Most landlords of commercial property will be more than familiar with the Landlord and Tenant Act 1954 and the protection it affords to tenants, but fewer landlords will have come across the Landlord and Tenant Act 1987.

Although less well-known, this gives tenants a significant right which can have serious consequences for landlords of residential and mixed-use buildings. Simply put, the Act gives certain residential tenants a right of first refusal so that a landlord planning a disposal must first offer the interest to those tenants. The Act applies where the landlord’s property comprises the whole or part of a building and contains two or more flats.

In the leisure sector, pubs and restaurants often come with residential accommodation above the commercial unit and owners of such properties should check whether the Act applies before making (or agreeing to make) a disposal.

Relevant Disposals

The types of disposals caught by the Act are wide-ranging. They include not only the act of creating or transferring an interest (e.g. selling the landlord’s interest or granting a new lease out of the landlord’s interest), but also to the act of entering into a contract to do so. (e.g. entering into an agreement to sell or grant a new lease). The Act therefore requires the landlord to offer the interest in question to the qualifying tenants before exchanging contracts.

Landlords should take care not to fall into the trap of assuming that the Act does not apply to upward disposals of its interest – such as a surrender of its own headlease. These are not excluded from being a relevant disposal. Indeed, the Act specifies that a ‘disposal’ for the purposes of the Act includes the surrender of a tenancy and the grant of an option or right of pre-emption.

Certain types of disposals are exempt from the Act. For example, granting a new lease of an individual flat is not a relevant disposal which triggers the tenants’ right of first refusal. Unfortunately the position in respect of a new lease of a commercial unit is not so clear as the Act contains no specific exemption in this case.

We have recently seen owners of pub/restaurant properties extending the existing building by adding residential flats, then granting long residential leases at a premium. It is worth noting that such addition of flats could cause the Act to become applicable to subsequent disposals by the owner, not only of the whole building but also of the commercial unit alone.

Tenant’s Right of First Refusal

If a landlord proposes to make a disposal to which the right of first refusal applies, they must first serve a written offer notice on the qualifying tenants setting out the key terms of the proposed disposal – such as details of the property, the estate or interest which is the subject of the proposed disposal and the consideration. The notice must also state the period within which the offer may be accepted. During the period set out in the offer notice, the landlord cannot dispose of the relevant interest other than to a person nominated by the qualifying tenants.

The requirements stipulated by the Act, for the offer notice and the minimum period for which the offer must remain open for acceptance, vary depending on the type of disposal. Landlords should seek advice in serving such notice to minimise the risk of any notice being invalid.

If the majority of the qualifying tenants on whom an offer notice is served accept the landlord’s offer and nominate a person to purchase the interest on their behalf within the periods set out in the offer notice, the nominated person can acquire the relevant interest on the terms set out in the landlord’s offer notice.

If the tenants fail to accept the landlord’s offer or to nominate a person within the periods set out in the offer notice, the landlord is free to make the disposal to a third party during the following 12 months.

Risk of Non-Compliance

If the landlord makes a disposal in contravention of the Act, the disposal itself will remain valid but the landlord may be liable to a criminal prosecution. Where the landlord is a corporate entity, an officer of the company or a person purporting to act in such capacity can be personally liable.

Any person interested may also bring a civil action to enforce the obligations in the Act against the landlord.

However, it is not just disposing landlords that should be concerned with compliance with the Act. The Act allows the qualifying tenants to call upon a third party purchaser to acquire the interest disposed of by the landlord in contravention of the Act.

Landlords of property containing two or more flats, as well as purchasers looking to acquire an interest from such landlords, should therefore seek early advice on whether the Act will apply to any proposed transaction.

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The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.