Tenants’ Rights of First Refusal

 

Tenants’ Rights of First Refusal

Dartmouth Court Blackheath Limited v Berisworth Limited [2008] EWHC (Ch) 350

  1. Under section 1 of the Landlord and Tenant Act 1987, tenants of premises to which the Act applies have a right of first refusal in the event that the landlord intends to enter into a “relevant disposal”. The Act applies to premises, by section 1(2), where they consist of the whole or part of a building, they contain two or more flats held by qualifying tenants, and the number of flats held by such tenants exceeds 50 per cent of the total number of flats in the premises. Section 1(3) excludes any premises from the ambit of Part I of the 1987 Act where any part or parts of those premises are occupied or are intended to be occupied otherwise than for residential purposes and the internal area of those parts (taken together) exceeds 50 per cent of the internal floor area of the premises (taken as a whole, but disregarding the internal floor area of any common parts). Therefore, mixed-use buildings will be subject to the Act, providing any non-residential parts do not account for more than 50 per cent of the floor area of the building (excluding common parts). Typical examples will be buildings with ground floor commercial premises and flats on the upper floors.
  2. Section 4(1) provides that a “relevant disposal” is a disposal by the landlord of any estate or interest in any premises to which Part I of the Act applies. The “landlord” for these purposes is the immediate landlord of the qualifying tenants, who is obliged to serve a notice under sections 5 to 5E offering the tenants the right to enter into the proposed transaction. Where there is a head leasehold title, any disposals by the superior landlord (who is not therefore the immediate landlord of the qualifying tenants) will not be caught because he is not the tenants’ “immediate landlord”.
  3. Where the landlord is proposing to make a relevant disposal of the whole building, there is no doubt that he is obliged to serve an offer notice on the tenants. But, what if the landlord proposes to dispose of part only of the building? This question is a very real one. In the case of a block of flats, the landlord may wish to sell the roof space (assuming that it is not demised) to a third party for development purposes. In the case of a mixed-use building which falls within the Act, what if the landlord wishes to let one of the commercial units? If that is a relevant disposal, the lease must be offered to the qualifying tenants before it can be granted.
  4. This issue arose in Dartmouth Court Blackheath Limited v Berisworth Limited [2008] EWHC (Ch) 350. The premises comprised 72 flats on four floors. The landlord had granted a lease to an associated company (the Defendant) of various parts of the building, including the roof space, a lightwell which ran from ground floor level up to the roof, part of the basement and a rear garden. By a separate lease, the landlord had demised some of the garages located in a detached garage block, but within the overall curtilage.
  5. The Claimant company represented a majority of qualifying tenants of the flats and argued that the landlord should have served offer notices in respect of both leases, and therefore relied upon the rights under Part I of the 1987 Act against a purchaser of an interest from the landlord in circumstances where the landlord has not complied with the requirement to offer the interest to the qualifying tenants.
  6. The Defendant admitted that the purpose of the lease of the roof space and other parts of the building was to facilitate the development of the roof space, by retaining an interest in the event that the tenants should seek to exercise their rights of collective enfranchisement under Chapter 1 of the Leasehold Reform, Housing and Urban Development Act 1993. The Defendant contended that where any disposal is proposed, it is necessary to ask whether the conditions in section 1(2) are satisfied in relation to the premises which are to be the subject of the disposal. The premises demised to the Defendant clearly would not be caught, on this analysis, because they did not consist of any flats. However, Warren J. preferred the submission of the Claimant, that one first identifies the “relevant premises” and then asks whether any particular disposal “affects those premises”. A disposal may affect relevant premises without relating to each and every part of them. Therefore, a disposal of one floor (or, here, the roof space) affects the relevant premises (which comprise the block as a whole).
  7. The Judge went on to consider the question of what is comprised in “the building” for the purposes of the Act in order to determine the extent to which the leases had been granted in breach of the terms of the Act. He considered the decision of the Court of Appeal in Denetower v Toop [1991] 1 WLR 945 and concluded that what is and is not appurtenant to the building is a matter of fact and degree in each case, rejecting the submission that everything within the curtilage of a building is properly regarded as part of the building for the purposes of the Act. On the facts of the transfer and lease before the court, the Judge held that the transfer of the garages in the garage block was not a transfer within the Act, as these garages were not “appurtenant” to the main building (the garages being held under separate leases to the leases of the flats). So far as the lease to the Defendant was concerned, the Judge held that the basement room, the lightwell and the airspace above the roof were all appurtenant, although he left open the question of the height above the roof to which the airspace is to be regarded as part of the building. Nevertheless, as pointed out by the Judge, the fact that any airspace at all fell within the scope of the Act would be likely to prevent the Defendant’s potential development from proceeding.

Adam Rosenthal
Falcon Chambers