Senior associate solicitor Gemma Smith, in our Commercial Property team, explains.
The rights of first refusal under the Landlord and Tenant Act 1987 (‘the Act’) grants certain residential tenants a right of first refusal should their landlord decide to dispose of the property. A disposal in these circumstances doesn’t just include a sale, but also a lease or even the grant of an easement.
If the rights of first refusal apply, then the tenants will have the right to group together with other tenants and nominate a party (possibly setting up a company) to purchase, let (or other dealing) at the price and on the terms set out in the notice.
When do rights of first refusal under the Act apply?
When it comes to mixed-use properties, ascertaining whether rights of first refusal apply isn’t necessarily straight forward. A few questions, set out below, will need to be considered to determine if the property in question is affected.
- The Property: does the property comprise the whole or part of a building?
- Flats: does the building contain two or more flats held by qualifying tenants and are more than half of the flats in the building owned by qualifying tenants?
Qualifying Tenants: most types of residential tenant are considered to be qualifying tenants under the Act, other than certain specified exclusions, which include assured tenancies (including ASTs) and business tenancies. However, a tenant will not be a qualifying tenant if they are the tenant of three (or more) flats in the building.
- Floor area: is 50% or more of the internal floor area of the building used for residential purposes? When carrying out this calculation, common areas should not be included.
If the answer to all three of the above questions is yes, then the tenants may have rights of first refusal under the Act. The Act generally only applies to the immediate landlord of the qualifying tenants, with some landlords being exempt.
What are offer notices and when should they be served?
Before proceeding with any disposal where the Act applies, the landlord will need to serve on the Qualifying Tenants the relevant statutory offer notices. There are different types of notice dependent on the proposed transaction but they generally set out the terms of the proposed disposal, including in the case of a sale, the purchase price.
It is advisable to serve the offer notices as early as possible when considering a disposal to avoid un-necessary delays and potential wasted costs progressing with a prospective third party, as the tenants may wish to take up the offer.
The tenants must then be given at least two months to respond, during which the landlord will not be able to exchange (or complete) on a transaction. Provided the tenants do not with to exercise the right (or do not respond) then the landlord will be able to proceed with the disposal to a third party on no more favorable terms than those set out in the notices.
What are the sanctions for non-compliance?
Proceeding with a disposal without complying with the Act is a criminal offence and may lead to criminal prosecution and penalties. The Courts have shown in recent caselaw that they are prepared to set transactions aside (and transfer the interest to the tenants at the same price) where the correct procedure has not been followed.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
