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An Overview Of A Tenant’s Rights of First Refusal

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Are you the landlord/freeholder of a building which contains flats let out to tenants on long leases? If so, please read this article before you begin to think about selling your freehold interest in the building to a third party.
The Landlord and Tenant Act 1987 (‘LTA 1987’) has the effect of preventing a landlord from disposing their freehold interest in a building to a third party.
Before the landlord is able to dispose of their freehold interest in a building to a third party, the landlord must first serve an offer notice on the eligible tenants of the building in accordance with section 5 of the LTA 1987. The purpose of the section 5 offer notice is to give the eligible tenants the right to obtain the landlord’s interest in the building.
Please note that without the landlord’s intention to dispose of their interest, the tenants do not have any rights under this legislation. The tenants could however rely on the Leasehold Reform, Housing and Urban Redevelopment Act 1993 in order to acquire the freehold on a collective basis.  This is called collective enfranchisement and will be dealt with in a separate article.
There are four key questions that must be asked to find out whether the landlord’s disposal will trigger the tenant’s right of first refusal:
Q1. Does the LTA 1987 apply to the building?

  • The building must contain two or more flats that are owned by qualifying tenants i.e. two or more flats that have been let out to tenants on long leases
  • The number of flats in the building owned by qualifying tenants must be more than 50% of the total number of flats in the building, i.e. if there are 10 flats in the building, 6 must have been let out to tenants on long leases with the remaining 4 must have been let out on Assured Shorthold Tenancy Agreements
  • If the building is part commercial and part residential, the internal floor area of the residential part must represent 50% or more of the building as a whole

Q2. Is the landlord exempt from the LTA 1987?

  • A landlord will be exempt if they are a local authority, a registered housing association, a development corporation or another kind of public body
  • A landlord will also be exempt if they also occupy a flat in the building and have been in occupation for at least 12 months. This does not apply where the building is a block of flats i.e. not a house that has been converted in to flats

Q3. Is the tenant a qualifying tenant?

  • A tenant will not be a qualifying tenant if they are (a) a tenant under an Assured Shorthold Tenancy Agreement or a protected tenancy (b) a tenant under a business tenancy to which Part II of the LTA 1954 applies or (c) a tenant who is the long leaseholder of three or more flats in the building
  • There are a few more circumstances where a tenant will not be a qualifying tenant but these are the main three circumstances

 Q4. Is the proposed transaction a relevant disposal?

  • The main definition of a relevant disposal is encompassed in section 4A of the LTA 1987. This section confirms that a relevant disposal takes effect when the landlord enters into a contract to create or transfer their interest in land. As you can see, this is quite a broad definition that covers a lot of different situations i.e. sale to a third party
  • There many exempt disposals but the most common are (a) gift to a member of the landlord’s family or a charity (b) the grant of a long lease (c) the creation of a mortgage (d) a disposal to a trustee in bankruptcy (e) a disposal under the terms of a will

If the landlord’s disposal will trigger the tenant’s right of first refusal, the landlord must serve an offer notice on the eligible tenants of the building.
It is extremely important that the landlord offers the freehold interest of the building to the tenants in accordance with the LTA 1987 as if he does not, he may face either criminal prosecution (an unlimited fine) or civil action.
Please contact us if you are a landlord and are thinking about disposing of your freehold. We will be able to assist you in drafting and serving the notices on the tenants.  Please also contact us if you are a tenant who believes that your landlord has wrongly disposed of the freehold interest to a third party.  We will be able to help you take civil action against your landlord.

Contact our Specialist team on 0800 088 6004.