Tenants First – Or Else

When the landlord of a residential building wishes to sell it (make a ‘relevant disposal’) with the associated tenancies left intact, it has a legal duty under the Landlord and Tenant Act 1987 to offer it to the tenants first.

Many landlords might be unaware of this, but the consequences of failing to comply with the duty can be severe, as a recent case shows. The property concerned had eight tenanted flats and three commercial lets. The owner of the property transferred it to a limited company without first offering it to the tenants.

When the tenants found out about the transfer, they invoked a legal procedure to exercise a right of pre-emption over the property, claiming the right to purchase it in the name of a property management company formed by a majority of the tenants for the purpose of buying the freehold.

The value put on the property when it was transferred to the landlord’s company was £225,000 and, in an attempt to frustrate the tenants’ claims, he transferred the property back to himself for no consideration. The tenants then claimed pre-emption over that transfer – alleging that the transfer of the property to them should take place at nil value.

The County Court accepted that both transfers were relevant disposals and that the landlord had breached his statutory duty to the tenants on each occasion as both of the transfers were in breach of his obligations under the Act. It ordered the landlord to transfer the property to the tenants for no consideration.

Unsurprisingly, the landlord appealed. The High Court took a slightly different view, ruling that the first transfer was a transfer of the title of the property – effectively in trust for the tenants. The second transfer therefore only restored the original position and was therefore exempt as the Act is worded.

Whatever the landlord’s purpose was for making the original transfer, it was ultimately frustrated and he ended up incurring the legal costs associated with fighting two court cases in order to retain his property. It is far better to take legal advice before undertaking any property transaction than to risk the consequences of making an error such as this.