UK: Tenant’s Right Of First Refusal

Last Updated: 3 June 2013
Article by Michelle Rowe

Following the publication of a 1985 government report into home ownership, the Landlord & Tenant Act 1987 (LTA) was rapidly enacted to give leasehold residential tenants a right of first refusal when their landlord sold the freehold. In 1996 this badly drafted "obscure" piece of legislation was overhauled. This article considers the implications for pharmacy owners whose commercial premises are located within the same building as residential flats.

This is particularly important if you are the building owner intending to sell.

The Right of First Refusal

Where the LTA applies, a landlord is prohibited from disposing of a freehold, unless it is first offered to the residential tenants of building. Penalties of up to £5,000 may be imposed for non-compliance.

The Act will apply if:

  • the building contains two or more flats held by "qualifying tenants" and the number of flats held by "qualifying tenants" exceeds 50% of the total number of flats.
  • if the residential flats are above a pharmacy, the floor area designated for residential use must be more than 50% of the total floor area of the whole building.
  • in order to be a "qualifying tenant" the tenant must have a long lease which is not a protected or assured tenancy, a business tenancy or one which is linked to the occupiers' employment. Note that if the residential tenants occupy under Assured Shorthold Tenancies then the LTA provisions do not apply.
  • a tenant will not be a 'qualifying tenant' if they are a tenant with long leases of more than 2 flats in the building.

The Relevant Disposal

Not all dealings with a freehold will trigger the obligation to first offer it to a tenant. Those which are exempt include granting a single tenancy or creating a mortgage. Disposals which will be caught by the legislation include:

  • the grant of an option or right of pre-emption;
  • the surrender of a tenancy;
  • entering into a contract to transfer or create an interest in land

If as landlord you are required to make an offer under the LTA you will need to serve a formal notice. This will need to be done strictly in accordance with the terms of the legislation.

You should seek legal advice before serving any notices under this legislation as the process is somewhat complex. Invalid notices will not discharge the landlord's obligation to offer the freehold to the tenant and failure to correctly serve a notice could lead to criminal sanctions.

Accepting the Offer

The offer notice should state the period within which the tenants must accept the landlord's offer. The usual period for acceptance is 2 months, starting with the date the offer notices are served.

To accept the offer, the requisite majority (of more than 50%) of tenants must serve a notice on the landlord. One vote is allocated for each flat in the building that is let to a qualifying tenant.

The tenants will also need to nominate a person to purchase the property on their behalf.

If the requisite majority of tenants fail to serve the acceptance notice within the time limit, the landlord will be free to dispose of the premises to a third party. However, there may be some restrictions on the price and method of sale.

After Acceptance

Until exchange of contracts, the tenant may withdraw from the transaction. The landlord would then be entitled to sell the premises to a third party.

The landlord can also serve a notice of withdrawal on the tenant purchaser. However, the landlord will not be able to dispose of the premises within the next 12 months and may be liable for the tenant's costs incurred.

Once contracts have been exchanged, the provisions of the LTA will no longer apply. Standard conveyancing and contract law applies to bind both parties to complete. Should either party fail to complete within the terms of the contract, the defaulting party will be liable for breach of contract as is standard in all conveyancing transactions.

The end result of this legislation is that you may end up with your residential neighbours as your landlord.

Breach of the LTA

Tenants can force the landlord to comply with the LTA, firstly by serving a notice requiring any breach to be rectified and if after a set period the notice has not been complied with the tenant may apply to court.

A disposal in contravention of the law will however remain valid and the purchaser will acquire good title. However, "qualifying the tenant" can, amongst other things, force the purchaser to sell the premises to him or take the benefit of any contract in place. In some situations these rights can be extended to the purchaser's successor in title.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Michelle Rowe
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