Background
Where a residential block of flats is subject to long leases and the freeholder wants to sell them, they are required to serve notices on any tenants that qualify under the Landlord and Tenant Act 1987 (“the Act”). These are known as Section 5 Notices and effectively give those qualifying tenants “first dibs” on buying the freehold and owning the building themselves. These can be fraught with problems.
Without going into full details of who would be a qualifying tenant, it is generally those who hold the flats in a building on a long lease. Those who qualify are entitled to first refusal if the property in question:
- consists of the whole or part of a building and contains two or more flats held by qualifying tenants, and
- the number of flats held by qualifying tenants is greater than 50% of the total number of flats contained in the property, and
- the flats are used for residential purposes (or 50% or more of the internal floor areas excluding common parts are for residential purposes).
Issues around giving notice
The principle of giving notice is not a complicated or unfair one. The tenants hold the property on a long lease. In many cases, that long lease can be a virtual freehold. Their interest in the property is substantial and if they were so minded, they would probably be entitled to buy the freehold, but that’s a rabbit hole we can disappear down another day. For the avoidance of doubt, living in a rabbit hole does not give rise to a qualifying tenancy.
Giving notice so that tenants can consider if they want to try and buy the freehold before it is put on the market sounds like a simple premise. Simple that is until the act of parliament establishing the right in law was drafted. Enter the Landlord and Tenant Act 1987, stage left.
Issues around the wording of the Act are well documented. It has been heavily criticised by some very senior judges. Sir Nicolas Browne-Wilkinson (as he then was) described the Act as, “ill-drafted, complicated and confused”[1], a criticism that Lord Bingham described as “understated”[2]. I have described it as, “my candidate for the worst drafting of the century award”. I have only just thought of that, but it means I am now quoted alongside Lord Browne-Wilkinson and Lord Bingham. I may well retire.
My source in Whitehall (a former political advisor to the Number Ten cat) tells me the Act was rushed through in time for the 1987 election to fulfil a manifesto promise. That may or may not be the case, but it is all very concerning given that criminal charges attach to falling foul of the legislation, penalties include the prospect of time behind bars.
Let’s see what the issue is in relation to giving notice, bearing in mind we have already looked at the first few sections of the Act which say that notice must be given to those who qualify. The crows-foot in the otherwise flawless complexion is section 5(3) of the Act. This is what it says. “Where a landlord proposes to effect a transaction involving the disposal of an estate or interest in more than one building (whether or not involving the same estate or interest), he shall, for the purpose of complying with this section, sever the transaction so as to deal with each building separately.” That means if your flats are in two (or more) blocks or, as we shall see shortly, if your blocks are capable of relatively simple subdivision, you have to sell each of those separately.
The Act does not define “building”, but here is some help in the Leasehold Reform, Housing and Urban Development Act 1993. A self-contained building is one which is structurally detached from any other building. So far, so obvious – but that is not all. A part of a building is self-contained if it constitutes a vertical division, and the structure is such that part could be redeveloped independently and the services are either independent or could be provided without significant interruption to the remainder of the building. Not so obvious – a single building might actually be a number of buildings thinly disguised as a single building.
We then need to dip into case law to assist further with working out what a building might be. This will be quick and relatively painless…
A building extends to the garden and other stuff expressly or impliedly included as part of the property included in the lease. “Stuff” is Latin for appurtenances. The fact that the building is included in one or more registered titles is irrelevant[3].
The question of whether a building is structurally detached is not simply one of engineering or structural interdependence or loadbearing connection. Design and function are also relevant including if the blocks were designed and constructed together as part of a single development[4]. That last bit turns out to be very important. In relation to terraced properties, each vertically divided building is a separate building[5]. There has to be reasonable alignment vertically, without too much variation laterally between floors – the aptly named vertical division test.
The most recent high-profile case, Long Acre Securities[6], has determined that actually, more than one block can be a building. Blocks that were built as part of the same scheme/development can be considered together as one building. There is (so Long Acre Securities tells us) a requirement to show shared use of stuff. Or appurtenant premises if you prefer.
The definition of appurtenant premises is set out at section 4(4) of the Act. “In this section “appurtenant premises”, in relation to any flat, means any yard, garden, outhouse or appurtenance (not being a common part of the building containing the flat) which belongs to, or is usually enjoyed with, the flat.” The inclusion of the word being defined as part of the definition, perhaps epitomises the difficulty with the Act in general.
The other key case about multiple buildings is Kay-Green. In short, blocks that were constructed at different times constitute different buildings and the proposed transaction should be severed to deal with each separately.
So where are we? A single building might be multiple buildings if they can be easily separated as the various cases describe. At the same time, multiple buildings might be considered a single building if they were part of a single development, designed to be treated as a whole and they share stuff. The definition of shared stuff being stuff that is shared. So how do we work it out?
The answer is that the extent of the premises must be ascertained in an objective way, disregarding the proposed disposal[7]. Next, use the criteria in the case law about divisions and so on without reference to any description in the title documents. Then consider the application of s1(2) of the Act to those premises[8].
If you are still not sure? Seek a declaration from the county court. Section 52 of the Act provides that the county court has jurisdiction in relation to all questions other than those falling within the jurisdiction of a rent assessment committee. A Civil Procedure Rules Part 8 application seeking a declaration that the property in question can be treated as one “Building” in relation to Section 5(3) of the Act should give comfort. Where such a declaration fails, one at least knows that treating the blocks (or other divisions) as separate buildings is the appropriate route to take.
How to avoid problems in the first place
There are two courses of action I can advise which may mitigate the risks. The first is, never buy a block of flats. Most of us will happily abide by that mantra and I can’t help but feel it might be a hit as a quote on a t-shirt. For those with property portfolio ambitions or responsibility, it may prove the least attractive of my pearls of wisdom.
The second is set up a Special Purpose Vehicle for purchasing such properties. Shares can then be sold without the freehold changing hands – the SPV company remains the freeholder and is simply transferred to new shareholders. The issue of giving notice does not arise at all because the property is not sold.
If you are thinking of disposing of a block or blocks of flats where the tenants may qualify under the Act, or if you are thinking of purchasing such a property and want advice, get in touch. Becket Chambers can also help if you are now wondering if you qualify as a tenant who might be able to purchase your own building. Anyone who wants a “Never Buy a Block of Flats” t-shirt (or perhaps hoodie) can message me on LinkedIn…. You can find me by searching for “Christian Fox – Barrister often quoted alongside (the late) Lord Bingham”. I suppose you could contact chambers as a last resort.
[1] Denetower Ltd v Toop and others [1991] 3 All ER 661 (judgment p 952G)
[2] Belvedere Court Management Ltd v Frogmore Developments Ltd [1997] QB 858
[3] Kay-Green v Twinsectra Ltd [1996] 2 EGLR 442
[4] Consensus Business Group (Ground Rents) Ltd v Palgrave Gardens Freehold Co Ltd [2020] EWHC 920 (Ch)
[5] Saga Properties Ltd v Palmeira Square Nos 2-6 [1995] 1 EGLR 199
[6] Long Acre Securities Ltd v Karat [2004] EWHC 442 (Ch)
[7] Denetower Ltd v Toop and others [1991] 3 All ER 661
[8] Dartmouth Court Blackheath Ltd v Berisworth Ltd [2008] EWHC 350 (Ch)
