You may have received a notice from your landlord headed with the words “Section 5 Notice” or you may be a landlord wanting to dispose of your freehold interest.

Serving a section 5 notice is an obligation of a landlord under the Landlord and Tenant Act 1987 (‘the 1987 Act’) in order to offer the freehold to the tenants before selling it to a third party. The notice triggers a period in which tenants can accept a landlord’s offer and restricts a landlord in further dealing with the freehold.

The tenant, premises and flat must qualify.

Generally, a tenant is a qualifying tenant if they are a tenant of a flat on a tenancy (but business, employee and assured tenancies do not apply and a qualifying tenant of 3 or more flats will be excluded).

The premises should qualify if:

• they consist of the whole or part of a building (the 1987 Act does not define ‘building’ and this is the subject of ongoing case law); and
• they contain two or more flats held by qualifying tenants; and
• 
the total number of flats held by those tenants must exceed 50% of the total number of flats contained in the premises.

Lastly, a flat is defined as a separate set of premises which:

• forms part of the building; and
• is divided horizontally from some other part of that building; and
• 
is constructed or adapted for use for the purposes of a dwelling.

It is important to note that if the internal floor area of the non-residential parts exceeds 50% of the whole premises (excluding the common parts) then the premises will be excluded from the right of first refusal.

Depending on the type of section 5 notice served, landlords may be required to stipulate the premium for the freehold. Tenants will not necessarily have to pay their landlord’s legal and survey costs but we find that this is often a condition of the section 5 notice. It is worth bearing in mind that the tenants’ right is a right of pre-emption. The right arises from a landlord’s proposal to dispose of property rather than a right to buy at the tenants’ option. It follows directly from this that, until a landlord has entered into a binding contract with the tenants, the landlord cannot be compelled to proceed with the disposal.

Please note that the creation or transfer of an estate or interest in premises or their common parts generally will necessitate serving a section 5 notice and so it is not just limited to the sale of freeholds.

If you have received a section 5 notice, please contact us without delay. The 1987 Act has a prescribed timeframe and time is very much of the essence.