Landlords of mixed-use premises should engage in forward planning on the position of what are known as ‘qualifying tenants’ when it comes to eventually disposing of the property, says commercial property lawyer Sophie Bedwell.
Sophie from Clarke Willmott LLP says disposing of something over which tenants have rights could trigger a Section 5 Notice of the 1987 Landlord and Tenant Act leaving the landlord at risk of criminal prosecution and/or civil proceedings.
The legislation means qualifying owners of leasehold flats have the right of first refusal to purchase the freehold – this means that if the freeholder wishes to sell the building, they must first offer the leaseholders the chance to purchase.
“There are practical ways to avoid the 1987 Act, but these require forward planning,” said Sophie who is an associate in Clarke Willmott's commercial property team in Bristol specialising in landlord and tenant work.
“The right of first refusal applies where premises consist of the whole or part of a building; contain two or more flats held by qualifying tenants; and the number of flats held by qualifying tenants exceeds 50% of the total number of flats contained in the premises (with some exceptions relating to mixed-use premises).
“The Section 5 notice must specify a period of not less than two months from the date of service of the notice within which a requisite majority of the qualifying tenants may accept the offer plus a further two-month period in which to nominate a purchaser.”
Avoiding the 1987 Act
- Timing of sale of flats – a disposal prior to the exchange of contracts for the flat which would take the number of Qualifying Tenants over the 50% threshold.
- Pre-existing contractual obligation – a disposal pursuant to a contract entered prior to 50% of the flats being held by qualifying tenants is an exempt disposal under the 1987 Act.
- Disposal to an associated company – a disposal to a company which has been associate of the seller for at least two years is also an exempt disposal.
- Creation of a headlease – the grant of a lease superior to the qualifying tenants’ leases may allow disposal of the commercial premises without triggering the 1987 Act.
- Mixed use development – a developer could plan a mixed-use development to ensure greater than 50% of each building on the development is non-residential.
- In new developments – an agreement for sale before any flats are subject to leases or agreements for lease; or using a special purpose vehicle to hold the premises.
- Plan the tenant profile to reduce the number of qualifying tenants in the premises.
- Another way of avoiding a disposal being caught by the Act is if the disposal is the grant of a tenancy of a single flat.
- A disposal by one charity to another might not be caught by the Act.