If you are the owner of a building which contains two or more flats which are held on a long lease and you are considering a disposal have you considered that it may first need to be offered to the tenants?
The statutory provisions for this “Right of First Refusal” are contained within Part 1 of the Landlord and Tenant Act 1987 as amended by the Housing Act 1996 (“Act”).
The provisions of the Act can have implications to not only the owner of the building but also potential purchasers.
Failure of the owner to comply with these statutory requirements is a criminal offence subject to a summary conviction and fine. The tenants may also require the purchaser of that interest to dispose of the interest to the tenants on identical terms. This could clearly have a costs implication to the purchaser of the interest, in that any legal fees, stamp duty and associated costs paid by the purchaser would have essentially been for no gain.
A building will fall within the RFR if:-
- it contains at least two flats held by qualifying tenants
- not more than 50% of the building are used for non-residential (not including common areas/staircases etc)
- more than 50% of the total number of flats are held by qualifying tenants
The provisions within the Act do not apply if the Landlord is:-
- a Housing Trust
- Registered social landlord and fully mutual housing associations which are not registered
- Charitable housing trusts
- Where the landlord is resident at the block and the block is not purpose built
Exemptions to these requirements are set out in Section 4 (2) of the Act. A lease of an individual flat, disposal by a liquidator or trustee in bankruptcy, disposal to an associated company (time limited) or a disposal under the Leasehold Reform Housing and Urban Development Act 1993 are exempt disposals.
What is a Disposal in Terms of the RFR
The right arises where a landlord proposes to dispose of a legal or equitable interest in the whole or part of the building. The Act sets out what is included as a “relevant disposal”. This includes not only the sale of the whole building but also (and not inclusive) surrender of a tenancy, an option or right of pre-emption and the entering into a contract for the sale of an estate or interest whether conditional or unconditional.
As indicated above certain disposals are exempt as set out in Section 4 of the Act.
Food for Thought – what affect does this have on commercial elements of mixed use developments
There has been much debate about whether or not a lease or renewal of a business tenancy of the commercial element of a mixed use building would fall within the provisions of the Right of First Refusal. How would the provisions in the Act fall in line with the security provisions of the Landlord and Tenant Act 1954?
Would the granting of a licence or a lease of telecoms aerials or solar panels on the roof of the building trigger the Right of First Refusal?
The Act itself does not address such situations. The drafting of the Act is not of particular assistance and a strict interpretation of the Act would suggest that these situations would be classed as a “relevant disposal”. Nor does there appear to be any case law which specifically deals with the issue.
It is quite clear that the Act had an objective to deal with the rights of residential tenants and the superior interests which may affect them. It appears common practice for the Right of First Refusal to be universally overlooked by landlords, their commercial tenants, residential tenants and advisers. Would residential tenants really want to take a business lease of the commercial element with the responsibility to pay market rental?
I feel the question to be asked when considering this issue is whether having regard to the disposal, does it affect the tenants interest. In Dartmouth Court –v- Berisworth 2008 it was held that a lease to an associated company demising airspace did fall within the Act. The intention was to build more flats above and it was felt that this would interrupt or intrude on the residential tenants’ interest.
Due to the uncertainties if you intend to develop a mixed use building you may wish to structure the development to ensure the commercial units are not caught by the Right of First Refusal. There are a few ways in which a development can be structured to ensure the commercial element falls outside the Act. A developer may consider granting a long lease of the commercial unit to a related company. The commercial element would then fall outside the Act as it would not be held by the tenants’ immediate landlord.
As with many aspects of long residential leasehold the law is relatively complicated. This is a brief outline and we have not gone into all the exemptions, the premises, the qualifying tenants or given details of the notice required under the Act and the relevant timescales.