Conflicting advice about Section 5 (right of first refusal) notices

[Baron Hardup]

I am co-freeholder of a site with residential and commercial property.
My partner wishes to sell his share of the freehold.
It doesn't affect our commercial tenants but we are uncertain about our obligations to our residential lessees under Section 5 of the 87 L&T Act.
We're trying to avoid unnecessary work, delay and confusion.

Many specialist firms' websites say "The Freeholder MUST serve Right of First Refusal (RFR) notices on residential lessees"
This is contradictory to lease-advice.org which says:

1. The RFR only applies when the immediate landlord of the tenants decides to sell.
2. The immediate landlord is the one to whom the rent or ground rent is paid
   and who will be entitled to vacant possession of the flat when the lease expires.

The distinction is between "Freeholder" and "immediate landlord"
We believe that although we are freeholders, - we are not "immediate" landlords of the residential tenants, so should NOT be required to offer right of 1st refusal to the flat lessees.

The details are:
The residential unit is a stand alone block of 8 flats (Wallace Court) demised on a head-lease of 125y from 24 June 1979.
A company "Wallace Court Ltd" was set up then to manage and insure the property.
Wallace Court Ltd granted 8 sub-leases to the flats for 125y less 3 days.
The 8 lessees automatically become directors of the company.
The flats pay GR to the company and the company pays GR to us
The reversion of each flat lease is to the head lessor (Wallace Court Ltd)

So as far as we can see the immediate landlord is "Wallace Court Ltd"
Does any reader have a view on our position?

[flyingfreehold]

I am of the opinion that RFR obligates the share being offered to them on the same terms on which it is intended that you acquire. For the sake of what is involved, and the theoretical risk of major earache, serve notices

[Baron Hardup]

We'd rather not serve notices because when my partner sells his share I know exactly who I want to buy it and it's not any of the lessees. If we serve notices, there is a risk that some of the enemy might actually seek to acquire it and then we'd have to withdraw the notice.
My reading of the act is in line with lease-advice.org... only "immediate" landlords need serve.

[Section20z]

Don't take too much stock in what Lease-advice say.
The only penalty of failing to issue section 5 would be a subsequent forced sale to qualifying tenants at price paid (which could be high) as there has apparently never been a prosecution.
Or a sale to family member might exempt it as well.

[rentreviewspecialist]

Residential is not my forte but I wonder if the answer is to be found in Artist Court Collective Limited v Khan [2016]. EWHC 2453 (Ch)

Mr Khan was the immediate landlord of the tenants in a mixed user building (commercial and residential flats). Mr Khan entered into a trust deed with SGR Properties (UK) Ltd a company controlled by Mr Khan, in which it was agreed that the freehold of the property would be transferred to SGR who would hold it on trust for Mr Khan. Mr Khan then transferred his freehold interest in the property to SGR for consideration of £225,000 (the “First Disposal”).

The residential tenants of the property felt aggrieved that Mr Khan did not implement their right of first refusal under the Act. They exercised their right of pre-emption and served a purchase notice requiring SGR to transfer the freehold of the property to Artist Court Collective Limited, a company incorporated by a majority of the tenants, on the same terms; £225,000. Mr Khan, allegedly in attempt to stop the litigation and to satisfy the tenants, then arranged for the freehold title to be transferred back from SGR to Mr Khan for no consideration (the “Second Disposal”). The majority of the tenants then sent a further purchase notice requiring Mr Khan to transfer the freehold to Artist Court Collective Limited on the same terms; for no consideration.

The County Court accepted the arguments put forward on behalf of the majority of the tenants. There had been two relevant disposals under the Act and Mr Khan was in breach of his statutory obligations by failing to give effect to the tenant’s first right of refusal. The judge ordered that the majority of the tenants were entitled to acquire the freehold on the same terms as the Second Disposal, for no consideration.

On appeal, the judge held that as a result of the First Disposal, all SGR had acquired was the legal title to the property subject to the trust and so there was no relevant disposal. The judge accepted the landlord’s case that the Second Disposal was made in order to bring the trust to an end and therefore it fell within one of the exceptions under the Act.


---

Under the Act there are various disposals that are not relevant disposals. for example:
a disposal consisting of a transfer by two or more persons who are members of the same family either:
(a) to fewer of their number; or (b) to a different combination of members of the family (but including at
least one of the transferors);
a disposal in pursuance of a contract, option or right of pre-emption binding on the landlord, except as provided by s.8D of the Act;

--

By the sound of it, the op should obtain legal advice from a lawyer well-versed in residential property law.

[Section20z]

Wow, that's an interesting case. And proves even the courts don't know how to interpret the legislation

[Baron Hardup]

Thanks for all the comments
I wrote the op because "Many specialist firms' websites say
"The Freeholder MUST serve Right of First Refusal (RFR) notices on residential lessees"
and this was contradictory to lease-advice.org (it was also at odds with my own reading of the act) https://www.legislation.gov.uk/ukpga/1987/31/section/2
Landlords for the purposes of Part I.
(1)Subject to subsection (2) [F1and section 4(1A)], a person is for the purposes of this Part the landlord in relation to any premises consisting of the whole or part of a building if he is—
(a)the immediate landlord of the qualifying tenants of the flats contained in those premises,

The key word appears to be "immediate" and in our case the immediate landlord is the head leaseholder, - not us.

Well.... Lease Adv indulged me in a long discussion and the para legal advised me I should serve sect 5.
But I pressed for written advice and when this arrived it contradicted the original conversation.
The definitive answer is that IF the freeholder is NOT the immediate landlord (as is my case) then Sect 5 notices are not required.

I have since written to 7 "Specialist" firms whose web pages I originally found to be misleading and they have kindly amended their sites.

I think Mr Khan was lucky to get away with the appeal.
According to rentreviewspecialist he was the immediate landlord and should have served Sect 5