Article contributed by Sarah Thompson-Copsey

Sarah Thompson-Copsey examines a recent ruling by the Court of Appeal concerning the Landlord and Tenant Act 1987, Part I. The focus is specifically on tenants’ pre-emption rights, s5 notices, principal terms, and severance.

Case name, reference and Bailii link  

FSV Freeholders Limited v SGL 1 Limited [2023] EWCA Civ 1318 

https://www.bailii.org/ew/cases/EWCA/Civ/2023/1318.html 

Summary 

The Court of Appeal upholds the High Court’s decision that offer notices served under s5 of the Landlord and Tenant Act 1987 were valid; the landlord was required by statute to sever the transaction into individual “buildings”, and so it was correct to state only the terms relating to the particular building in the notice. 

Facts 

The Landlord and Tenant Act 1987 (the 1987 Act) gives qualifying tenants of flats within a building (that itself falls within the Act) the right, acting collectively, of first refusal, or pre-emption, where their immediate landlord proposes to dispose of an interest in the building. The right is not freestanding and is a right only to take the disposal the landlord is proposing to make and on the terms it proposes. 

The 1987 Act prohibits the landlord from making a disposal that falls within the Act without first serving on the tenants an “offer notice” under s5. (Breach of this obligation is a criminal offence.) The form of notice is not prescribed but it must contain “particulars of the principal terms of the disposal proposed by the landlord” and, where the proposed disposal consists of entering into a contract to create or transfer an estate or interest in land, s5(A) of the Act states that the principal terms of the disposal include in particular “the property, and the estate or interest in that property, to which the contract relates” and “the principal terms of the contract (including the deposit and consideration required)”.  

In addition, s5(3) of the Act provides that: “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”. 

On 11 February 2020, the administrators for FSV Ltd (the immediate landlord of the qualifying tenants) served s5 notices, under the 1987 Act, on the qualifying tenants in respect of FSV Ltd.’s proposed disposal of Blocks A-E, Fox Street, Liverpool. As the proposed transaction involved more than one building, the transaction was severed: s5 notices were served on the tenants of Block A setting out a consideration of £350,000 and on the tenants of Blocks B, C & E (the blocks being considered together to be one “building” with a consideration of £1,050,000. Block D was empty and so the Act did not apply to it. 

No acceptance notices were served and on 12 June 2020, the landlord agreed to sell Blocks A-E (the Entire Property) to SGL Ltd for £1.6m (which sum was broken down as to Block A: £350,00, Block B, C, E: £1,050,000 and Block D: £200,00). 

The tenants contested the validity of the s5 notices and SGL sought a declaration that s5 had been complied with. 

Issues 

The question before the Court of Appeal was whether the s5 notices were valid given that they did not set out “the principal terms of the disposal proposed by the landlord” i.e., the disposal of the Entire Property for £1.6m. 

First instance

At first instance, on 11 January 2022, District Judge Lampkin made a declaration that s5 had been complied with; the tenants appealed. 

On appeal to the High Court, ([2022] EWHC 3336 (Ch) https://www.bailii.org/ew/cases/EWHC/Ch/2022/3336.html), Fancourt J allowed the tenants’ appeal in part (as to whether Blocks A, B, C & E formed one, two, three or more “buildings” and gave directions for the hearing) but rejected the tenants’ argument that the s5 notices were invalid. This latter part was the subject matter of the tenants’ appeal to the Court of Appeal. 

Decision  

Dismissing the tenants’ appeal, Asplin LJ (with whom Peter Jackson LJ and Arnold LJ agreed), emphasised the need to read s5 of the Act as a whole and in context. Section 5(1) “provides that where the landlord proposes to make a “relevant disposal affecting premises” he shall serve a notice (an “offer notice”) on the qualifying tenants”. As that offer has to be capable of acceptance by the tenants it is important to consider s5 as a whole in that light.  

Asplin LJ emphasised that “the requirements in section 5A (and 5B-E) are incorporated into section 5, and must be read in the light of it [and by so reading] the interpretation of section 5A in the circumstances which have arisen becomes clear …” and, in the circumstances of the proposed transaction, “the requirements of sections 5A – E must be read in the light of section 5(3) which is in mandatory term”. 

That means, she added that “In circumstances in which section 5(3) applies, references to the “disposal” by entering into a “contract” should be interpreted by reference to each separate building. The reference to “property” in section 5A(2)(a) should be construed to mean the building in question and the reference to the “contract” in section 5A(2)(b) must be interpreted to refer to the contract in relation to the building in question.” 

Interestingly, the completed contract required payment of an £80,000 deposit and was conditional upon a Sealed Court Order – neither of which was mentioned in the s5 notices. Obiter, Asplin LJ dismissed the argument that this invalidated the notices “In the light of my conclusions … the failure to mention the deposit of £80,000 and the condition precedent of obtaining a Sealed Court Order fall away. … in any event, I consider that the Sealed Court Order was not a “principal term” of the main contract for sale of the Entire Property. It was merely part of the machinery for completion.”  

Comment

This case is of interest on the question of principal terms to be set out in a s5 notice where the proposed disposal involves multiple buildings; in such circumstances, the offer notices only need to contain the key terms of the transaction as they relate to each individual building, and not the terms of the overall transaction (and note that the tenants cannot argue that the consideration proposed for a severed part is too high and should be adjusted). 

Of perhaps more interest is the court’s obiter view that a condition precedent to a disposal is not a principal term of the contract. Unfortunately, no reason is given for such view. 

The matter of the machinery of severance itself – i.e. the definition of “building” (not in fact defined in the 1987 Act) in this case, remains to be decided.  

Interesting too is s18 of the 1987 Act. This permits the proposed disponee to serve notices on the qualifying tenants in place of s5 notices served by the proposed disponor. It does not require ‘severance’ (even where the proposed disposal consists of more than one building) and requires the notices to contain “the general nature of the terms of the proposed disposal”, including in particular “the property to which it would relate and the estate or interest in that property proposed to be disposed of by the landlord” and “the consideration required for making the disposal” (but does not refer to the deposit). Does “the general nature of the terms of the disposal” referred to in s18 mean something different from “the principal terms of the disposal” referred to in s5A?