There are contrasting views around whether the disposal of a commercial unit is caught by Section 5 of the Landlord & Tenant Act 1987. Landlords are sometimes unclear as to whether they need to comply with section 5 before granting a commercial lease in a mixed use building. The below considers this in further detail and outlines some considerations for landlords before they dispose of a commercial unit.
Under the Landlord & Tenant Act 1987 (‘1987 Act’), Section 4 states of Relevant Disposals:
… references to a relevant disposal affecting any premises to which this Part applies are references to the disposal by the landlord of any estate or interest (whether legal or equitable) in any such premises, including the disposal of any such estate or interest in any common parts of any such premises but excluding—
(a) the grant of any tenancy under which the demised premises consist of a single flat (whether with or without any appurtenant premises); and
(b) any of the disposals falling within subsection (2) ….
Relevant Disposals are widely defined and disposals of commercial premises are not specifically excluded. This means that the disposal of a commercial unit within premises to which the 1987 Act applies will be a “Relevant Disposal” unless it falls within the exclusions. Residential tenants would accordingly expect to have rights of pre-emption under the 1987 Act where a Relevant Disposal of any commercial unit occurs within such premises.
A differing view is that it was not the intention of Parliament for commercial premises to fall within the 1987 Act. The 1987 Act’s primary intention was to give the residential tenants protection against landlord’s dispositions of reversions of the flats, and that giving residential tenants rights of first refusal over a commercial unit goes beyond the intention of the legislation. As yet, this remains a matter of conjecture as no case on the point has yet come before the Courts.
In Dartmouth Court Blackheath v Berisworth [2008] EWHC 350 (Ch) it was decided that the premises to which the 1987 Act applies are to be ascertained in an objective way, disregarding the disposal concerned. This case involved the tenants of a block of flats and the grant of a lease allowing additional flats to be erected on the roof of the block. The Court held that the tenants were entitled to acquire the airspace lease and they should have been offered the right of first refusal of the lease of the airspace above the block.
This decision however raises some points:-
- The 1987 Act exempts the grant of a lease of a single flat, so it seems inconsistent that a lease of a single commercial unit would be caught and that qualifying tenants would have more control over a commercial unit in their building than other flats in their building.
- There is a potential conflict between the 1987 Act and the Landlord & Tenant Act 1954 where a commercial tenant who is renewing its tenancy could lose the new tenancy to residential tenants, thereby affecting its ongoing business.
- Business tenants and residential tenants do not have the same protections under the 1987 Act. Under Section 3(1)(b) of the 1987 Act a tenant of a 1954 tenancy is not a qualifying tenant, so if they do not benefit from the provisions of the 1987 Act, it seems inconsistent for the residential tenants to have rights to acquire business premises.
- It is difficult to understand what purpose is served by allowing the residential tenants to acquire a commercial unit. It seems unlikely that the residential tenants would have any genuine business interest or even expertise in the running of a commercial business.
In view of this Dartmouth decision, it is important for landlords who are proposing to dispose of a commercial unit to consider whether the disposal affects premises to which the 1987 Act applies and satisfies section 1(2) of the 1987 Act. If so, and provided not specifically excluded, such a disposal is caught by section 5 and the qualifying tenants would have a right of first refusal.
In view of the consequences of not complying with the 1987 Act namely the commission of a criminal offence, in addition to incurring disposal costs for a property that the landlord may be required to transfer to the qualifying tenants, most landlords would be wise to err on the side of caution when granting commercial leases to which the 1987 Act applies.
If you have any queries regarding Section 5 of the LTA 1987, please get in touch with one of our Residential Investment Team.