Right of first refusal

This page deals with the following points:

  • Exempt transactions
  • Relevant disposal?
  • Defects in notice
  • Rectification and the right of first refusal
  • Service of documents

 

Exempt transactions

Grant of leases to oneself

York House (Chelsea) Ltd v Edward Thompson

[2019] EWHC 2203 (Ch)

Summary

A husband and wife who are the joint freeholders of a block of flats, granted a number of leases of various parts of that block to one or other of themselves. These were found to be disposals which were exempt from the provisions of part 1 of the Landlord and Tenant Act 1987 (‘the 1987 Act’), either because these were gifts to family under s.4(2)(e) or disposals within a family under s.4(2)(h).

Facts

The Defendants, who are husband and wife, are the joint freeholders of York House. They became aware that the tenants of that block were intending to acquire the freehold under the Leasehold Reform, Housing and Urban Development Act 1993 (‘the 1993 Act’).

Concerned that the development opportunities in York House would not be properly reflected by a valuation under the Act as matters stood, they granted themselves 14 leases of various parts of the House and its surrounding areas. These included leases of storerooms, subsoil, air space, courtyards and internal corridor spaces, amongst other things. There was no premium payable under any of the leases and the rent reserved was in each case a peppercorn.

The Defendants did not serve notices offering the qualifying tenants’ rights of first refusal over these leases pursuant to s.5 of the 1987 Act. The tenants contended that they ought to have done so and therefore sought an order that the Defendants transfer the leases to the Claimant company, pursuant to s.19 of that Act.

The Defendants argued that the disposals effected by the leases were exempt disposals, and alternatively argued that many of the disposals were not ‘disposals affecting premises’ to which Part One of the 1987 Act applies.

Issues

  • Did disposals effected by the leases fall within the exclusions under s.4(2)(e) or (h) the 1987 Act?
  • If not, was each lease a disposal affecting premises to which part one of the 1987 Act applies?

Decision

Zacaroli J. sitting in the Chancery Division of the High Court found that the leases were not relevant disposals, such that the Defendants had not been obligated to offer rights of first refusal to the qualifying tenants of the block.

In relation to s.4.2(e), the Claimant had argued that the disposals could not be gifts because:

  1. The creation of leases involved consideration. The judge disagreed, finding that it is conceptually possible to describe the grant of a tenancy as the making of a gift: the better analysis was that mutual covenants in a lease were part and parcel of the estate in land created.
  2. The Defendants were really seeking to retain the benefit of their property, rather than giving a ‘gift’ of leases. The judge disagreed: the purpose of the exception in s.4.2(e) was to allow the landlord to transfer his property to an acquiring party in which he had an interest – any ulterior motive behind the gift was not relevant.
  3. The Defendants granting leases to one or other of themselves could not properly be described as gifting to a ‘member of their family’ per various strict readings of the statutory language in s.4.2(e). The judge disagreed with these interpretations and further could see no legislative purpose for such an exclusion.

S.4(2)(h) excludes “a disposal consisting of a transfer by two or more persons who are members of the same family… to fewer of their number.” The Claimant argued in relation to this subsection that the creation of an estate in land such as a lease was not a disposal ‘consisting of a transfer’. The judge again disagreed: ‘transfer’ in that provision was used for the purpose of identifying ‘between whom’ the disposal is to take place, rather than in the sense of the ‘type’ of disposal permitted.

Although not strictly necessary, the judge went on to consider which of the disposals would be relevant disposals affecting premises to which part one of the 1987 Act applies. Agreeing broadly with the Claimant, he found that appurtenances include areas over which the tenants have rights under their leases and areas usually enjoyed with the building, including those to which access is required by the landlord in order to comply with its repairing obligations [113]. As a result, airspace to the height of the chimneys, subsoil and courtyards (inter alia) were found to be appurtenances.

Comment

Paragraphs 119-169 of the judgment contains in-depth analyses of whether various different parts of a block of flats may be considered as exterior, appurtenant or a common part of a building, which could likely be useful to readers considering the application of these issues to their own facts.

 

Relevant disposal?

Relevant statutory provisions

In outline, Part I of the Landlord and Tenant Act 1987 confers on qualifying tenants of residential flats in a building rights of first refusal when a "relevant disposal" is intended to be made by the landlord (section 4). It also gives rights of enforcement if the landlord makes such a disposal without observing the requirements of the Act.

A landlord is prohibited from making a relevant disposal affecting premises to which the Act applies unless it has first offered to dispose of these to the qualifying tenants by serving a notice under section 5 of the Act.

There are a number of exceptions to what amounts to a relevant disposal under the Act (section 4(2)).

 

Surrender of interest and re-grant

Kensington Heights Commercial Co Ltd v Campden Hill Developments Ltd

[2007] EWCA Civ 245

In this case the landlord was accused of not having complied with the 1987 Act in that he did not serve a notice on the tenant before making a relevant disposal. So far, so normal. But in this case the landlord was not the freeholder and the relevant disposal was not the sale of his interest but the surrender of his interest to the freeholder and the re-grant of a longer term. Thus in essence the landlord was not disposing of it but enlarging it. That, however, did not mean that there was no relevant disposal within the Act.

The agreement to surrender, was the relevant disposal. An offer notice should have been, but had not been, served under s.5 in respect of the agreement to surrender. As a result the tenant could have brought an action against the freeholder for a grant of a lease on the same terms as that surrendered.

But it had not done that. It had sought the grant of a new lease from the landlord in the same terms as the one the landlord had surrendered. Section 16 of the Act gives the court the power to order the transfer of the estate or interest that was the subject-matter of the original disposal. But that estate no longer existed; the old lease had been brought to an end by the surrender. It could not be said that the new lease which was in different terms was substantially the same interest.

 

Effect of declaration of trust on disposal by landlord

Artist Court Collective Ltd v Khan

[2016] EWHC 2453 (Ch)

Summary

A transfer from a trustee to the beneficial owner upon the discharge of the trustee was not a "relevant disposal" under the 1987 Act and so did not entitle the residential tenants to take a transfer of the building from the transferee. The relevant exception for the present case is set out in section 4(2)(g) of the Act:

    "a disposal consisting of the transfer of an estate or interest held on trust for any per-son where the disposal is made in connection with the appointment of a new trustee or in connection with the discharge of any trustee."

Facts

K was the owner of a building that contained eight flats and three shops. Without serving notices under the Landlord and Tenant Act 1987 on the residential tenants, he agreed in return for a payment of £225,000 to transfer the title to the property to a company (in which he was the majority shareholder) (K Ltd) to hold the property on trust for himself.

The leaseholders then discovered what had happened and formed a company to act as a nominee purchaser (Artist Court) to exercise rights under the 1987 Act. K and his associated company then ar-ranged for the freehold title to be transferred back to him for a nil consideration, again without serving s5 notices. The leaseholders claimed that their rights arose from events which, they argued, were broadly comprised in the following stages.

(1) There was a contract, transfer and deed of trust to K Ltd which had triggered their pre-emption rights under the Act. The consequences of these documents meant that following the transfer to K Ltd of the whole beneficial and legal interest of K, there had then been a “relevant disposal” within the Act by virtue of the Trust Deed which had provided that the property was then held on trust for K.

(2) There had then been a transfer back from K Ltd to K for no consideration (the second transfer).

The tenants claimed that they had the right to a transfer of the freehold from K under the provisions of the 1987 Act. At first instance the Central London County Court directed that the free-hold be transferred to the leaseholders’ company for a nil consideration. K appealed to the High Court.

Decision

The High Court allowed the appeal.

Stage (1) above

In principle, a trust deed could amount to a relevant disposal within the Act (see section 4(1) of the Act). However, this was not the case here on the facts. On this occasion the transfer, contract and trust deed should be read together.

The Court held that K had produced a deed of trust, which pre-dated the first transfer from him to his company by several days, by which the company declared that it held the beneficial in-terest in the property for him. This deed of trust purported to be supplemental to the contract for sale from K to the company. The contract also provided that the beneficial interest would remain vested in K. Reading the documents together, the correct analysis was that K Ltd did not "dispose" of any estate or interest in the property back to K for the purposes of the Act by virtue of the Deed of Trust. All that happened on this occasion was that K Ltd acquired the legal title "impressed with the trust".

Stage (2) above

The transfer from the company back to K was not a "relevant disposal", being a transfer from a trustee to the beneficial owner upon the discharge of the trustee as this was within the exception in section 4(2)(g) (see above), and so the tenants had no rights in relation to it. Henderson J said:

    "It would be very strange if the transfer of the legal estate in property held on trust to a beneficiary who is absolutely entitled were to trigger a right in the qualifying tenants to acquire the property for nil consideration ... The grounds upon which I have now ruled are sufficient to dispose of the present appeal in [K’s] favour. Artist Court's claim de-pends on establishing that the Second Transfer was a relevant disposal of the Property, either alone or as the second stage of a disposal which began with a transfer of the beneficial inter-est in the Property by the Trust Deed. The first of these possibilities is eliminated by my ruling on the construction of section 4(2)(g) [the provision that excludes from being a ‘relevant dis-posal’ a transfer from a trustee to the beneficial owner on the discharge of the trustee]. The second is eliminated by my ruling that the Trust Deed never effected a separate disposal by SGR of the beneficial interest in the Property. Accordingly, [K] was not a purchaser of the Prop-erty from [K Ltd] within the meaning of the Act, the purchase notice served upon him was inva-lid, and he was not in breach of his obligations under the Act."

Comment

Ignoring the three shop leases granted by K (and nobody suggested there is anything wrong with them having been granted despite the lack of s5 notices!), there are 4 disposals in this case which could cause a problem, namely (1) the trust deed (2) exchange of contracts (3) first transfer (4) second transfer.

The trust deed stated that K Ltd would hold the property on trust for K, when it was transferred to the company. It was expressed to be supplemental to the contract, although it pre-dates it. So the combined effect of the trust deed and the contract was that there was no disposal of the beneficial interest from K to K Ltd, because it was holding on trust for K throughout (and the contract confirmed that there was no transfer of the beneficial interest). The first transfer (when registered) transferred the legal interest from K to K Ltd. ‎It was held that it did not transfer the beneficial interest because by virtue of the trust deed that remained with K. It was alternatively argued in the case that both the legal and beneficial interest went across to K Ltd, which then transferred the beneficial interest back to K under the trust deed. Henderson J. preferred the former argument, and that would seem right.

But what about the transfer of the legal title? Surely the first transfer must cause that? ‎Para-graph 58 of the judgment suggests that Henderson J agrees, but obviously it was not relevant to the proceedings. Should a similar situation arise in another case, it may be possible to argue that the first transfer might not have been a relevant disposal by virtue of s4(2)(g), because the combined effect of the trust deed and the first transfer is simply to transfer land held on trust on the appointment of a new trustee, namely K Ltd.

The second transfer (when registered) transferred the legal interest from the company to K. But s4(2)(g) excludes from being a relevant disposal a disposal in connection with the discharge of any trustee. The trust is ended by the second transfer as both legal and beneficial interests are again held by K. So the company as trustee is discharged and the transfer of the legal interest is not a relevant disposal.

 

Defects in notice

Failure to state address

M25 Group Ltd v Tudor

[2003] EWCA Civ 1760

Right of first refusal under Part 1 of the Landlord and Tenant Act 1987. The tenants served a notice on the purchaser, pursuant to s 11A of the Landlord and Tenant Act 1987 requesting information but in breach of s54 did not state their addresses on the notice. Held: The omission was not fatal and did not invalidate the notice.

 

Rectification and right of first refusal

Swainland Builders Ltd v Freehold Properties Ltd

[2002] EWCA Civ 560

The freehold of a block of flats was sold subject to an agreement for grant back of long leases in respect of all the flats. Appropriate notices were served on the tenants under s5 of the Landlord and Tenant Act 1987. By mistake long leases were not granted in respect of two of the flats and the vendor sued for rectification. The purchaser argued that an order for rectification would breach s10A of the Act because of the failure to serve further notices under ss5, 5D and 5E. The argument failed. Rectification would simply put in place the mechanism for giving effect to the parties intentions.

 

Service of documents

Savva v Galway-Cooper

[2005] EWCA Civ 1068

This was a claim in which tenants were seeking to enforce a purchase notice served upon the landlord under s12 of the Landlord and Tenant Act 1987. Under s11(2)(b) the tenants had to show that documents, indicating that the original disposal of the leases had taken place, had been served on the requisite majority of qualifying tenants within a three-month time limit of service of their purchase notice. The landlord argued that service of the documents indicating the original disposal had taken place more than three months prior to service of the purchase notice; so that the tenants claim was out of time. In respect of one flat a letter had been sent by the tenants solicitor to the tenant. In the case of another flat there was evidence that the tenants solicitor, following the acquisition of the lease in 1996, had sought and obtained office copy entries from the Land Registry in which the disposal was mentioned in a schedule.

The trial judge held that service had taken place. He held that the word "served" under the 1987 Act had no special connotation. It did not matter where the documents came from, or when; nor whether they were received by the tenants individually or collectively. In effect, he said "served" simply meant "received". It was enough therefore if each of the tenants making up the requisite majority had at some received a document or documents "indicating" that the transfer had taken place.

On appeal it was held that the judge was wrong in his interpretation of the word "service" in s.11(2). Service is a formal step and none of the steps taken in respect of the flats could be said to be service. Thus, notice had not been served to the majority of qualifying tenants and the tenants did not fall foul of the three month time limit from that step.

    "Service of documents under 11(2) is intended to provide a defined and workable trigger point for the running of time against the tenants for something they are to do collectively. To achieve this, one would expect the documents to be provided in a manner and form which would fairly alert a reasonably informed tenant to their significance." (Carnwarth LJ at para 17)

Back to top

Copyright © Property Law UK