Right of first refusal offer notices - all for one or one for all?
Right of first refusal offer notices - all for one or one for all?
If a landlord of a block of flats wants to sell their interest, and the building satisfies certain criteria, it must first offer qualifying tenants the chance to club together to buy that interest. This is called the “right of first refusal”.
The legislation that governs the right of first refusal is widely regarded as being poorly drafted. This has led to much caselaw.
One situation the legislation does not cater for particularly well, and that has taken up a good deal of court time, is where the landlord wants to sell more than one block of flats on the same estate. This was the situation in FSV Freeholders Ltd v SGL 1 Ltd .
The question for the Court of Appeal was whether the landlord’s offer notices only had to give the tenants details of the terms on which it intended to sell their individual block of flats, or the terms of the proposed sale of the whole estate.
Right of first refusal
The right of first refusal is set out in the Landlord and Tenant Act 1987 (LTA 1987).
If a building contains two or more flats held by “qualifying tenants”, and more than 50% of the flats in the building are owned by qualifying tenants, the premises will qualify for the right of first refusal.
The definition of qualifying tenant is widely drafted. It is not restricted to tenants who own long leases. Tenants of certain types of tenancy are, however, excluded (such as assured shorthold tenants). Long leaseholders who own three or more flats in the same building will also not qualify.
If the premises are used partly for residential and partly for business purposes, 50% or more of the internal floor area of the premises (excluding common parts) must be for residential use.
The premises won’t qualify where certain landlords (including local authorities) are involved.
An intended sale of a purpose-built blocks of flats by a private landlord will, however, usually be caught.
Where the LTA 1987 applies, a landlord is prohibited from selling the block of flats unless it has first served formal offer notices on the qualifying tenants.
The legislation says that offer notices must contain the principal terms of the proposed disposal, including the property to which the contract relates and the principal terms of the contract (including the deposit and the price).
It is open to the majority of the qualifying tenants to accept the landlord’s offer.
If the offer is not accepted in time, the landlord can proceed with the proposed sale to a third party. However, it must not sell for less than the price set out in the offer notices, or on any different terms, or else fresh notices must be served.
There are serious consequences if a landlord fails to comply with its obligations under the LTA 1987.
The landlord could face criminal prosecution or, in certain instances, civil liability.
If the landlord has already sold the building to a third party, the qualifying tenants can require the buyer to provide information about the sale, and force the buyer to sell the building to them on the same terms.
Sale of multiple buildings
If a landlord intends to sell an estate or interest in more than one building, it must `sever the transaction and deal with each building separately’.
This can present difficulties in practice, particularly where the physical construction of the estate may make it hard to determine whether there is more than one building, and where tenants in different blocks may have the right to use communal estate roads, gardens and grounds.
FSV Freeholders Ltd v SGL 1 Ltd
In this case, the landlord had served two sets of offer notices.
One set of offer notices related to Block A, stating a price of £350,000 with a 10% deposit.
The second set of notices related to Blocks B, C and E, stating a price of £1,050,000, with no reference to a deposit.
Block D was empty and, as such, no notices were, or needed to be, served in relation to it.
The qualifying tenants did not accept either of the landlord’s offer notices.
The landlord went on to sell the freehold of the whole estate, comprising Blocks A, B, C, D and E, to a third party in one transaction. The purchase price was stated to be £1.6 million, being the aggregate of the amount paid for Block A (£350,000), Blocks B, C and E (£1,050,000) and Block D (£200,000). The deposit was £80,000.
The qualifying tenants subsequently served an information notice on the buyer seeking details of the sale.
The tenants then served a purchase notice requiring the buyer to sell the whole estate to the tenants on the same terms on which the buyer had acquired it.
When the buyer did not sell the property to the tenants, a default notice was served.
The buyer issued court proceedings seeking a declaration that the right of first refusal procedure had been properly complied with.
Main issue for the court
The central question for the Court of Appeal was whether the landlord’s offer notices should have set out the principal terms of the proposed disposal for the whole of the estate (comprising Blocks A to E), rather than just the principal terms relating to the separate buildings.
The tenants argued that the offer notices should have set out the terms for the intended sale of the whole estate, and should therefore have stated the total price as £1.6 million, a deposit of £80,000 and the other terms that had been agreed with the buyer.
There was a separate issue as to whether Blocks B, C and E should be treated as one building for the purposes of the LTA 1987, but this was assumed to be correct for the purposes of the appeal.
The Court of Appeal dismissed the tenants’ appeal.
It rejected the tenants’ primary argument that, where there were separate buildings, a landlord’s offer notice had to contain the principal terms of the disposal of the entire site. If a landlord was required to do this, the qualifying tenants would not know what terms they were being offered. They would be provided with a headline purchase price which would not assist them when it came to deciding whether to accept the offer to purchase their individual building.
The Court of Appeal also rejected the tenants’ alternative argument that the offer notices had to contain particulars of both the contract in relation to the whole site and each of the individual buildings. There was no room to interpret the legislation in this way.
The Court of Appeal found that it is not necessary that qualifying tenants should be given 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.
The qualifying tenants only have a right of first refusal in relation to the estate or interest in the building of which their flats form part. The right of first refusal provisions of the LTA 1987 therefore only require that the terms in the offer notice should relate to that building.
However, so long as the transaction is severed for the purposes of the offer notices, with separate notices for each building, if the tenants to not accept the offer, the landlord does not then have to sell on a severed basis to the proposed buyer. The landlord can, as happened in this case, proceed to sell multiple buildings in one unsevered transaction.
This case helpfully confirms that offer notices should contain all of the principal terms for one building, rather than one notice containing the principal terms for all properties and interests being sold (all for one, rather than one for all). It also confirms that, whilst separate offer notices must be served, the landlord can sell multiple buildings in one transaction if the tenants do not accept.
However, the case highlights some of the other issues that can come up where multiple buildings are involved.
There is still a live issue to be determined as to whether blocks B, C and E should have been treated as a single building. Whether a structure constitutes one building sounds like it should be straightforward, but this is often far from the case. It is very fact-specific. It may, for example, be necessary to consider whether buildings are physically separate by looking at architectural plans, whether services or facilities are shared and how each block is or could be managed (whether together or separately).
The right of first refusal process is complicated, with many traps for the unwary, and a number of grey areas even for the well-informed.
If you are a landlord looking to sell a building containing flats, or a tenant that has received a right of first refusal offer notice, it is important to obtain legal advice at the earliest stage.