Rights Of First Refusal Part 1

By Author: Neil parmer
Total Articles: 7
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A right of first refusal is the shorthand term for the right available to tenants under Part 1 of the Landlord and Tenant Act 1987 ("the Act"). This "confers on tenants of flats, rights with respect to the acquisition by them of their landlord's reversion", essentially giving qualifying tenants’ rights of first refusal on disposals by their landlord. The facts of a recent case colourfully illustrate the workings of the Act.
Artist Court
In Artist Court Collective Ltd v Khan L2015] PLSCS 313, the tenants were five out of eight long leaseholders in a block with three shops beneath. On 9 August 2011, Khan, the landlord, contracted to transfer the freehold to SGR Properties (UK) Ltd ("SGR"), referred to as his "investment vehicle". Khan became a majority shareholder and SGR the new landlord.
The contract stated that SGR "would acquire the freehold at a nominal sum of X225,000 but the sale price will not include the three shops" and that "the rental income from the shops would be given to [Khan) by [SGR]': A year later, on discovering that the property had been transferred to SGR, the tenants served a request ...
... for information (eliciting a denial that there was a deed of trust) and then served a purchase notice on 15 December 2013.
SGR did not comply, and the tenants started proceedings against it which revealed that SGR had transferred the property back to Than on 19 April 2013 for nil consideration. This was found
to have been done in order to "stop" the proceedings. The tenants had to restart the
statutory process, this time against Khan. For the first time, then produced a deed of trust (pre-dating the first transfer from Than to SGR) by which SGR
declared it held the beneficial interest in the property for Khan.
After a trial, then was ordered to transfer the freehold to the tenants for nil consideration.
Disposals
Relevant disposal is a "disposal by the landlord of any estate or interest (whether legal or equitable)" (section 4(1)) but excludes: (a) the grant of a tenancy to a single flat; or (b) disposals defined in section 4(2) - for example, a disposal pursuant to a matrimonial adjustment order (section 4(2)(c)(i)). In Artist Court, then effected a "disposal" on transferring the freehold to SGR. Applying Lord Browne-Wilkinson's dictum in Westdeutsche Landesbank Girozentrale v Islington LBC C1996j AC 669, this was analyzed as a transfer of the whole legal and beneficial interest, which, by virtue of the declaration of trust, was then followed immediately by a further "disposal" of the equitable interest by SGR to Khan. When SGR later transferred the freehold back to Khan, there was a "disposal" of the legal title.
The judge rejected an argument that it was exempt disposal under section 4(2)(g) ("disposal... made in connection with... the discharge of any trustee") because the property had to be held on -trust both before and after the transfer. Also, this subsection only applied where a trustee was discharged from a continuing trust pursuant to the Trustee Act 1925 section 36 or section 39.

Landlord, tenants and premises
The landlord is usually "the immediate landlord of the qualifying tenants" or (less frequently) the superior landlord if the immediate landlord has a term of fewer than seven years or whose interest is terminable within seven years (sections 2(1) and (2)).
Part 1 of the Act applies to those
premises which consist of the whole or part of a building, containing at least two flats held by qualifying tenants and where those tenants hold at least 50% of the flats in the building (section 1(2)) but not if more than 50% of the internal floor area excluding common parts is occupied for non-residential purposes (section 1(3)).
A qualifying tenant, subject to exceptions, is a tenant of a flat other than a protected shorthold, service, business and assured tenancies (section 3(2)). The requisite majority is 50% of these tenants, each flat having one vote (section 18A).

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