Housebuilders Building Residential Flats or Mixed Use Developments

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Are you a house builder who wishes to sell the freehold reversion of either an apartment block or a leasehold mixed-use development?  The right of first refusal under the Landlord and Tenant Act 1987 (the Act), makes this more complicated than you might expect.

The Act says that in certain circumstances, where a landlord intends to sell its freehold interest in an apartment block, it can’t do so until it has served an offer notice known as a Section 5 Notice on 90% of the “qualifying tenants”.

The notices must be served where more than 50% of flats in a building are held by qualifying tenants, before disposing of the freehold.

These notices give the qualifying tenants the opportunity to purchase the freehold before the block is sold on the open market.

The Section 5 notice sets out the terms on which the landlord intends to sell the freehold and must give the qualifying tenants at least two months to decide if they want to buy the freehold.

Who are the Landlords for the purposes of the Act?

The Act does not apply to the following landlords:

  • most local housing authorities;
  • registered social landlords and fully mutual housing associations which are not registered;
  • charitable housing trusts.

Who are qualifying Tenants for the purposes of the Act?

Qualifying tenants include not only the owners of sold units, but also those who have exchanged contracts, but not yet completed.

What if I go ahead without complying with the Act?

It is a criminal offence with the risk of an unlimited fine not to comply.

How can I structure my development, so that I don’t have to worry about the Act?

The choice of a structure depends largely on your future plans for development.  You need to start thinking about this before you start selling units, so that you can take advantage of some of the exemptions in the Act such as:-

  1. Selling the freehold interest to a company that is associated with the Landlord company. The onward freehold sale could then take place via a share sale of the associated company rather than a straightforward property sale.  The associated company must have been associated with the landlord company for at least two years.
  2. If you wish to exit from the development as soon as all of the units have been sold. Then you ought to have exchanged an agreement, option, or right of pre-emption for sale with the buyer of the reversion before more than 50% of the plot sale contracts have been exchanged.  This way the transaction will not be caught by the LTA 1987.   Alternatively, you could grant a head lease before the 50% threshold is reached.
  3. In a mixed-use development structure the commercial space so that more than 50% of the internal floor area will be in non-residential use, disregarding common parts. In such cases, the landlord will not be required to offer any disposal of the whole or part of these premises to the residential tenants.
  4. Structure the ownership for the development so that the number of flats held by “qualifying tenants” does not exceed 50% of the total number of flats in the premises. This could be done by ensuring that there are sufficient shorthold or assured tenancies. Someone who is a tenant of three or more flats in the building (as leaseholder or tenant) will not be a qualifying tenant. However, this can be difficult to achieve.

The landlord should be aware that notwithstanding the above if tenants can satisfy the relevant criteria, tenants will still have the right to request not only collective enfranchisement but also the right to manage.

Developers of blocks of flats need to consider what they wish to do with the freehold at the outset of the development and seek specialist legal advice as early as possible.

Bennett Griffin’s property team are well versed in all matters of property law and are prepared to help you with your commercial or residential property; get in touch by calling 01903 229999 or by calling info@bennett-griffin.co.uk

Disclaimer: Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.