Part 1 of the Landlord and Tenant Act 1987 (the “Act”) imposes on the landlord of residential tenants (including tenants in a mixed use building), who intend to make a relevant disposal of their freehold or head lease interest, an obligation to first offer the relevant disposal to the tenants of the residential flats before that interest can be disposed of in the open market. Failure to comply with the requirements of the Act could result in a criminal offence being committed.

In the case of Artist Court Collective Limited v Khan [2016], Mr Khan was the immediate landlord of the tenants in a building consisting of 8 residential flats and 3 commercial units on the ground floor (the “Property”). Mr Khan entered into a trust deed with SGR Properties (UK) Limited (“SGR”), a company controlled by Mr Khan, in which it was agreed that the freehold of the Property would be transferred to SGR who would hold it on trust for Mr Khan. Mr Khan then transferred his freehold interest in the Property to SGR for consideration of £225,000 (the “First Disposal”). The tenants of the Property felt aggrieved that Mr Khan did not give effect to their right of first refusal under the Act. They exercised their right of pre-emption under the Act and served a purchase notice requiring SGR to transfer the freehold of the Property to Artist Court Collective Limited, a company incorporated by a majority of the tenants, on the same terms; that is, for £225,000. Mr Khan, allegedly in an attempt to stop the litigation and to satisfy the tenants, then arranged for the freehold title to be transferred back from SGR to Mr Khan for no consideration (the “Second Disposal”). The majority of the tenants then sent a further purchase notice requiring Mr Khan to transfer the freehold to Artist Court Collective Limited on the same terms; that is, for no consideration.

In the first instance, the County Court accepted the arguments put forward on behalf of the majority of the tenants. There had been two relevant disposals under the Act and Mr Khan was in breach of his statutory obligations by failing to give effect to the tenant’s first right of refusal. The judge ordered that the majority of the tenants were entitled to acquire the freehold on the same terms as the Second Disposal, for no consideration.

On appeal, the judge held that as a result of the First Disposal, all SGR had acquired was the legal title to the Property subject to the trust and therefore there was no relevant disposal. The judge accepted the landlord’s case that the Second Disposal (being the transfer of the freehold from SGR to Mr Khan) was made in order to bring the trust to an end and therefore it fell within one of the exceptions under the Act.

Although the landlord was ultimately successful, this case is a reminder to landlords of residential tenants (including tenants in a mixed use building) of the strict requirements under the Act and the potentially draconian consequences of failing to give effect to the tenant’s first right of refusal. Not only could this result in a criminal offence having been committed but the majority of the tenants could also be entitled to acquire the landlord’s interest on the same terms from a third party purchaser. In certain circumstances, there may be options available to a landlord to manage the application of the Act and these should be considered at the outset of a scheme.