Under the Landlord and Tenant Act 1987 (the Act), before they can dispose of their interest in a residential building, freeholders are obliged to offer the leaseholders of the individual flats the opportunity to collectively purchase the interest being disposed of. The rules also apply to many mixed-use developments, and it is not just disposals of the whole of the freehold which are caught by the rules – a sale or lease of part (for example, the common parts of a block or the roof space) can also trigger the first refusal requirements in the Act.
Failing to comply with the Act has serious consequences: as well as possible criminal and civil liability for the freeholder, the residential leaseholders also have the ability to unwind a sale or transfer entered into in contravention of the rules, and step into the shoes of the purchaser.
However, there are exceptions when it is not necessary to offer the leaseholder first refusal, and a recent case has provided clarity on one of these exceptions.
York House (Chelsea) Ltd v Thompson and another (2019) concerned a block of 42 flats, the freehold of which was owned by a husband and wife, Mr and Mrs Thompson. As freeholder, they jointly granted a number of different leases of parts of the block (including the courtyard, airspace, internal corridors and subsoil) to one or the other of themselves. The purpose of these leases was to protect the perceived development value of these areas, in anticipation of a number of the leaseholders launching a collective enfranchisement claim over the building.
Mr and Mrs Thompson did not serve offer notices on the leaseholders before they granted the leases, which the leaseholders argued was in contravention of the Act. Mr and Mrs Thompson sought to rely on two exceptions under section 4 of the Act when offer notices do not need to be served on leaseholders: (i) where a disposal is made by way of a gift to a member of the freeholder’s family or to a charity, or (ii) where the disposal consists of a transfer by two or more members of a family to a smaller number or different combination of family members.
The leaseholders argued that neither exception applied to these circumstances. In relation to the first exception, they said that a transfer from two people to one of those people could not be described as a gift to a family member. The court disagreed – there would be no rationale in the Act permitting a gift from a husband to a wife, but not from the pair of them to the wife.
In relation to the second exception, the leaseholders said that the grant of a new lease did not constitute a ‘transfer’, which is the specific wording used in that exception. However, the court said in the context of the whole of this section of the legislation, it was clear that all disposals of this nature were intended to be covered and not just transfers.
This was a disappointing outcome for the leaseholders, but provides some much needed clarity on the meaning of these exceptions. For freeholders, although Mr and Mrs Thompson were permitted to rely on the exceptions in this case, it is always safest to serve offer notices where the legislation is unclear (as it sadly remains in relation to many other sections), to avoid any risk of civil and criminal liability.