Overcoming Tenants' Rights Of Pre-Emption

• Published date: 09 December 2020
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Law Firm: Hill Dickinson
• Author: Jane Janvier and Bill Chandler

Most property professionals will be aware that the Landlord and Tenant Act 1987 creates a right of first refusal in favour of residential tenants. Jane Janvier and Bill Chandler consider some of the problems this right causes in practice for landlords and developers.

Put simply, the right of pre-emption requires a landlord who wishes to make a relevant disposal affecting qualifying premises to offer the same deal to the qualifying tenants before proceeding with the disposal. It sounds so simple, but there is a lot of detail to wade through.

Premises qualify if they contain at least two flats held by qualifying tenants and the number of flats held by qualifying tenants exceeds 50 per cent of the total number of flats contained in the premises. The definition of qualifying tenants will generally include residential tenants on long leases but not, for example, tenants on assured shorthold tenancies. Tenants who own three or more flats are excluded. Mixed-use premises qualify if the commercial areas do not exceed 50% of the overall internal floor area (ignoring common parts).

A relevant disposal does not just include the outright disposal of the landlord's reversionary interest, but also includes disposals of part and the grant of leases. It is not necessary for the disposal to include any of the flats themselves, and a disposal of appurtenant premises or the airspace above a building can also be caught.

There is a whole raft of excluded disposals that aren't caught, including disposals to associated companies (provided they have been associated for at least two years) and the grant of a lease of a single flat.

If a proposed disposal is caught, the landlord must serve a 'section 5 notice' on the qualifying tenants, giving them at least two months to accept the deal. This creates delay and uncertainty for a landlord, especially since exchanging contracts is a disposal and so the landlord cannot even enter into a conditional contract for the disposal during the offer period.

If the tenants accept the offer, the Act provides the machinery to conclude the disposal to the nominee of the qualifying tenants. This article is however concerned with transactions where the tenants are unlikely to exercise the right and the primary concern is to ensure that the procedural requirements of the Act are complied with, or avoided where possible.

Forward planning

Many of the problems created by the Act can be avoided if ownership is structured sensibly at the outset.

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