Q&A section: Where there has been a failure to serve notice of the right of first refusal under the Landlord and Tenant Act 1987 which parties would have been qualifying tenants and what is the effect of the same on a subsequent transfer?

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This article is produced in partnership with Chris Bryden of 4 King’s Bench Walk.

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Case study

There was a historic disposal of a mixed use building (over 15 years ago) and section 5 notices under the Landlord and Tenant Act 1987 (LTA 1987) were not served on two residential tenants. The building is now being sold again and section 5 notices have been served. One of the long residential leaseholders acquired his interest a number of years after the previous sale. In order to challenge the historic disposal, who are the qualifying tenants for that purpose given that one of the tenants acquired his interest after the previous sale?

Also, can the existing seller of the building serve a section 18 notice under the LTA 1987 in respect of the current proposed disposal and against the previous disposal?

Tenant rights of first refusal

LTA 1987 gives the right to tenants of residential flats contained in a building to the first refusal of the acquisition of the landlord’s interest where a sale is proposed. The landlord is required to serve notices on the tenants informing them of his intention to dispose of his interest and providing time to them to consider a purchase at the offer price. The landlord cannot sell the property during that time, and breach is a criminal offence. The tenants are also able to force the new landlord to sell the property to them at the price he paid, if notice of the sale is not given to them.For the right to arise, there must be at least two flats in the building; no more than 50% of the building must be in non-residential use, and more than 50% of the flats must be held by qualifying tenants. The right does not apply to premises where the interest of the landlord is held by a resident landlord. This Q&A only covers the situation where these prerequisites apply.The right (where it exists) accrues to all qualifying tenants collectively. In order to exercise the right, the requisite majority of the qualifying tenants of the constituent flats must serve an acceptance notice (LTA 1987, s 6). Each qualifying flat has a vote, and more than 50% must vote in favour to exercise the right.There is very limited case law relating to the LTA 1987. One recent case that came before the County Court (and thus is not binding Precedent) was Artist Court Collective Ltd v Khan [2015] PLSCS 313 (unavailable on Lexis®Library). In that case, having discovered that the landlord had transferred his interest in a property into a company he had formed, the majority of tenants formed a company and served a purchase notice under LTA 1987, s 12B requiring the transfer of the freehold to them. The twist in that case was Mr. Khan then undid the transaction for nil consideration. The tenants were able therefore to acquire the property for nil consideration.

 

In Westleigh Properties Limited v Green, the freehold was acquired by the tenants some 16 years after the disposal in breach. An historic failure to serve a section 5 notice therefore can have long-running consequences.

In the case study scenario, notices were not served on two tenants. It is not clear whether the tenants who were served (if any were served) formed the requisite majority. If they did, and chose not to exercise the right, then it is likely that there will be no issue over the previous failure.

The number of tenants is relevant because LTA 1987, s 10(2) provides that a landlord who has not served a notice on all of the qualifying tenants, but has done so on not less than 90% of them, or, where the qualifying tenants number less than ten, on all but one of them, will be treated as having duly served notice. This will not assist however in respect of the leaseholder who acquired the tenancy after the original disposal, as the obligation is to serve on the qualifying tenants at that time.

The right to exercise the provisions of the LTA 1987 accrues, as noted above, to qualifying tenants. While the LTA 1987 is silent expressly as to when the qualifying tenant must be a tenant, it is implicit from the use of the word ‘is’ in LTA 1987, s 3(1) that the qualifying tenant must be a tenant at the time that the LTA 1987 operates—ie at the time of the disposal. It follows that the tenant who acquired the flat subsequent to the first disposal does not have a right in respect of that first disposal, though his predecessor as leaseholder would do. In theory, the previous leaseholder could, with the requisite majority of other tenants, still exercise the right to compel sale. If, however, there are insufficient other tenants to form that majority, there is no real risk.

Service of a LTA 1987, s 18 notice (which is a notice served by the purchaser on qualifying tenants inviting them to confirm whether they would wish to avail themselves of the right of first refusal, and which, where more than 50% of the tenants confirm that they would not) will not assist in respect of the original breach, due to the provisions of LTA 1987, s 18(3), which provides that the section has that effect in relation only to that disposal.

This is a complicated and difficult area of the law, with limited case law to provide guidance and potential criminal consequences. In the circumstances it is essential that specialist legal advice be sought at the earliest opportunity, to include as appropriate the potential for deeds of release from the tenants relating to the original disposal, but these are matters on which specific advice must be taken.

 

Filed Under: Property

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