Navigating the challenges of serving Section 5 notices under the Landlord and Tenant Act 1987

The Landlord and Tenant Act 1987 imposes obligations on landlords when they intend to dispose of their interest in a multi-occupied building where qualifying tenants reside. A critical requirement of the Act is the service of a Section 5 notice, which landlords must issue before selling the freehold or superior leasehold interest to a third party, offering tenants the right of first refusal. While this legislative framework is intended to regulate property disposals, commercial landlords frequently encounter challenges when attempting to comply with its requirements.

The purpose and application Section 5 notices

Section 5 of the Act applies to mixed-use and residential buildings where at least 50% of the premises are in residential use, and at least 50% of the tenants qualify under the Act. When a landlord intends to sell their interest, they must first serve a Section 5 notice on the qualifying tenants, offering them the opportunity to purchase the property on the same terms that would be offered to an external party. This process is a legal requirement that landlords must follow to ensure the safeguarding tenants’ interests and ensuring they have a fair chance to acquire ownership.

The form and content of a Section 5 notice vary depending on the nature of the disposal. There are five different types of Section 5 notices (5A to 5E), each corresponding to different methods of disposal, such as a straightforward sale by contract, an auction sale, or the grant of an option. Landlords must ensure they issue the correct notice type to avoid legal repercussions.

Common mistakes commercial landlords make when serving Section 5 notices

Many commercial landlords inadvertently fall foul of the Act by making procedural errors when serving Section 5 notices. A frequent mistake is failing to identify the correct qualifying tenants, which can render the notice invalid. The Act mandates that notices be served on at least 90% of qualifying tenants in the building, making tenant identification crucial for compliance.

Another common pitfall is errors in drafting the notice. The Section 5 notice must include key details such as the price, terms of the disposal, and the response period. Failure to provide clear, precise information can invalidate the notice and cause delays in the sale process. Additionally, landlords sometimes fail to allow tenants the full statutory timeframe to respond. Depending on the type of notice, tenants are typically given a minimum of two months to accept the offer. Cutting this period short can result in non-compliance and potential legal action for landlords.

Landlords also frequently neglect the proper service of notices. The Act specifies how notices must be served, and any deviation, such as failing to send notices to tenants’ last known addresses or not using appropriate delivery methods, can lead to disputes and delays.

Implications of non-compliance with Section 5 requirements

Failing to comply with the requirements of Section 5 can have severe consequences for landlords. If a landlord proceeds with a sale without correctly serving a Section 5 notice, the transaction may be deemed void. This can not only delay the sale but also expose the landlord to legal action from tenants who may seek an injunction or damages for the failure to comply with their statutory rights.

Moreover, a failure to comply with Section 5 obligations can result in criminal penalties. The Act states that landlords or their agents who unlawfully dispose of an interest without complying with the right of first refusal provisions may be subject to fines.

Serving a Section 5 notice correctly

To ensure compliance, commercial landlords should adopt a structured approach when serving a Section 5 notice. The first step is to confirm whether the building and tenants qualify under the Act. This requires a detailed review of the tenancy agreements and property composition to ascertain eligibility.

Once it is established that Section 5 applies, landlords must carefully determine the correct type of notice to serve. Given the complexities involved, obtaining an accurate legal assessment of the nature of the disposal is crucial to avoid costly mistakes or legal challenges.

The drafting and service of the notice must be executed with precision. Landlords should ensure that all statutory requirements are met, such as the offer terms, the correct recipient details, and the response deadlines. Notices must be served in accordance with statutory provisions, ensuring that they reach the relevant tenants promptly and in a legally acceptable manner to minimise the risk of disputes or delays in the sale process.

If tenants accept the offer, landlords must ensure the transaction proceeds smoothly by finalising negotiations and completing the sale under the agreed terms. If tenants decline or fail to respond within the statutory timeframe, the landlord is free to proceed with the sale to third parties, provided the terms remain unchanged.

Lessons from recent case law

There are several notable instances in recent case law which highlight the importance of strict compliance with the Act’s provisions.

The first is that of FSV Freeholders Ltd v SGL 1 Ltd [2023] EWCA Civ 1318. Here, the Court of Appeal addressed the requirements for Section 5 notices when a landlord sells multiple buildings in one transaction. The court held that when disposing of multiple buildings, landlords must “sever” the transaction and treat each building separately, providing individual Section 5 Notices for each building. The failure to do so in this instance resulted in the entire transaction being challenged, creating significant legal and financial risk for the landlord, as the tenants were deprived of their statutory right of first refusal.

In the separate case of S. Franses Ltd and another v Block 6 Ashley Gardens Roof Gardens Ltd and others [2023] EWHC 2880 (Ch), the High Court emphasised the severe consequences of failing to serve Section 5 notices at all. The case involved a landlord who granted new leases to third parties without first offering them to qualifying tenants. As a result, the tenants challenged the transaction and the court ruled that the leases were void due to non-compliance with the Act, leading to setbacks and financial loss for the landlord.

Given the technical nature of Section 5 notices and the risks associated with non-compliance, it is highly advisable for landlords to seek professional legal advice before all else. A specialist property solicitor can help navigate the legal intricacies, ensure that notices are correctly drafted and served, and mitigate the risk of disputes or enforcement actions.

At Newmanor Law, we provide expert guidance to commercial landlords navigating the complexities of the Landlord and Tenant Act 1987. Whether you require assistance in determining your obligations, drafting Section 5 notices, or addressing disputes arising from non-compliance, our team of specialists is here to help.