If a freeholder agrees to allow a leaseholder to extend their demise, would the surrender and regrant facilitating this change be caught by the right of first refusal?

Right of first refusal

Part 1 of the Landlord and Tenant Act 1987 (LTA 1987) provides that in specified circumstances a landlord is obliged to offer to sell their interest to tenants before otherwise being allowed to dispose of that interest. The precise scope of these provisions is defined in some detail in LTA 1987, but they will apply to the typical private landlord who owns premises containing multiple residential flats that are not let on short-term tenancies. In considering any particular case there is no substitute for checking the statutory provisions carefully.

Where LTA 1987 does apply, the obligation on the landlord is not greatly onerous but it can be inconvenient as the offer to qualifying tenants must be kept open for at least two months. The obligation is reinforced by a criminal sanction under LTA 1987, s 10A, which is now an unlimited fine.

Surrender and regrant

The surrender of an existing lease and the creation or regrant of a superseding lease can occur for a variety of reasons. A frequently arising reason is the extension of the demise. For obvious reasons, the parties will often prefer not to grant a new separate tenancy in respect of the area to be added but rather to alter the existing tenancy to include that area. The inclusion of this new area still entails a fresh demise even though it is not a separate demise.

However, the newly altered tenancy agreement is also in respect of the existing demise it is logically inconsistent with the existing tenancy simply continuing—the landlord cannot freshly demise what they have already parted with. The result is that the existing tenancy is surrendered, and the newly created tenancy is a (re)grant of the whole demise.

The (un)importance of formalities

The first issue is whether the agreement to allow a leaseholder to extend their demise is effective in itself. A contractual agreement of this kind would be for the disposition of an interest in land, and would therefore be subject to the usual formality requirements.

It is doubtful that an agreement compliant only with sufficient formalities to be enforceable in equity can amount to a surrender and regrant. However, even if such a transaction is not caught by LTA 1987, because it is a surrender and regrant, it will anyway be caught by LTA 1987, s 4A—if it was going to be caught at all.

Is an agreement extending a leaseholder’s demise caught by the 1987 Act?

LTA 1987, s 4 of defines ‘relevant disposals’. Any transaction falling outside this definition is not affected by the right of first refusal even if the other statutory criteria are all satisfied. The starting point is ‘the disposal by the landlord of any estate or interest’, which would certainly catch a surrender and regrant. The key issue therefore is whether any of the exceptions apply.

LTA 1987, s 4(1)(a) is especially relevant, as it excludes ‘the grant of any tenancy under which the demised premises consist of a single flat (whether with or without any appurtenant premises)’. Because of the circumstances that must apply for the 1987 Act to be relevant at all, this exclusion will affect the majority of agreements to extend a leaseholder’s demise where this question could arise. The term ‘appurtenant premises’ is further defined at LTA 1987, s 4(4).

However, the question could arise such that LTA 1987, s 4(1)(a) does not provide the answer. For example, if one flat is forfeited then the freeholder might seek to agree with the leaseholder of a neighbouring flat for the demise to be extended to include the vacant flat as well. The surrender and regrant would involve the grant of a tenancy for demised premises consisting of two flats rather than a single flat. Unless some other (unusual) exception applied, the freeholder would be obliged under the LTA 1987 to offer first refusal to qualifying tenants generally.

Produced in partnership with Jonathan Edwards of Radcliffe Chambers

Further reading on this topic can be found in our Practice Notes: Landlord and Tenant Act 1987—tenants' right of first refusal;  Lease variations—surrender and re-grant issues;