Tenants’ Rights of First Refusal

8th August 2018

Where a landlord sells or disposes of a freehold interest, leasehold tenants may qualify for the right of ‘first refusal’ to buy the freehold. This arises under Section 6 of the Landlord and Tenant Act 1987. Where the tenants qualify, the landlord must serve a notice under Section 5 of the Act. This starts a procedure that gives the tenants the right of first refusal. Many landlords are unhappy with this and prefer to keep their freeholds, for commercial or for other reasons.

The Section 5 procedure must be strictly followed. If a landlord fails to follow it, the landlord can be liable to prosecution and criminal penalties.

However, a recent case of Artists Court Collective v Khan [2016] EWHC 2435 [2017] Ch 53 shows a potential way of avoiding the Act and avoiding giving tenants the right of first refusal. In Khan, the landlord lost at County Court, but won on appeal at High Court.

Many of the blogs and comment found on the internet refer to the case before Khan won his appeal, and so are out of date. Khan appealed successfully in the High Court and there does not appear to be any further appeal happening at the time of writing this blog.

In Khan, the landlord used a two stage process:

  • First phase: transfer of beneficial interest to new beneficial owner ie a trust arrangement is set up.
  • Second phase: appoint new beneficial owner as trustee. A disposal of land held on trust in connection with the appointment or discharge of a trustee is an exempt disposal (Section 4(2)(g)). The trust then comes to an end and the buyer becomes landlord, without the Section 5 notice procedure coming into effect.

The owner of beneficial interest is NOT a landlord at all for purposes of Section 2 of the Act: the trustees are the landlord. This seems to give a clear route to avoid the Act, and in Khan the High Court said so.

Nevertheless, breach of the Landlord and Tenant Act 1987 is a criminal offence and can lead to CRIMINAL penalties – beware! – and also may give the leaseholders a civil claim against the landlord.

Before you attempt a transaction of this nature, we would urge you in the strongest terms to take legal advice and have any transaction of this nature carried out by an expert lawyer. If you have a transaction like this in mind, call us now on +44(0)20 7354 3000 or email enquiries@colmancoyle.com.

This blog is an edited version of a training webinar given by Michael Large of Colman Coyle to LexisNexis (a leading supplier of training to lawyers) on 16 July 2018.