Landlord and Tenant Act 1987 – Sale by Auction
Please note that Landlord and Tenant act law is a complex subject and you should not rely on this article without professional advice on the facts of your case
The flat owner’s right of first refusal – Landlord and Tenant Act 1987
Selling freehold reversions at auction
Many freehold owners of blocks of flats and the flat owners in them do not appreciate that if the freehold is to be sold in many cases the freeholder must give the flat owners a right of first refusal. Only if the flat owners do not take up the offer can the freeholder then sell the property to a third party. The right is in the Landlord and Tenant Act 1987. It is a collective right which needs to be taken up by at least 50% of the qualifying flats. The right is to enable flat owners to buy the freehold at the same price and on the same terms offered to a third party buyer.
There are various other qualifying criteria and some exceptions which I do not propose to go into here. However, whenever a freehold owner is selling a property which includes flats which have been sold on long leases, they should check to see whether the 1987 Act applies. Similarly, the buyer of such a property. Failure to comply with the Act is a criminal offence and if a sale takes place in breach of the requirements the flat owners have a right to force the buyer to transfer the freehold to them. It should be noted that there is a procedure and timetable to be followed and if the flat owners, acting collectively, do not carry out any of the required steps within the relevant time limits then the right of first refusal is lost in respect of that offer and the freeholder is to sell the property to a third party on the same terms.
The Act can operate in unexpected ways for example it can catch the sale of a common part in a building or the grant of a long lease of all or part of the building other than the sale of a single flat.
A particular situation where transactions are often caught is where a freehold owner proposes to sell a ground rent reversion at auction. The procedure here is started by what is known as a section 5B notice which has to be served on all flat owners of the building by or on behalf of the freeholder. It is important both from the point of view of the solicitor for the selling freeholder and for the auctioneer that a check be made to see whether the Act applies and if it does to make sure that the correct procedure is followed. In theory any professional agent involved could be liable to prosecution as aiding and abetting and may also be subject to criticism and/or claim.
An interesting question was put to me recently when I was asked to advise on the consequences of including the wrong auction details in a section 5B notice or including auction details which were later to be changed. There is no need to give the name of the auctioneers and the time, place and date of the auction in the section 5B notice but if these are not given, and the tenants serve what is called an acceptance notice, then those details must be given to the relevant flat owners at least 28 days before the date of the auction. I thought that it might be helpful to share my advice.
- A section 5B notice has been served on all three lessees in the building of which the freehold is to be sold. The form of notice served specifies that the auction is to be by [ A auctioneers ] at [B address] on [C date] whereas it is intended to offer the property by [X auctioneers at Y address on Z date].
- The requisite majority of tenants have not served an acceptance notice and the time for doing so either has expired or is about to expire. I am assuming that the s5B notices were correctly served and that an acceptance notice has not been/will not be served in time.
- The requirements for a different notice in the case of sale by auction are in section 5B of the 1987 Act. The section contains mandatory requirements as to what the notice must contain including the principle terms of disposal and details of property and estate disposed of and also that it is to be made by means of a sale at a public auction. The other requirements of the notice are not material to the point. There is a requirement that unless the time and place and name of the auctioneers is stated in the notice the landlord shall within 28 days before the date of the auction serve on the requisite majority of qualifying tenants of the constituent flats a further notice stating those particulars.
- Section 7 of the 1987 Act, in summary, states that where a landlord is served an offer notice and no acceptance notice is served (within the relevant period) the landlord can within 12 months beginning with the end of the acceptance notice period dispose of the interest to a third party but in the case of an offer notice under section 5B the disposal must be made by means of a sale at public auction and the other terms correspond to those specified in the offer notice.
- If the tenants here have not served an acceptance notice then the only issue is whether by including incorrect details of the auction (or those that the seller wishes to change) that would invalidate the section 5B notices. I believe this consequence to be extremely unlikely. There is no mandatory requirement for a section 5B notice to state the auction details. Only that there is to be a sale by public auction. Giving the tenants details of the auction is a purely mechanical function and the Act clearly envisages a situation where the tenants only have to be notified of details of the auction at least 28 days beforehand and on the basis that they have then served an acceptance notice, those details otherwise being irrelevant.
- The auction details are not a term of the disposal and are not anything which should affect the tenants’ decision as to whether or not to serve an acceptance notice. My view is that in providing the wrong details or changing them, the statement concerning the auctioneers and the date and time for the auction should simply be treated as if no such details had been given in the section 5B notice.
- As I have said, the Act does not require a s5B notice to give these particulars and the tenants have suffered no loss or prejudice by virtue of the incorrect details having been given, they not having served an acceptance notice. Had they served an acceptance notice then it would be necessary to remedy the position by giving the correct details at least 28 days beforehand.
- Whilst in my view the tenants have lost the right of first refusal based on the proposed terms, it might be prudent for a letter to be written to them along the lines of “we note that no acceptance notice has been given by a majority of qualifying tenants and therefore [the landlord/our client] is entitled to dispose of the property to a third party by way of public auction and otherwise on the same terms as is set out in the section 5B notice served upon you. Without prejudice to this we would wish to inform you that the auction details are no longer as stated in the section 5B notice and that the auction details are now as follows [state details] etc.”
In conclusion the operation of the Landlord and Tenant Act 199 is a very technical area of law as can be seen from the above and contains a lot of traps for the unwary. Sale by auction is only one method of sale to which it applies. If you are selling the freehold of a building containing flats or a part of it, or if you are an agent instructed in the sale, you need to check if the transaction is caught by the Act.