Where a landlord wishes to dispose of commercial premises which form part of a mixed use development, it could be caught under the LTA 1987 whereby Qualifying Tenants (see below) must be given first refusal in respect of any sales within the development.
Historically the LTA 1987 was not expected to capture commercial units, however the case of Dartmouth Court Blackheath Limited and Berisworth Limited  EWHC 350 established that where “premises” (for the purposes of LTA 1987) are found, then a disposal of any part of that premises (including the commercial units) will be caught by the LTA 1987 provisions.
This is important for landlords as breach of the LTA 1987 provisions runs the risk of criminal prosecution and penalties for the landlord, as well as the right to compensation for the Qualifying Tenants.
What is LTA 1987?
Under Section 1 of the LTA 1987, Qualifying Tenants have the right of first refusal on disposals made by a landlord unless a notice under section 5 of the LTA 1987 has previously been served on the Qualifying Tenants in respect of the disposal.
Who is Qualifying Tenant?
A person is a Qualifying Tenant under the LTA 1987 Act if they are a tenant of the flat under a tenancy other than:
(a) a protected shorthold tenancy;
(b) a business tenancy;
(c) a tenancy terminable on the cessation of his employment; or
(d) an assured tenancy or assured agricultural occupancy.
Does the LTA apply?
A Section 5 notice will need to be served on all Qualifying Tenants prior to the disposal of commercial premises if the answer is “yes” to the following questions:
- Is the development (as a whole) a “premises”? i.e.
- it consist of the whole or part of the building;
- it contains two or more flats held by Qualifying Tenants; and
- the number of flats held by such tenants exceeds 50% of the total of flats contained in the premises.
- Is the disposal a “relevant disposal”? (i.e. creation of an estate or interest in land)
- Is the Landlord a “landlord”? (i.e. is it the immediate landlord of the qualifying tenants and not exempt or a resident landlord)
- Are there the relevant number of “Qualifying Tenants” ? (i.e. over 50% of the units must be held by Qualifying Tenants)?
What does this mean?
The section 5 notice provides notice to the Qualifying Tenants of the proposed sale of the commercial premises to a third party and offers the Qualifying Tenant the right of first refusal to acquire the commercial premises on the same terms as the proposed sale to the third party.
The notice must specify a period within which a requisite majority of Qualifying Tenants may accept the offer, being a period not less than 2 months starting from the date of service of the notice.
Following the two month notice period, if the landlord does not receive any response (or not enough of a response), then the sale can proceed with the third party within a period of 12 months beginning at the end of that notice period.
If a requisite majority of Qualifying Tenants do accept the offer, or nominate a third party on their behalf, to acquire the premises then the landlord shall proceed with the sale to the Qualifying Tenants (or their nominated person) on the same terms as set out in Section 5 notice.
Exempt and Avoidance
There are some situations where disposals would not be caught under the LTA 1987 such as the grant of a tenancy of a single flat, charges, disposals as gifts, disposals pursuant to contracts that were entered into prior to 50% of the units being held by Qualifying Tenants, and a disposal to an associated company (i.e. a company within which the landlord holds voting shares) which has been associated for at least two years.
If a landlord wishes to avoid having to serve notices under the LTA 1987 it could dispose of the commercial units prior to 50% of the residential units being occupied (as LTA 1987 will not be triggered at this point).
The implications of the LTA 1987 do not have to be detrimental when disposing of commercial units in mixed use developments provided that, if Section 5 notices do need to be served on Qualifying Tenants, sufficient time to deal with the notice process, as well as the cost implications of serving on all relevant tenants, are factored in when planning such disposals.