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Published 16 January 2024
Anyone selling an interest in a multi let residential building should be aware of the Landlord and Tenant Act 1987 ("the Act"), which grants certain residential tenants the right of first refusal when a landlord proposes to make certain disposals affecting the whole or part of its premises. Where the Act applies, a landlord may not make such a disposal unless it has first served formal offer notices on the "qualifying tenants" of the flats in accordance with section 5 of the Act ("Section 5 Notice"). Failure to comply with this process can render a landlord guilty of a criminal offence, and any transaction made in breach can be subject to clawback rights against the purchaser in favour of the tenants.
In the recent case of FSV Freeholders Ltd v SGL 1 Ltd [2023] EWCA Civ 1318, the Court of Appeal handed down judgment concerning the information a landlord's notice under section 5 of the Act should contain when a landlord sells multiple buildings in one transaction. When dealing with multiple buildings, section 5(3) of the Act requires landlords to "sever" the transaction and treat each building separately.
In FSV, administrators of a landlord company were selling the freehold interest in five apartment blocks known as Blocks A to E, Fox Street, Liverpool. Blocks A, B, C, and E were let to long-term tenants who qualified for the pre-emption rights given by Part 1 of the Act. As such, the administrators served Section 5 Notices on those tenants as follows: (1) in relation to Block A, notice offering to sell the freehold to the qualifying tenants of Block A for £350,000; and (2) in relation to Blocks B, C and E together, notice offering to sell the freehold in those blocks for £1,050,000. The tenants did not serve acceptance notices in response to these Section 5 Notices, so the landlord sold all five blocks to a third party, SGL, for £1.6m.
The tenants claimed that the Section 5 Notices were invalid because they had not been made aware of the overall sale of the five blocks to SGL and therefore the full terms of the sale had not been disclosed in the Section 5 Notices. The tenants subsequently served notice under section 12B of the Act requiring SGL to dispose of its interest to the tenants' company.
Under Section 5A, Section 5 Notices are required to state "particulars of the principal terms of the disposal proposed by the landlord” including “the principal terms of the contract (including the deposit and consideration required)”. If the landlord proposes to dispose of more than one building, section 5(3) of the Act states that the landlord “shall, for the purpose of complying with [section 5], sever the transaction so as to deal with each building separately”.
The key question in FSV was therefore whether section 5(3) means that a Section 5 Notice is required to include only the principal terms of a contract relating to the severed part (as the landlord had done), rather than being required to set out the principal terms of the whole agreement for sale to the buyer (as the tenants argued was the case). The Court of Appeal held that the Section 5 Notices were only required to contain particulars relating to the separate building, and the reference to the “contract” in section 5A(2)(b) was interpreted to mean a contract in relation to each building in question. The landlord’s Section 5 Notices had therefore been valid.
The FSV case is linked (although the position was not explored in that case) to a common issue in cases concerning Section 5 Notices: what is a "building"? There is no definition of a “building” in the Act and this can be a problem in cases where a complex is comprised of, for example, several apartment blocks which share amenities, like a car park. In Long Acre Securities Ltd v Karet [2004] EWHC 442 (Ch), the court held that a building scheme (where flats share areas such as gardens) should be construed as one “building” for the purposes of the Act. This was because it was decided that Parliament could not have intended that things such as gardens and other shared areas should need to be divided into one (or even several) parts to satisfy the requirements of the Act. So, it was ruled that in circumstances where blocks of flats share the use of the same appurtenant areas, the whole building scheme will itself be regarded as a 'building' for the purposes of the Act. In FSV, it was assumed that Block A was correctly regarded by the landlord as one building, with Blocks B, C, and E treated together as another building.
While the court in FSV ruled in the landlord's favour, the case still serves as a reminder of the importance of navigating the requirements of the Act correctly so that the sale of such a building is not at risk of being challenged further down the line after completion. Specialist advice should be taken in any case where a disposal is at risk of being caught by the Act, both in terms of whether the Act applies and the content of any Section 5 Notices to be served.
