Not just residential - why landlords of mixed-use premises need to know about the right of first refusal

What is the right of first refusal?

The ROFR gives qualifying tenants of residential flats the right to be offered the chance to purchase the relevant interest before the landlord sells that interest to a third party. The obligation is triggered where the landlord proposes a 'relevant disposal', subject to statutory exemptions. In simple terms, before selling or transferring an estate or interest in their building (subject to exemptions), the landlord must first serve a formal (Section 5) offer notice on the qualifying tenants, giving them the opportunity to acquire the estate or interest on the same terms.

When does It apply to mixed premises?

The ROFR can apply to buildings containing two or more residential flats where more than 50% of those flats are held by 'qualifying tenants', generally long leaseholders. For example, consider a freeholder who owns a building used as a GP practice on the ground floor, with two residential flats above. If those flats are held by qualifying tenants, the ROFR provisions may apply. The landlord would then need to serve the required offer notices on the residential tenants before any disposal. It should be noted that the ROFR will also only apply where the non-residential element is no more than 50% of the building.

Why it matters

The consequences of failing to comply with the Act are significant. If a landlord completes a relevant disposal without first offering the qualifying tenants the right to purchase, the disposal is not automatically void, but the tenants gain the right to compel the new owner to transfer the estate or interest to them on the same terms. This can create uncertainty, delay and additional cost for both the original landlord and the purchaser.

For landlords of mixed-use commercial buildings, the risk is often greatest where the property is viewed primarily as a commercial asset. Landlords in sectors such as healthcare, retail, education, hospitality, or office investment may not immediately consider the Act to be relevant. Where a building has been used primarily for commercial purposes for many years, the residential element may be overlooked. A change of ownership, refinancing or restructuring could trigger obligations that the landlord is simply unaware of.

Law commission consultation on ROFR

It is also worth noting that the Law Commission is currently consulting on proposed reforms to the LTA 1987. One of the key changes under consideration is the removal of the ROFR provisions applying to any commercial premises contained within a mixed-use development. If implemented, this reform could significantly alter the scope of the Act, potentially exempting many mixed-use buildings from the ROFR obligations. Landlords should keep a close eye on developments in this area, as any changes could impact their compliance requirements.

Key risks and practical considerations

There are several areas of uncertainty that landlords should bear in mind. The definition of 'qualifying tenant' includes most long leaseholders of residential flats, but certain tenancies are excluded. The calculation of whether more than 50% of flats are held by qualifying tenants can be more nuanced than it first appears, particularly in buildings with a mix of uses. Landlords should also be aware that the obligation to serve offer notices applies to a wide range of disposals, not just straightforward sales.

Important points

• The ROFR under the LTA 1987 is not limited to purely residential buildings. Mixed-use premises with residential flats can fall within the Act’s scope.

• Landlords must serve formal offer notices on qualifying tenants before making a relevant disposal.

• Failure to comply gives tenants the right to acquire the interest on the same terms, creating risks for both landlords and purchasers.

• Commercial landlords should review whether their buildings contain qualifying residential tenancies.

• The rules around qualifying tenants and relevant disposals can be complex, and professional advice is strongly recommended.

How VWV can help?

If you are a landlord of commercial premises that include residential flats, or if you are planning a disposal of your commercial premises and are unsure whether the right of first refusal applies, our Real Estate team can advise. We regularly help landlords navigate these obligations and would be happy to discuss your specific circumstances. Please contact us for further guidance.