The Impact of the Landlord and Tenant Act 1987 in the context of Rooftop Development
The increasing popularity of rooftop and airspace developments has brought renewed attention to the provisions of the Landlord and Tenant Act 1987, particularly the statutory right of first refusal granted to qualifying leaseholders.
Under the Act, where a landlord intends to dispose of its interest in a building, it is generally required to offer that interest to qualifying leaseholders before proceeding with a sale to a third party. While leaseholder ownership of a freehold can often be beneficial, the right of first refusal can create additional complexity and delay for landlords seeking to complete commercial transactions, including rooftop development deals.
The right of first refusal applies where a building contains two or more residential flats held by qualifying leaseholders and those flats represent more than 50% of the total number of flats within the building. However, the requirement will not generally arise where the non-residential element of the building exceeds 50% of its internal floor area.
In some circumstances, landlords may seek to rely on the building’s non-residential status to avoid compliance with the statutory process, which typically requires only a two-month notice period and extra costs before a transaction can proceed.
Certain categories of landlord are exempt from the legislation, although these exemptions are generally more relevant to institutional owners, such as housing trusts, than to private landlords.
For landlords considering future airspace development, advance planning can be particularly valuable. One commonly discussed structure involves the grant of a head lease between the freehold owner and the residential long leaseholders. However, this strategy is only effective if implemented before the sale of the residential units and therefore requires considerable foresight. Given that the permitted development regime for rooftop extensions largely applies to older buildings, many qualifying buildings will already have long leaseholders in occupation, making retrospective restructuring difficult. As a result, compliance with the right of first refusal procedure is often unavoidable
The Act also contains a number of exemptions relating to transfers within a landlord’s family. For example, where a private individual owns the reversionary interest, it may be possible to grant a rooftop or airspace lease to a family member who subsequently assigns that interest to a developer.
A similar exemption may arise where a rooftop or airspace lease is granted to a company associated with the landlord. Like family transfers, however, this route requires advance planning. In particular, the company must generally have been associated with the landlord for a minimum period of two years before the transaction takes place. Consequently, some landlords establish associated companies well in advance of any proposed disposal to preserve future flexibility
Where the property is owned through a company, another option may be to sell the shares in that company rather than dispose of the property interest itself. In practice, this approach is most effective where the company owns a single asset, unless the transaction forms part of a wider portfolio sale.
It is sometimes argued that the right of first refusal creates little practical difficulty because leaseholders can simply choose not to accept the landlord’s offer. However, rooftop and airspace transactions are typically complex, highly specialised and involve significant financial investment. In reality, relatively few residential leaseholders have either the appetite or the resources to undertake a development project of this nature. Equally, most are unlikely to be willing to pay the premium that a specialist developer may offer for valuable rooftop development rights.
Landlords contemplating rooftop development should therefore consider the implications of the Landlord and Tenant Act 1987 at an early stage. Careful structuring and forward planning can help minimise delays and maximise the value of development opportunities while ensuring compliance with statutory requirements.
For advice on rights of first refusal and rooftop development structures, please contact Meaby & Co at info@meaby.co.uk or on 020 7703 5034.
