SGL 1 Ltd v FSV Freeholders Ltd and others

Landlord and tenant – Leasehold enfranchisement – Right to acquire freehold – Landlord proposing to sell freehold interest in four blocks of flats – Landlord serving two offer notices on qualifying tenants – Claimant purchaser seeking declaratory relief that notices valid – Whether blocks forming one, two, or more “buildings” for purposes of Part 1 of Landlord and Tenant Act 1987 – Whether notices served on qualifying tenants valid – Claim dismissed A company in administration owned Fox Street Village, a residential development in Everton, to the north of Liverpool city centre, comprising five blocks. Its administrators wished to dispose of the freehold. Section 5 of the Landlord and Tenant Act 1987 Act gave qualifying tenants the right of first refusal and required the landlord to serve notices on relevant tenants. Under section 5(3), if the proposed disposal involved more than one building, the landlord had to deal with each building separately. One block did not fall within the pre-emption rights and the other four blocks formed two buildings. Accordingly, two sets of notices were served. No acceptance notices were served and the entire property was sold to the claimant for £1.6m. The qualifying tenants said they were unaware of the sale and the first defendant was incorporated for the purposes of acquiring the freehold. The claimant sought to counter allegations by the defendants that, in selling the freehold, the joint administrators had failed to comply with the requirements of section 5 of the 1987 Act. The High Court set aside the decision of a district judge that section 5 had been satisfied: [2022] EWHC 3336 (Ch); [2023] L&TR 18. The judge gave directions for the trial of the issues: (i) whether the blocks formed one, two, or more “buildings” within Part I of the 1987 Act; and (ii) whether the notices served on the qualifying tenants pursuant to section 5 or 5A of the 1987 Act were valid. Held: The claim was dismissed. (1) Where a transaction involving the disposal of an estate or interest in more than one “building” was proposed, the landlord had to sever the transaction so as to deal with each building separately, with each offer notice dealing with a maximum of one building and one transaction. An offer notice was rendered invalid if it dealt with a transaction that involved more than one building. However, it was not intended to require integrated developments, with appurtenant premises in common use, to be split into inappropriate and unwieldy parts in order to satisfy the requirements of section 5(3). The term “building” in the 1987 Act could therefore include more than one structure in some limited circumstances. Qualifying flats in one or more structures, which had appurtenant premises, within the meaning of section 4(4) of the Act, in common use, were to be regarded as one “building” for the purpose of the severed transaction contemplated by section 5(3). (2) As a matter of pure construction, an offer notice was rendered invalid by the clear words of section 5(3) if it dealt with a transaction encompassing more than one building. However, one had to have regard to the purpose of the legislation. This was to give tenants the right to acquire their landlord’s reversion. In order to achieve that object, the legislature had to be taken to have intended to create a workable procedure. Section 5(3) was intended to prevent landlords amalgamating separate structures or buildings into the same transaction so as to hinder qualifying tenants in achieving the necessary majority to enable them to purchase the freehold. It was not, however, intended to require integrated developments to be split into inappropriate and unwieldy sections. Parliament could not be taken to have intended that common yards, gardens and other appurtenant areas should have to be split into one (or even several parts) in order to satisfy section 5(3): Long Acre Securities Ltd v Karet [2004] EWHC 442 (Ch); [2004] 2 EGLR 121 applied. The 1987 Act could only make sense, if the word “building” was construed to mean either a single building or one or more buildings, where the occupants of the qualifying flats in each of those buildings shared the use of the same appurtenant premises. (3) Determining whether more than one structure constituted a single “building” for the purposes of the tenants’ right of first refusal under Part 1 of the 1987 Act involved weighing and balancing a number of competing factors: plans of the structures, underlying structural support for the structures, lessees’ rights to use appurtenant premises, connections at any levels, the dates of construction of the structures, how the structures were managed (ie, whether together or separately), how the service charge was operated and visual impressions: see Radevsky & Clark: Tenants’ Rights of First Refusal, paragraph 2.9.  However, the evidence in this case demonstrated the potential relevance of at least five further factors, namely: the means of access to the structures and any appurtenant premises, how the structures were serviced, the sharing of common facilities and amenities, the planning history of the structures, any enforcement action taken in relation to planning requirements and conditions and the requirements of housing legislation, and building and other applicable regulations and the measures considered necessary to enforce compliance with them. (4) Those were not intended to constitute an exhaustive list of the potentially relevant factors and some of them might overlap. Particular individual factors might point in different directions. All of them would require weighing in the balance in what was essentially a multi-factorial evaluation exercise. However, in any individual case, a particular factor or factors might exert a magnetic attraction in favour of a certain conclusion. There was no reason why the court should not afford equal weight to the rights of particular individual leaseholders to access, and make use of, appurtenant premises in the form of individual car parking spaces that had been demised to them. When that factor was added in with all the other factors that pointed to the existence of a single “building”, within the meaning, and for the purposes, of Part 1 of the 1987 Act, it outweighed all countervailing factors and considerations.     Therefore, in the present case, all four of the blocks constituted a single building, within the meaning, and for the purposes, of Part 1 of the 1987 Act. In consequence, the section 5 offer notices served by the joint administrators of the freeholder on the qualifying tenants were not valid notices. The claim for declaratory relief therefore fell to be dismissed. Philip Byrne (instructed by MSB Solicitors Ltd, of Liverpool) appeared for the claimant; Farhan Asghar (instructed by Direct Access) appeared for the defendant. Eileen O’Grady, barrister Click here to read a transcript of SGL 1 Ltd v FSV Freeholders Ltd and others