Landlords can easily overlook the requirements of the Landlord & Tenant Act 1987 when making a disposal affecting a block of flats.
The Act requires flat owners to be given the right of first refusal in respect of certain proposed disposals in this regard and, where the Landlord fails to do so, then the right arises for the flat owners to acquire the interest on the terms it was disposed for.
Flat owners can do very well out of this where their landlord makes a disposal at an undervalue for tax planning or other reasons.
Broadly speaking the right attaches to premises which consist of the whole or the part of the building that contains at least two flats held by qualifying tenants such as long leaseholders and they hold more than half of the flats.
Disposals can be of the legal or equitable interest in the premises and includes the surrender of the tenancy or grant of an option. Disposals of common parts are caught such as the grant of a lease of air space above a block of flats; it is not restricted to a disposal that includes the reversion to a flat lease.
After a disposal has been made the new landlord has to give flat owners notice of their acquisition in a particular format that informs them of these rights. That in turn triggers a deadline for flat owners to act within if they are entitled and wish to acquire the interest acquired by the new landlord (on the same terms as it aquired the interest.
In this case, the freehold had been disposed of without the right of first refusal offer notices having been given to flat owners. They therefore sought to enforce their rights. In the meantime the landlord granted a lease of a flat that was held within the freehold to a third party. This was to avoid the vacant possession value of that flat falling within the freehold to be acquired as that would have represented a windfall to the flat owners and so a big loss for the landlord.
The court had to determine whether the flat owners were entitled to acquire the freehold plus the lease of that flat or subject to it. It has a discretion this regard. If it finds in the landlord’s favour and so orders the transfer of the less valuable asset then the price is adjusted to reflect that.
If the court had ordered that the flat lease be acquired as well as the freehold, then the flat owners would achieve a windfall as against the position they would be in normally if the landlord hadn’t overlooked giving the offer notices. So if the landlord had given the flat owners the required right of first refusal notices then, before making a disposal to the flat owners accepting such an offer had gone through, the landlord could have withdrawn or put the lease in place. Alternatively, if instead the flat owners had sought to enfranchise the freehold interest the landlord could have retained possession, so value, in the unlet flat by taking a lease back of it.
The court highlighted that the dominant purpose of the legislation is to enable tenants to take control of their freehold so as to allow them to manage their own building. The landlord’s actions in this case didn’t go to management but instead the value of the asset to be acquired, namely whether it included vacant possession of the flat or not. Further if the landlord had thought about it more carefully then it could always have retained possession of the flat and so it was not achieving an advantage by retaining the flat. On that basis it found in favour of the landlord and so the flat owners acquired the freehold but not the lease of the flat and so were denied their bonus.
This case is a reminder for landlords to carefully consider the right of first refusal before making any disposals out of their interest whether it is leasehold or freehold. Flat owners are put on notice that they may incur significant costs chasing such a “bonus”.