between them and separate, standalone services and amenities (see Saga Properties v Palmeira Square Nos 2-6 Ltd [1995] 1 EGLR 199).
A building, however, is more than just its bricks and mortar: it includes the appurtenances of the building, such as gardens, airspace and roadways, but not necessarily a caretaker’s office, electricity sub-station or garages (see Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] EWHC 350 (Ch); [2008] 2 EGLR 141 and Denetower Ltd v Toop and others [1991] 1 EGLR 84). Although properties around a shared landscape which had built up incrementally over a long period would constitute multiple buildings (see Kay-Green and others v Twinsectra Ltd [1996] 2 EGLR 43), a development constructed all at one time is likely to be treated as a single building (see Long Acre Securities Ltd v Karet [2004] EWHC 442 (Ch); [2004] 2 EGLR 121).
To which landlords?
The Act applies to immediate landlords of the requisite number of qualifying tenants and also to superior landlords where the immediate landlord has a term of less than seven years remaining or if the superior landlord can break the intermediate lease within the first seven years. In that case, the Act will apply to all landlords up the chain who are in that position.
The Act does not apply to certain “exempt” landlords, such as local authorities, housing associations and development corporations, nor to resident landlords who for the past year have occupied a flat in the building (not purpose-built) as their principal residence.
To which tenants?
A qualifying tenant is any tenant except a tenant under an assured, protected shorthold, assured shorthold, assured agricultural or business tenancy, or one coterminous with the end of the tenant’s employment. Also excluded is a tenant of three or more flats in the same building, irrespective of how many leases it holds, and a tenant whose own landlord is a qualifying tenant.
A tenant which is a company can be a qualifying tenant, but is treated as having more than one flat for these purposes if an associated company owns a lease of another flat in the same building. A tenant can also be a qualifying tenant against himself, where, for instance, it also part-owns the freehold.
To which disposals?
Relevant disposals are widely defined, to include the disposal of any legal or equitable estate or interest affecting the premises. As well as contracts to sell, surrenders and the grants of options are caught, but not the creation of mortgages or charges (see Kensington Heights Commercial Co Ltd v Campden Hill Developments Ltd [2007] EWCA Civ 245; [2007] 1 EGLR 130).
Unless the disposal is covered under the defined list of exemptions in section 4 of the Act, it is likely to be covered. The most commercially significant exempted disposals are: to a trustee in bankruptcy or liquidator; by way of security for a loan; under a will or the law of intestacy; pursuant to a court order in family or inheritance cases; pursuant to or as a compromise of a compulsory purchase order; to a charity or gift to a family member; and, perhaps most importantly for the purposes of a landlord avoiding the operation of the Act, between companies which have been “associated companies” for at least two years.
Two (of the many) favoured ways to avoid effecting a relevant disposal (and hence avoiding the operation of the Act) are sales of the shares in a property-owning company and the creation of a mortgage followed by default and re-entry as mortgagee-in-possession by the “mortgagor”/purchaser. The former was assumed to be valid (if not actually approved) in Michaels and another v Harley House (Marylebone) Ltd [1997] 2 EGLR 44, a decision affirmed by the Court of Appeal ([1998] PLSCS 289).
What does a landlord have to do to comply?
i) Under section 5 of the Act, the landlord must serve its offer notice on all qualifying tenants (or if there are more than 10, 90% of them) when it “proposes” to make the relevant disposal. This means at or by the point when the landlord is seriously considering the disposal even though it has not yet firmly and irrevocably decided to proceed (see Mainwaring v Henry Smith’s Charity Trustees [1996] 2 EGLR 25), though the criminal offence under the Act is not committed until the relevant disposal is made, without an offer notice having been served. Late but pre-disposal service of the offer notice is not, therefore, the criminal act. It is critical that the offer notice complies with the notice provisions under the lease.
ii) The landlord must not effect any disposal of the interest offered to the tenants (the “protected interest”) during the time properly allowed to the tenants to take up their rights of first refusal (the “protected period”). The protected period will end when the specified period of no less than two months expires for the last of the qualifying tenant(s) served.
What must be in an offer notice?
The offer notice must spell out the type of disposal being made from the four categories defined in section 5A to 5D. All of those categories have their own list of the information that must be conveyed to the qualifying tenant in the offer notice made under them.
Where the disposal is a sale under contract, the qualifying tenants have an “acceptance period” of no less than two months for the requisite majority to accept the offer to buy the premises at the price described in the offer notice and not less than two months to nominate the purchaser(s) on their behalf.
Where the disposal is by auction, the offer notice must be served between four and six months before the auction and the nature of the offer will be for the qualifying tenants to contract on the basis of the winning bid in the auction. The qualifying tenants are also entitled to be told the date and venue of the auction and the name of the auctioneers: their period for deciding whether to accept the offer is the same period of not less than two months (ending not less than two months before the auction) though the period for the qualifying tenants deciding on their nominee purchaser is 28 days (ending not less than 28 days before the auction).
Similar rules apply where the disposal is by way of the grant of an option or involves contract and completion taking place simultaneously.
In all cases details of price must also include details of non-monetary consideration and there is machinery to protect the qualifying tenants from any inability to provide such non-monetary compensation.
What must tenants do in response, to exercise their right of first refusal?
i) Accept the offer notice by service of an acceptance notice on behalf of the requisite majority of qualifying tenants, within the time period properly specified; and ii) nominate a purchasing person or entity. If the tenants do not respond within that period, their right of first refusal will be lost and, so long as it takes place within the following 12 months (or the nominated purchaser withdraws the acceptance offer) the landlord will be able to effect the disposal of the protected interest by the method, and at no lower than the price, specified in the offer notice, free of the requirements of the Act. The requisite majority is more than half of the flats occupied by qualifying tenants and must remain the requisite majority until contracts are exchanged (see Mainwaring).
What happens if, following receipt of an acceptance notice, the landlord decides not to sell?
The landlord can change its mind about selling at any time up to exchange, by service of a notice of withdrawal. The tenants’ right is not a right to buy, but a right of first refusal. If ultimately there is no sale, no right of first refusal arises, though the landlord cannot then propose a sale to anyone else for the next 12 months.
What are the penalties for a landlord’s non-compliance?
There are unlimited fines and potential personal liability for directors, managers, secretary and other officers of a corporate landlord if, without reasonable excuse, it makes a relevant disposal without a prior offer notice or contravenes a prohibition in sections 6-10 of the Act. There is also potential civil liability for damages against the landlord in default. In addition, qualifying tenants have powers under the Act to seek information from – and then, within six months of obtaining it, to force a sale of the protected interest by – the party who bought the landlord’s interest or its successor.
Useful resources
Woodfall: Landlord and Tenant, 28.001 to 28.036 (Sweet & Maxwell)
Anthony Radevsky and Wayne Clark: Tenants’ Right of First Refusal (Jordan Publishing)
Sarah Thompson-Copsey and Peta Dollar: Tenants’ Pre-emption Rights: A Landlord’s Guide to the Landlord and Tenant Act 1987 (Jordan Publishing)
Leading authorities and statutory provisions
Landlord and Tenant Act 1987, sections 1 to 20
Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] EWHC 350 (Ch); [2008] 2 EGLR 141
Denetower Ltd v Toop and others [1991] 1 EGLR 84
Mainwaring v Henry Smith’s Charity Trustees [1996] 2 EGLR 25
Seitler’s leading practitioners
Mark Chick, Bishop & Sewell LLP
Samantha Davies, Biscoes
Peter Dawson, Russell Cooke
Kerry Glanville, Pemberton Greenish
Paul Marco, Trowers & Hamlins
Caroline Wild, Blake Morgan
