Part 1 of the Landlord and Tenant Act 1987 ("the Act") obliges landlords of some residential and mixed use properties to offer certain interests to the residential tenants before disposing of them to a third party. Famously described as "ill drafted, complicated and confused," this Act is also renowned for its sanctions. A disposal in breach of the Act is a criminal offence. Furthermore, it entitles the tenants to undo the relevant transaction and have the interest transferred to them at the same price. Two cases from the last few years demonstrate the further unpalatable consequences of failure to comply.
The very recent case of Artist Court Collective Limited v Khan  PLSCS 313 involved a mixed use building in East London; 3 commercial units on the ground floor, with 8 residential flats above let on long leases. In 2011, the freeholder, Mr Khan, transferred his interest to a recently incorporated company (within his control) for £225,000. This disposal occurred without an offer being made to the residential tenants, in contravention of the Act. Indeed the tenants did not become aware of this transfer until the middle of the following year, when the opening of a fish and chip shop in one of the commercial units prompted them to look into their rights as tenants.
Having discovered the breach, the majority of the flat tenants formed a company and served a purchase notice on the freeholder, under section 12B of the Act, requiring the freehold to be transferred to them at the same price. On receipt of this notice, Mr Khan sought to rectify the position and close off the litigation. However, in fact he did the opposite - by transferring the freehold from the name of the company back into his sole name, for no consideration, he breached the Act for a second time. As a result, the county court held that the tenants were entitled to purchase the freehold on the same terms as the second transfer - for no consideration. Mr Khan lost an asset worth (by the time of the trial) in excess of £225,000 - for nothing.
Despite initially similar circumstances, the case of Green v Westleigh Properties Limited  EWHC 1474 (QB) is a good example of the lengths to which courts may go to protect tenants affected by the Act. Mr Green was one of two residential tenants of a property in Southend. In 1992, his then landlord - Broadway (Essex) Limited - transferred its freehold interest in this property to Marcus and Baum Limited (now known as Westleigh Properties Limited) for £500. Mr Green did not become aware of this transfer until 2002 and, in 2004, he made a claim for the freehold as part of proceedings taken against him by the Landlord for non payment of sums due under the lease. The county court judge gave Mr Green 3 months in which to serve a formal purchase notice under the Act.
Mr Green claimed in later proceedings that notice had been served in a letter sent to Westleigh by Mr Green's solicitors on 10 June 2005 - which was incorrectly dated 10 June 2004, referred to 'Section 12A of the Housing Act 1987', failed to identify the qualifying tenants and, perhaps most importantly, omitted to mention that it required the transfer of the freehold. Despite these many and significant errors, the High Court judge held that, considering the context it was served, it would have been clear to a reasonable recipient that the tenants were giving notice to have the freehold transferred to them. Therefore the tenants were able to acquire the freehold for £500, 16 years after the disposal in breach.
Both of these cases amply illustrate the dire consequences that can flow from a disposal in breach of the Act and provide a salutary lesson to landlords of residential and mixed use properties.
It is important to remember too that the Act does not only apply to the transfer of a freehold. A wide range of disposals are caught, including, for example, the grant of an option, or the disposal of some airspace next to the building. Similarly, tenants do not have to hold long leases to qualify for an offer notice; short term company tenants and Rent Act tenants also qualify. Whether the draftsmen of the Act intended these far reaching effects we will never know but, bearing in mind the sanctions for non-compliance, it is often best to tread with caution.