If it looks like a lemon, smells like a lemon, and tastes like a lemon, it’s a lemon, yes? What about a building?
The High Court in SGL 1 Limited v FSV Freeholds Limited & Others [2005] had to decide if a building in its conventional sense was a building, and whether several separate blocks of flats should be treated as a building. Let me explain….
Section 5 of the Landlord and Tenant Act 1987 (the Act)
Section 5 of the Landlord and Tenant Act 1987 (the Act) imposes an obligation on certain freehold owners of buildings to first offer those buildings for sale to the leaseholders, should they wish to sell them. It is known as the right of first refusal. There are a few transactions which would be exempt and specific criteria for qualifying tenants, which I won’t expand upon in this article.
In this case, the administrators for the freeholder, whom I shall refer to as FSV, were looking to dispose FSV’s freehold title to property known as Blocks A to E, Fox Street Village, Liverpool.
The property comprises five blocks of residential accommodation. Section 5 Notices were served on behalf of FSV on the qualifying tenants in blocks A, B, C and E on 11 February 2020, specifying 27 April 2020 as the date by which the tenants were required to give notice of acceptance of the offer to sell to them.
Once the Notice has been served, Section 6 of the Act prohibits a landlord disposing of its interest in the premises to anyone other than the qualifying tenants or their nominated purchaser, during the notice period. After expiry of the notice period (assuming the offer is not accepted within the period), Section 7 of the Act prohibits the freeholder from disposing of their interest within a period of 12 months for any less amount than the sale price specified in the Section 5 Notice.
In this case, one set of Notices was served in respect of Block A, offering to sell the freehold for £350,000. Another set was served for Blocks B, C and E together, offering to sell the combined freeholds of those 3 blocks for £1,050,000. Section 5 did not apply to Block D, and it was sold to a company known as SGL1 for £200,000.
The issue which came before the Court to determine was whether Blocks A, B, C and E form one, two or more ‘buildings’ within the meaning of the Act, and therefore whether the approach taken in issuing two sets of notices across the 4 blocks constituted valid notice under the Act.
Section 5(3) stipulates that “where a landlord proposes to effect a transaction involving the disposal of an estate or interest in more than one building (whether or not involving the same estate or interest), he shall, for the purpose of complying with this section, sever the transaction so as to deal with each building separately”. However, rather unhelpfully, the term ‘building’ is not defined in the Act.
In the earlier 2004 case of Long Acre Securities Limited v Karet, the Judge held that where a transaction involving the disposal of an estate or interest in more than one building was proposed, the landlord must sever the transaction to deal with each building separately, with each offer notice dealing with a maximum of one building and one transaction. An offer notice would therefore be held to be invalid if it dealt with a transaction involving more than one building. However, the Judge went on to say that in relation to an integrated development site, a single notice contemplating a single transaction in relation to the whole estate, was the appropriate approach. Thereby finding that a building could include more than one structure in some circumstances.
There have been differences in opinion amongst lawyers regarding this interpretation and treatment of a building in the Long Acre Judgment. For example, the unintended consequences where individual blocks are precluded self-determination by reason of the grouping together of several blocks in a much bigger and therefore more expensive transaction.
Where there is more than one block of flats there can often be shared communal spaces and roadways which makes it difficult to separate the extent of each block in a meaningful sense and by reference to a plan.
In this case, the evidence adduced was that Block A is self-contained and could have been sold separately to the other blocks. By comparison, Blocks B and C are inter-connected and Blocks B, C and E share services and plant. The argument advanced before the Court was that because of the multi-faceted and multi-layered common facilities, Blocks B, C and E should be found to constitute a building under the Act.
The submissions on behalf of the Defendant were that one single Section 5 Notice should have been served for all four Blocks A, B, C and E because of their shared rights across the site, and accordingly the Section 5 Notices which had been served should be held to be invalid. Alternatively, the Defendant contended that three separate Notices for Block A, Block B and a Notice for Blocks C and E combined should have been served.
In weighing up his decision, the Judge referred to the following as being factors (non-exhaustive) to consider when assessing what constitutes a building for the purpose of the Act, and in the circumstances of more than one structure across the site:
- How the structures are managed;
- How the service charge is operated;
- Visual impressions and plans;
- The sharing of common facilities and amenities;
- How the structures are serviced;
- Dates of construction of the structures;
- Planning history;
- Means of access and any appurtenant premises, etc.
On the particular facts of this site, the Judge concluded that all four Blocks A, B, C and E constituted a single building within the meaning of the Act and consequently, the two Section 5 Notices which has been served were not valid notices.
It remains to be seen whether this decision will be the subject of an application for permission to appeal. However, as a practitioner who advises on rights of first refusal, and the preparation of Section 5 Notices, I expect further litigation on what constitutes a building to arise. Each case will be judged on its own facts and applying the list of factors to take into consideration, there would appear to be scope for inconsistency in approach when judging a building where a wider site is involved, and how many notices to serve.
If you are a freeholder wishing to dispose of a site and need legal advice on Section 5, or alternatively, you are a tenant who has received a Section 5 Notice, please contact me on 01392 401176 or H.Williams@stephens-scown.co.uk or visit the Property Litigation team page.