A cautionary reminder for residential and mixed-use landlords

For landlords of residential and mixed-use buildings a recent case acts as a reminder of the danger of failing to serve a s5 notice on qualifying leaseholders.

 

Section 5 - rights of first refusal

The Landlord and Tenant Act 1987 (the Act) grants certain residential tenants (known as qualifying tenants) a right of first refusal when a landlord proposes to make a “relevant disposal”. A landlord is prohibited from making such a disposal unless it complies with its obligations under the Act. Most importantly, section 5 obliges the landlord to serve formal notices on all ‘qualifying tenants’ offering them a right of first refusal before making any disposal. Qualifying tenants cannot compel a landlord to sell its interest; they simply have a right to acquire that interest before the landlord sells it to any other party. Should the qualifying tenants fail to exercise their right within a specified period, the landlord may dispose of the interest on the same terms (not more favourable terms) as were specified in the notice.

 

Consequences of a failure to comply

Criminal Offence

Under section 10A of the Act, a landlord will be guilty of a criminal offence if, without reasonable excuse, it makes a relevant disposal without complying with the requirements of section 5. In fact, property disposed of in breach of the Act could fall within the definition of ‘criminal property’ under the Proceeds of Crime Act 2002, which could have further implications for the landlord, purchaser and potentially their advisors.

As such, should a landlord ignore its obligations under the Act, it not only opens itself up to a civil action, but also potential criminal prosecution.

Default and Purchase Notices

The recent case of, S. Franses Ltd and another v Block 6 Ashley Gardens Roof Gardens Ltd and others [2023] EWHC 2880 (Ch), highlights that a failure to serve s5 notices can have serious consequences for not only the landlord, but also a purchaser.

 

Facts of the case

Before we get into the facts of the case there are two parts of the Act which are key:

• Section 19 of the Act allows an interested party to serve a default notice on a landlord or purchaser who has allegedly failed to comply with their obligations under section 5 of the Act, requiring them to make good the failure to serve a s5 notice within a specified time.
• Section 12B of the Act permits a majority of qualifying tenants to give a purchase notice to a purchaser, requiring them to dispose of the relevant interest in the premises to a person nominated by them (which could include the qualifying tenants themselves).

In this case, roof space leases had been granted in 2012 by the landlord-owned company without complying with s5 of the Act (despite the directors being aware of the need to serve such notices). The qualifying tenants claimed that the leases were granted without them being offered the option to purchase the roof space themselves. This case saw the High Court consider the validity of default notices pursuant to section 19 and purchase notices pursuant to section 12B of the Act which required the transfer of the roof space leases to the "qualifying tenants" for just GBP1.

 

Decision

At first instance, the qualifying tenants were successful, and it was held that the Court had a discretion under section 19 of the Act to make an order requiring the purchasers to comply with their statutory duty to comply with the purchase notice served under section 12B(2). 

On appeal, the High Court considered the validity of such notices. Ultimately the notices were found to be valid, and the appeal was dismissed. It was held that default notices did not need to be in a prescribed form. It was enough that the notice had referred to the section 12B purchase notice which had been served and made clear that the purchasers were required to make good on their default.

While the facts of this case are complex (there were 44 factors relied upon by the purchasers as to why an order in favour of the qualifying tenants should not be made), the principle is clear and serves as a poignant reminder of the dangers of failing to serve section 5 notices. In short, section 5 should not be ignored!