|
|
Mixed use property
Freehold owners of residential or mixed use property will likely know they must consider whether the Landlord and Tenant Act 1987 (“the Act”) applies when proposing to sell their interest in the property because, if it does:
- The Act provides residential qualifying tenants with a right of first refusal. This enables them to purchase the interest the landlord intends to sell at the price and on the terms proposed.
- The landlord must follow a statutory procedure and serve offer notices offering the terms of the proposed transaction to the qualifying tenants. That means a potentially lengthy delay, even if the qualifying tenants ultimately decide not to proceed.
- A landlord breaching the provisions of the Act risks criminal prosecution and penalties, as well as creating a right to compensation for qualifying tenants.
“Thank you Mike for your incredible diligence and determination. It will take a while to sink in that it’s all over, but I’m so grateful I can now look forward to the future.”
Relevant disposal
What is less widely known is that the legislation applies to many other dealings, as well as a sale of the freehold.
The landlord must serve offer notices if the disposal is a ‘relevant disposal’, which includes any disposal of an estate or interest in the building unless it falls within a list of excluded transactions.
Selling the freehold of a qualifying building is clearly subject to the right of first refusal. But it also includes less obvious transactions, for example:
- granting a lease of common parts;
- accepting a surrender of a tenancy; and
- granting an option or right of pre-emption.
The list of exempt disposals includes:
- the grant of the lease of a single flat; and
- disposing to an ‘associated company’ as long as it has been an associated company for at least two years.
What is mixed use property?
For the purposes of the Act, if the non-residential use of the building exceeds 50% of the floor area, the building will not qualify for the right of first refusal. Therefore, the landlord can deal with the premises without concerning itself with service of offer notices. The calculation includes only internal areas and excludes the common parts.
The Act applies if the residential use amounts to 50% or more. In that case, the landlord must serve offer notices before proceeding unless the structure of the transaction avoids the Act.
Mixed use property has multiple use classes over different areas or floors of the building. Common examples include a building with retail premises on the ground floor and flats above. Or an extensive new development incorporating retail space, office space, and new homes. However, the definition is broad, covering a wide variety of properties. What is relevant is the ratio of residential use to non-residential.
Initially, the general thought was that the Act would not apply to the grant of new leases of commercial units in a mixed use building. However, in 2008, the case of Dartmouth Court Blackheath Limited v Berisworth Limited established that where the building satisfies the definition of ‘premises’ under the Act, then a disposal of any part of it – including commercial units – catches the Act’s provisions.
The Act is a tricky one to navigate. However, it’s also regarded as poorly drafted with a number of exceptions.
Qualifying criteria
In addition to being a relevant disposal, additional qualifying criteria must be satisfied for the right of first refusal to arise:
The premises
To qualify, a premises must be a self-contained building or part of a building. Always consider the construction of the premises. Are there any shared services with a neighbouring structure, meaning it is one larger building rather than multiple buildings?
Qualifying tenants
A ‘qualifying tenant’ is the residential tenant of a flat under a tenancy. The most common example is a long lease of a flat. A short term tenant under an assured shorthold tenancy is not a qualifying tenant. However, his/her immediate landlord will be if they own the flat on a long lease.
A flat is a separate set of premises divided horizontally from some other part or parts of the building and constructed or adapted for use as a dwelling. The building must contain at least two flats held by qualifying tenants. The number of flats held by qualifying tenants must be more than 50% of the total number of flats in the building. But if a tenant has a tenancy of three or more flats in the building, they are not a qualifying tenant of any of them.
The landlord
The individual or company making the disposal must be the immediate landlord of the qualifying tenants. So, in situations with a headlease, the headlessee is the qualifying tenants’ immediate landlord, not the freehold owner. Accordingly, a disposal by the freehold owner is not subject to the right of first refusal in those circumstances.
Avoiding the Right of First Refusal
There are some limited ways to avoid the legislation. For example, if the disposal is to an associated company of the landlord, there is no need to serve offer notices on the lessees. However, it is essential to manage this carefully. Alternatively, does the developer know to whom and how they intend to transfer the freehold? If so, it is possible to structure such a transaction before the building qualifies (i.e. before selling the flats on long leases).
