Commercial Property Update October 2019

Introduction

In this edition we focus on the statutory procedure allowing qualifying tenants of flats to purchase their landlord’s interest on a relevant disposal (pursuant to Part One of the Landlord and Tenant Act 1987) and look at the recent decision of the High Court (in the case of York House (Chelsea) Limited v Thompson & Thompson).

Landlord and Tenant Act 1987 

Introduction

As many readers will know, Part One of the Landlord and Tenant Act 1987 (LTA 1987) creates a statutory pre-emption right for “qualifying tenants” of residential flats to purchase the landlord’s interest on a relevant disposal. The LTA 1987 applies to “premises” if the following criteria are met:

• They consist of the whole or part of a building;

• They contain two or more flats held by qualifying tenants;

• The number of flats held by such tenants exceeds 50% of the total number of flats contained in the premises.

A “relevant disposal” is a disposal by the landlord of any estate or interest (legal or equitable) in any such premises (including disposal of common parts of such a building). 

A landlord of a building to which the LTA 1987 applies must (where he or she intends to make a relevant disposal) first notify the tenants (by service of a statutory notice under section 5 of the LTA 1987) and, subject to conditions, offer the disposal to the tenants upon the terms proposed. 

Once an offer notice (section 5) is served on the tenants, the landlord may not during the offer period, dispose of its interest except in compliance with the offer procedure. Failure to comply is a criminal offence and pre-emption rights will bind any purchaser from the landlord if the correct procedure has not been complied with.

Pre-emption rights apply however only in the context of a “relevant disposal”. This is defined in section 4 (1) of the LTA 1987. Certain disposals are expressly excluded by section 4. These include:

• Disposals by way of gift to a member of the landlord’s family;

• Disposals by two or more persons who are members of the same family to fewer of their number;

• The grant of a tenancy where the premises demised consist of a single flat.

It is worth noting that there remains uncertainty as to whether or not the disposal of one or more commercial units in a mixed-use building is caught by the provisions of the LTA 1987. There has not yet been a definitive judgement on this aspect.

York House (Chelsea) Limited v Thompson & Thompson 

In this particular case, the Defendants were owners of a block of flats in Sloane Square, Chelsea let on long residential leases. The landlords were concerned that the tenants may exercise their collective right of enfranchisement (pursuant to the Leasehold Reform Housing and Urban Development Act 1993) at a price that they considered to be unrepresentative of the potential development value of the property. To counter this threat, the Defendant landlord granted 14 leases (at nil premiums and peppercorn rents) of various common parts of the block. The leases were granted to one or other of the Defendants.

The Court considered the grant of the leases in the context of the relevant sections of the LTA 1987. The Court held that the grant of the leases did not amount to “relevant disposals” because they were specifically excluded by the Act itself. The Court held that a disposal by a landlord would not be a relevant disposal if it was a “disposal by way of gift to a member of a landlord’s family or to a charity”. The Judge in the case held that the grant of a lease to a members of the landlord’s family could be deemed a “disposal by way of gift” where it was granted for nil value and held that the motive behind the grant of the leases (in this case to avoid the exercise by the tenants of their collective right to purchase the property) was irrelevant. 

Comment

Landlords of flats containing qualifying tenants must tread very carefully when seeking to dispose of their interest in the property. The relevant provisions of the LTA 1987 must be considered very carefully before any attempt to dispose is made and the section 5 notification procedure must be followed carefully to avoid committing a criminal offence. The above case does, however, show that it is still possible to avoid the section 5 procedure in certain limited circumstances with careful planning.

The contents of this article do not constitute legal advice and are provided for general information purposes only.