Health Warning for Sellers of a Building of Flats – Hidden 1987 Act Issue

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You should read this if you are selling a residential building made up of more than one flat.

The 20-second summary

Occupational interests which appear to be ASTs may actually be common law tenancies, which are ‘qualifying tenants’ under the Landlord and Tenant Act 1987, and so a landlord may be prohibited from selling unless it follows the relevant statutory procedure.

Overview

Occupational interests which appear to be assured shorthold tenancies (ASTs) may actually be common law tenancies, which are ‘qualifying tenants’ under the Landlord and Tenant Act 1987, and so a landlord may be prohibited from selling.

If the proposed disposal of the property is caught by the provisions of the 87 Act, failure to adhere to its procedure is a criminal offence, punishable by a fine.

87 Act

Under the 87 Act, qualifying tenants have a right of first refusal where a landlord seeks to dispose of whole or part of premises comprising a number of flats. The disposal is prohibited unless the landlord has served a statutory offer notice on all of the ‘qualifying tenants’, giving them the opportunity to buy the premises.

A tenant under an assured tenancy, including an AST, is not a ‘qualifying tenant’ for the purposes of the 87 Act.

So, when a building made up of a number of flats is being sold, and the majority of the occupational interests are ASTs, the 87 Act will not apply. However, sellers should be paying close attention to the precise nature of the occupational interests in the building being sold because tenancies that purport to be ASTs may not always be ASTs. If they are not, the 87 Act may bite, and there is a risk of criminal sanctions.

AST Or Not AST?

There are several situations where an occupational interest, documented by what is referred to on its face as an AST, is in fact void.

Relevant examples of void ASTs, which could pose problems for sellers, are where:

  • the residents do not occupy the premises as their only or principal home (as required by section 1(1) Housing Act 1988), or
  • the properties are ‘high value properties’ (rent is more than £100,000 per annum) and therefore not capable of being assured tenancies (paragraph 2A, Schedule 1, Housing Act 1988).

Where ASTs are void, two important questions should be asked:

1.            What is the status of the occupier?

2.            Does the 1987 Act apply?

Status of Occupier

The status of the occupier depends on whether the common law or the rules of equity apply.

Where an agreement is capable of being specifically enforced, equity is available, and that will prevail over a legal interest created under the common law. Specific performance is available where the void lease is a valid contract at law; and the essential terms are agreed between the parties.

So, if the purported (void) ASTs referred to above are not capable of specific performance, the common law applies, and the residents occupy as periodic tenants. That means that the 87 Act may apply, and one must analyse whether the right of first refusal is triggered.

87 Act Questions

For a proposed disposal to be caught by the LTA 1987, the following four questions need to be asked and if any of them can be answered in the negative, the landlord will not be obliged to comply with LTA 1987 when carrying out its proposed transaction:

1.            Does the 87 Act apply to the premises?

2.            Is the landlord a landlord for the purposes of 87 Act?

3.            Are there sufficient qualifying tenants?

4.            Is the proposed transaction a “relevant disposal”?

Key messages

Be wary of all purported ASTs, double check their validity, check for the other 87 Act qualifying criteria.

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