It is well known that the Landlord and Tenant Act 1987 - legislation relating to tenants' right of first refusal - is badly drafted, but developers need to be aware of a lesser known defect affecting flats schemes.
The Act imposes an obligation on a landlord to notify any qualifying tenants when the landlord intends to sell the building containing their flats, in order to give the tenants the right of first refusal. This affects all immediate landlords of qualifying tenants and requires a section 5 notice procedure to be followed.
A qualifying tenant for the purposes of the Act is the tenant of a flat under a tenancy which is not a protected shorthold tenancy, a commercial business tenancy, a tenancy terminable on the ending of the tenant's employment, an assured tenancy or an assured agricultural occupancy. A person is not a qualifying tenant if he owns three or more flats in the same building.
In a new development, it is not uncommon for a landlord to want to transfer the reversion in the block of flats to a residents' management company specifically set up for that purpose. If a contract is put in place between the landlord and the residents' management company before 50% of the flats have exchanged, this will override the need to serve section 5 offer notices on the qualifying tenants.
However, if no contract is in place before this date, then technically under the 1987 Act, section 5 offer notices will need to be served on the qualifying tenants.
Thankfully, this set of circumstances does not arise often, but when it does it places the landlord in a difficult situation. If he fails to serve notices on the tenants he puts himself at risk of a breach of the Act, which could result in a criminal liability. If the landlord does serve notices and these are taken up by the requisite majority but not all of the tenants, then the reversion will be transferred to a much smaller group of tenants.
This situation will undoubtedly result in the landlord being forced to balance the risks of breaching the Act or complying with the Act in a manner that may result in an unsatisfactory outcome. The commercial solution may be to serve notices to comply with the Act, but also send separate letters explaining that if the tenants want the reversion to be transferred to their management company, they should not respond to the notices.