Cases involving Section 5 of the Landlord & Tenant Act 1987 (LTA 1987) are not heard very often. The Court of Appeal case of FSV Freeholders Ltd v SGL 1 Ltd [2023] EWCA Civ 1318 was a recent Appeal relating to, amongst other things, whether Section 5 Notices for severed developments need to contain the terms for the entire development.
Background to the case
On 11 February 2020, the administrators of Fox Street Village Limited (FSVL) served two sets of Section 5 Notices dated 11 February 2020 on the qualifying tenants. The Notices were addressed to the particular “qualifying tenant” at the flat and stated that they were from the administrator of FSVL, that they contained important legal rights for the benefit of the addressee and other qualifying tenants under section 5 and 5A of the Landlord & Tenant Act 1987 and that urgent independent legal advice should be sought. One of the Notices referred to Block A and the other Notice referred to Blocks B, C and E. Section 5 Notices were not served in relation to Block D as it was empty and section 5 of the Landlord & Tenant Act 1987 did not apply.
The Block A Section 5 Notice referred, at paragraph 1, to the Property edged red on the attached plan and stated that the flat of which the addressee was a qualifying tenant formed part of that Property. Paragraph 2 of the Notice stated that the landlord owned the freehold of which the Property forms part and confirmed the title number. Paragraph 3 confirmed that the landlord proposed to “enter into a contract to create or transfer an estate or interest in land, namely to sell the freehold interest in the Property edged red on the plan attached …”. Paragraph 4 stated that it was intended that the proposed disposal will be subject to the leases, tenancy agreements, occupancies and other interests affecting the Property, the details of which were set out. Paragraph 5 stated the consideration was £350,000. Paragraph 6 provided for completion to take place 20 working days after the date of exchange and that a 10% deposit would be payable on exchange of contracts.
The Section 5 Notice relating to Blocks B, C and E was in similar form, although there was no reference to a deposit. The Property was defined as Blocks B, C and E shown edged red on the plan. Paragraph 5 referred to a consideration of £1,050,000.
The Section 5 Notices specified the acceptance date of 27 April 2020 and a further two months for nomination. No acceptance notices were served by the qualifying tenants.
By a Contract dated 12 June 2020 made between FSVL (in administration), the administrators and SGL1, FSVL agreed to sell the freehold of the Entire Property, being Blocks A, B, C, D and E, registered under title number LA303457 for the Purchase Price of £1,600,000 (exclusive of VAT), being the aggregate of the following considerations attributable to the 5 blocks comprising the property: Block A £350,000; Blocks B, C and E £1,050,000, Block D £200,000. The deposit was referred to as being £80,000 exclusive of VAT and there was reference to an Exclusivity Sum of £25,000, which had been paid by the buyer and held by the seller’s solicitors. The Contract contained other conditions including the delivery of a Sealed Court Order authorising the sale for no less than the Purchase Price and providing for the cancellation of title entries relating to charging orders and equitable liens protected by a notice. That order was obtained on 25 September 2020.
On 28 September 2020, the tenants offered to purchase the Entire Property for £1.65 million. This was rejected.
On 25 November 2020, the Contract was completed and subsequently SGL1 was registered as the freehold proprietor of the Entire Property.
The tenants stated they were unaware that FSVL’s administrator had executed a Contract with SGL1 and also argued that the Section 5 Notices should have referred to the total price for the Entire Property of £1.6 million.
FSV Freeholders Ltd was incorporated on 14 January 2021 and was authorised by 115 of the qualifying tenants as their nominee for the purposes of acquiring the freehold. A Notice dated 22 March 2021 pursuant to section 11A LTA 1987 was served on behalf of the qualifying tenants requesting SGL1 to give particulars of FSVL’s disposal. A further Notice dated 20 June 2021 pursuant to section 12B LTA 1987 was served on SGL1 requiring it to dispose of the Property to the qualifying tenants on the same terms as those to SGL1. A default Notice was served on 30 August 2021, informing SGL1 that it was in default of its obligations under section 12B LTA 1987 and requiring it to make good its default.
On 17 September 2021, SGL1 issued a Part 8 Claim seeking a declaration that the provisions of Part 1 of the LTA 1987 had been complied with. That claim was heard by District Judge Lampkin and he held that the provisions of Section 5 of the LTA 1987 had been complied with on the administrator’s disposal of the Entire Property to SGL1.
FSV Freeholders Ltd appealed stating that the Judge incorrectly interpreted Section 5 of the LTA 1987 when he held that the Section 5 Notices did not need to contain the terms agreed by the buyer in relation to the purchase of the Entire Property comprising Blocks A-E and that the Notices should have stated the price for the Entire Property, the deposit of £80,000, and that the terms of the sale were conditional upon obtaining the Sealed Court Order.
Appeal
Judge Fancourt J heard the Appeal from District Judge Lampkin’s order that had declared that FSVL had complied with Section 5 of the LTA 1987. By an order dated 14 October 2022 Judge Fancourt J allowed the Appeal in part; set aside the order of District Judge Lampkin; restored the claim for the purposes of determining whether, (i) Blocks A, B, C and E, Fox Street form one, two, or more “buildings” within the meaning and for the purposes of Part I of the LTA 1987; and, as a result of the answer to (i); (ii) whether the Notices served on the qualifying tenants by the administrator of FSVL pursuant to Section 5 or 5A of the LTA 1987 were valid; and made directions for the hearing and an order as to costs.
The Judge considered whether the Notices were invalid because they did not set out the proposed terms of the transaction, i.e., the sale of the Entire Property for £1.6 million. He decided that the argument was based on an incorrect interpretation of section 5A(2) of the LTA 1987 which requires the terms of the proposed disposal to be summarised and states:
5A(2) The notice must contain particulars of the principal terms of the disposal proposed by the landlord, including in particular—
(a)the property, and the estate or interest in that property, to which the contract relates,
(b)the principal terms of the contract (including the deposit and consideration required).
Section 5(3) requires the transaction to be severed for the purposes of the Notices as follows:
“Where a landlord proposes to effect a transaction involving the disposal of an estate or interest in more than one building (whether or not involving the same estate or interest), he shall, for the purpose of complying with this section, sever the transaction so as to deal with each building separately.”
The Judge stated that the Section 5 Notices do not have to contain the terms that the buyer agreed but rather the severed terms that section 5(3) requires, and that accordingly, there was no arguable basis for contending that the Notices were invalid in this respect.
In relation to the validity of the Section 5 Notices which severed the transaction, he stated that if Block A was one building, and Blocks B, C and E were another, the Notices were correctly severed. He stated that it is not the case that if the offers to the tenants are not accepted, the landlord then has to sell on a severed basis to the proposed buyer. It can proceed with the unsevered transaction.
The Judge looked at the wording of Section 5 of the LTA 1987 as follows:
Section 5(1) states: “Where the landlord proposes to make a relevant disposal affecting premises to which this Part applies, he shall serve a notice under this section (an “offer notice”) on the qualifying tenants of the flats contained in the premises (the “constituent flats”).
Section 7 states:
“Where a landlord has served an offer notice on the qualifying tenants of the constituent flats and—
(a)no acceptance notice is duly served on the landlord, or
(b)no person is nominated for the purposes of section 6 during the protected period,
the landlord may, during the period of 12 months beginning with the end of that period, dispose of the protected interest to such person as he thinks fit, but subject to the following restrictions …..
(3)In any other case the restrictions are—
(a)that the deposit and consideration required are not less than those specified in the offer notice, and
(b)that the other terms correspond to those specified in the offer notice …”.
Judgement
In the Judgement, the Judge said:
“I reject what appeared to be Mr Asghar’s (for the tenants) original submission that in a situation in which section 5(3) applies, the section 5 offer notice must contain the principal terms of the disposal of the entire site, rather than the terms relating to the particular building. In addition to the matters to which I have already referred, if this original submission were correct, it is difficult to see what real purpose or effect section 5(3) would have.
I also reject Mr Asghar’s alternative position which was that the section 5 offer notice must contain particulars both of the offer in relation to the individual building (in this case, Block B and Blocks A – C and E) and the contract in relation to the site as a whole (Blocks A – E (including Block D to which the LTA 1987 did not apply)). He relied upon the phrase “the property and the estate or interest in that property” in section 5A(2)(a). He submitted that: the reference to “property” was to the whole premises being disposed of; “estate or interest” referred to separate building or buildings within that premises and was consistent with the use of “estate or interest” in section 5(3) itself; and the use of “and” in section 5A(2)(a) made it clear that details of both the contract for the purchase of the separate building and the premises as a whole were necessary. Not only is such an interpretation inconsistent with section 5A(3), in my judgement, it is also a misreading of the phrase “the property and the estate or interest in that property” in section 5A(2)(a). Once section 5A is read in the light of section 5(3), it becomes clear that the disposal and the contract relating to it refers to the disposal and contract in relation to the separate building. It seems to me therefore, that in that context, the natural and ordinary meaning of “the property” is to the building in question and the additional requirement to provide details of the “estate or interest in that property” is to the nature of the interest in the building, whether legal or equitable which the landlord proposes to dispose of. This is consistent with the way in which “estate or interest” is used in section 5(3). It seems to me that once section 5 is read as a whole and section 5A is construed in context, there is no room for an interpretation which requires the section 5 notice to contain details of both the contract in relation to the site as a whole and the individual building.
The fallacy of the argument is illustrated quite neatly in this case where part of the entire site being disposed of, being Block D, was not even subject to Part 1 of the LTA 1987. There can be no reason why details in relation to Block D should be provided in a section 5 offer notice. This may not be an unusual situation. If Mr Asghar were right, it would be necessary to give details of the principal terms of the contract for sale of the Entire Property which would include Block D.
It also seems to me that an interpretation which only requires the details of the offer in relation to the individual building to be provided is consistent with the purpose and intention of Part 1 of the LTA 1987. It is not necessary that qualifying tenants should have information about the disposal of the site as a whole or the way in which the overall headline purchase price has been apportioned between separate blocks in order to enable them to exercise their rights effectively. As the tenants of a building would be extremely unlikely to accept an offer under section 6 without having obtained a separate valuation for their building, it seems unlikely that they would suffer in any way were a landlord to apportion a headline price for the buildings unfairly. In any event, in those circumstances, they would be entitled to seek redress whether in the County Court or the appropriate tribunal. I should add that it is not suggested that there has been any unfairness or bad faith in this case.
In the light of my conclusions in relation to the interpretation of section 5A, Mr Asghar’s points about the failure to mention the deposit of £80,000 and the condition precedent of obtaining a Sealed Court Order fall away. I should mention, however, that, in any event, I consider that the Sealed Court Order was not a “principal term” of the main contract for sale of the Entire Property. It was merely part of the machinery for completion. Accordingly, even if section 5A(2) ought to be interpreted in the way Mr Asghar suggested, the failure to mention the Sealed Court Order in the offer notices would not have invalidated them.
For all of the reasons set out above, I would dismiss the Appeal.”
Conclusion
In the dismissal of the Appeal, the Judge stated that it is important to read Section 5 of the LTA 1987 in its entirety and in context and to interpret Section 5 with a view that the Section 5 Notice must be capable of acceptance.
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