The Right Of First Refusal: Why Commercial Property Solicitors Need To Be Alert

If you own a building containing shops, offices or restaurants together with residential flats, there is an important statutory regime that should be considered before any sale takes place. In certain circumstances, residential tenants may have a right to be offered the property before it can be sold to a third-party purchaser.

When does The Right of First Refusal (RFR) apply?

RFR is a statutory protection that can have significant implications for property transactions, particularly where residential and commercial uses are combined within the same building. Although often more relevant for residential property law, commercial property solicitors should be aware of the provisions of the Landlord and Tenant Act 1987, as overlooking them can lead to transaction delays, financial losses, and even criminal liability.

Under Part I of the Landlord and Tenant Act 1987, qualifying residential tenants have RFR when their landlord proposes to make a “relevant disposal” of an interest (the most relevant being a sale) in the building. The landlord must first offer the interest to the qualifying tenants on the same terms, by way of notice, before it can be sold to a third party. The legislation applies to certain buildings containing residential flats and can also affect mixed-use developments. 

Qualifying tenants under the 1987 Act are tenants who hold a tenancy of a flat other than under a short list of exceptions (see separate box). It includes sub-tenants (unless their own landlord qualifies) and agreements for tenancy. The test is based on:

• there being at least two flats held by qualifying tenants 
• more than 50% of the flats in the building must by held by qualifying tenants 

How can solicitors best protect their clients?

Solicitors advising investor clients who own mixed-use buildings comprising retail units, offices, or restaurants at ground floor level with residential flats above must be alert to these issues. In these circumstances, RFR may apply if the statutory criteria are met, including requirements relating to the number of qualifying tenants and the proportion of residential floor space within the building (with the exclusion applying where more than 50% of the internal floor area is non residential). It is therefore essential for solicitors to assess the status of a property at an early stage of any proposed disposal. 

Failure to comply with the legislation can have serious consequences. A transaction completed in breach of the 1987 Act may give qualifying tenants the ability to compel the purchaser to transfer the acquired interest to them on the same terms. In addition, failure to comply may expose landlords (and, in the case of a corporate landlord, potentially its officers) to criminal sanctions for non-compliance. Early due diligence is therefore crucial to avoid unexpected risks and delays. 

Recent case law has also highlighted the complexity of determining whether a building falls within the scope of the 1987 Act, particularly where estates contain multiple blocks or shared facilities. These developments reinforce the need for careful legal analysis before proceeding with transactions involving mixed-use or residential elements. 

In SGL 1 Ltd v FSV Freeholders Ltd [2026] EWCA Civ 267 the Court of Appeal overturned a previous High Court decision related to what consisted of a "building.” There is no definition of "building" in the 1987 Act and so in this case, there was careful consideration of which out of 5 blocks of flats could be considered a “building” and therefore require the notice to be given on the qualifying tenants. The court held that a “building” can extend beyond a standalone structure; separate structures may together constitute a single building where they are contained within a "functionally integrated built envelope".

The key message for landlords and investors is simple: the right of first refusal is not solely a residential property issue. Any disposal involving a mixed-use building should trigger a review of the Landlord and Tenant Act 1987 to ensure compliance, manage risk, and protect clients from costly consequences.

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.