The Landlord and Tenant Act 1987: understanding Section 5 notices and the right of first refusal
The Landlord and Tenant Act 1987 (LTA 1987) provides certain protections to tenants in residential buildings. One of its most notable provisions is the right of first refusal under section 5, which ensures that qualifying tenants are given the opportunity to purchase the property before a landlord disposes of it to a third party. This article provides an overview of section 5 notices, the conditions under which the Act applies, key exemptions, and the complexities that arise when dealing with mixed-use properties.
Recent legislative changes introduced by the Fire Safety Act 2021 (FSA 2021) provide clarity as to what qualifies as "common parts" of residential buildings. Section 1 of the FSA 2021 confirms that, where a building contains two or more sets of domestic premises, the RRO and the duties thereunder shall apply to the building's structure and external walls and any common parts and "all doors between the domestic premises and common parts". The FSA 2021 further clarifies that reference to external walls includes doors or windows within those walls and anything attached to the exterior of those walls (including balconies).
What is a Section 5 Notice?
A section 5 notice is a formal notification that landlords must serve on qualifying tenants when they propose to dispose of their interest in a building, or part of it, that contains residential long leasehold flats. The notice must:
- Be served on qualifying tenants in the building.
- Offer the tenants the right of first refusal.
- Provide a notice period of at least two months.
- Be on the same terms as those offered to a third party.
When Does the LTA 1987 Apply?
The LTA 1987 applies when the following three conditions are met:
- The premises must consist of a whole or part of a building
The Act applies to premises that consist of a whole or part of a building. However, determining what constitutes a "building" can be complex. For example, in the case of three terraced houses with interconnected flats and shared facilities, it may not be clear whether the premises should be treated as one building or three separate buildings. Factors such as vertical severance, shared access points, and utilities play a role in this determination. - The premises must contain two or more flats held by qualifying tenants
A flat is defined as a self-contained unit within a building, designed for residential use. A qualifying tenant is typically a long leaseholder (a lease originally granted for more than 21 years to a residential tenant). Business tenants and those under assured shorthold tenancies do not qualify. - Qualifying tenants must hold more than 50% of the flats
For the Act to apply, qualifying tenants must hold the majority of flats in the building.
Exemptions to the Act
Even if the above conditions are met, certain exemptions may apply. One exemption is the mixed-use exemption, which applies when:
- Part of the premises is used for non-residential purposes; and
- The internal floor area of the commercial parts exceeds 50% of the total internal floor area.
It is important to note that common parts of the building, such as stairwells or communal areas, are excluded from the calculation of the internal floor area. Determining what constitutes a "common part" or "internal area" can be complex and often requires a detailed analysis of the building's layout and usage.
What is a Relevant Disposal?
If the LTA 1987 applies and no exemptions are available, a section 5 notice must be served when there is a "relevant disposal." This includes the sale or lease of a building or part of it, the grant of an option, or even the lease of airspace above a building. Certain transactions, such as transfers between associated companies, disposals between family members, or disposals between charities, are exempt.
Challenges with Commercial Properties
One of the most debated aspects of the LTA 1987 is its application to commercial property. Although the LTA 1987 was designed to protect residential tenants, it has been interpreted in ways that create uncertainty for landlords disposing of commercial only parts of mixed-use buildings. For example, the case of Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] highlighted that the LTA 1987 applies to premises objectively, regardless of whether the disposal involves only commercial units. This interpretation has led to a cautious approached being adopted and a general recommendation that if the LTA 1987 applies to a building and the disposal is not exempt, then section 5 notices must be served.
Landlords are advised to proceed cautiously and seek legal advice to avoid the significant penalties for non-compliance, which include criminal and civil sanctions.
If you require assistance with section 5 notices or navigating the complexities of the LTA 1987, please do not hesitate to get in touch with Ziandra Holland for any questions.