The Impact of the Landlord and Tenant Act 1987 in the context of Rooftop Development
The Landlord and Tenant Act 1987 requires a landlord, in the event that they decide to sell to their interest on the open market, to offer it to the existing leaseholders before any sale to a third party.
Ownership of the freehold by residential leaseholders can be a good thing, of course. But if the leaseholders do not want to or cannot buy their freehold then this can cause delays in commercial sales.
The existing leaseholders’ right of first refusal applies provided that there are two more residential flats in the landlord’s building held by qualifying leaseholders and, of those flats, that they constitute more than 50% of the flats so contained. However, this obligation does not apply if the total extent of the commercial part of the building is more than 50% of the internal floor area.
The non-residential status of parts of the building might include an intention to convert from residential to non-residential in the future and this may be a way to circumvent the right of first refusal procedure although this would probably take longer than the right of first refusal process as only two months need to expire from receipt of those notices.
There are various exempt landlords but these are unlikely to be private landlords as exemption includes bodies such as housing trusts.
Avoidance techniques include putting a head lease in between the freehold and the leases of the residential long leaseholders but this requires advance planning. It is worth bearing in mind that the permitted development rights for rooftop extensions apply to buildings constructed between 1948 and 2018. Given that any existing residential flats are likely to have already been sold, unless thought was given before the sales of the residential flats to qualifying leaseholders then it is likely that the right of first refusal process will need to be followed as earlier blocks are unlikely to have a head lease in place to take advantage of this loophole.
Other exemptions include disposals by way of a gift to members of the landlord’s family. So, for example, if it is proposed that there is to be a lease of the rooftop and airspace and the reversionary interest is owned by a private individual than that private individual might grant a lease to a family member and that family member might assign it to the proposed developer.
Another loophole is the grant of a rooftop/airspace lease to an associated company of landlord. This is similar to a transfer to a family member before selling on to the third-party. However, both this and the grant of a head lease that require advance contemplation of the sale of the landlord’s interest.
We are aware that sometimes landlords set up associated companies years prior to any sale to satisfy the requirement that the company must have been an associated company of the landlord for a period of two years.
Alternatively, if a company, a landlord might consider selling the shares in the company but this would only work in practice if that company only held that one asset (unless a portfolio sale is intended).
Some might feel that if the tenants accept the offer made by the landlord under the right of first refusal process then does it really matter who they sell to? However, most rooftop and airspace leases (and this is the type of transaction envisaged by this note) would be far too complicated and expensive for the existing leaseholders to consider taking it up. Very few residential leaseholders fancy themselves as developers (although never say never and we saw one instance of this in 2021). Generally speaking and in reality: not many residential leaseholder would want to pay the sort of premium that a developer would pay to the landlord to thwart that development.
If you have any questions on right of first refusal, please contact Meaby & Co at email@example.com or on 020 7703 5034.
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