Lawbite: How many buildings do you see?

This case is the first authority to provide any particularly useful guidance on the factors that the Court will take into account when assessing what constitutes a ‘building’ for the purposes of the provisions in the Landlord and Tenant Act 1987 (“the Act”). The provisions in question require a landlord of a residential building in England and Wales who wishes to dispose of its interest, to first offer to sell that interest to qualifying tenants. The decision will be of particular interest to landlords and tenants of residential buildings in England and Wales and their professional advisers.

The right of first refusal

Where it applies, the Act requires:

• a landlord of a residential building who wishes to dispose of an interest in it to first offer to sell that interest to the building’s qualifying tenants
• that landlord to do so by following a prescribed statutory notice process – involving the service of what are known as ‘s.5 notices’

Failure to comply with the Act’s requirements can have substantial and far reaching consequences - a disposal in breach of the Act is a criminal offence and entitles the qualifying tenants to undo the relevant transaction and have the interest transferred to them at the same price for which it was initially sold.

Where the landlord has an interest in more than one building in an estate, the Act requires such a landlord “to sever the transaction so as to deal with each building separately”.

Unhelpfully, however, the Act (famously once described as “ill drafted, complicated and confused”) offers no guidance as to what constitutes a ‘building’ for the purposes of the Act.

This presents real issues for landlords of residential estates which might appear, at first glance, to consist of a number of separate buildings – failure to identify and serve a s.5 notice in respect of each ‘building’ (as properly regarded under the Act) will mean that the notice is invalid, exposing the landlord and any purchaser of the interest disposed of to the above consequences. This decision which will be of assistance to those tasked with drafting s.5 notices.

The Facts

This High Court decision concerned four residential blocks, known as A, B, C and E, in one residential development in Everton.

The landlord wanted to sell its freehold interest in these blocks and served two s.5 notices: one in respect of block A (on the basis that it alone constituted a ‘building’ for the purposes of the Act) and a second in respect of blocks B, C and E (as these were regarded to constitute a separate ‘building’ together under the Act).

The Decision

Ultimately the judge decided that the four blocks constituted one ‘building’ for the purposes of the Act, and so the notices were invalid.

In arriving at that decision, the judge felt bound by the decision in Long Acre Securities Ltd v Karet, which established that a ‘building’ can consist of a number of detached blocks which together comprise an integrated estate, and that the correct approach is the weighing of various factors in the balance.

The judge identified the following factors as relevant for consideration:

1. Plans of the structures
2. Underlying structural support for the structures
3. Tenants' rights to use appurtenant premises
4. Connections at any levels between the structures
5. The dates of construction of the structures
6. How the structures are managed (i.e. whether together or separately)
7. How the service charge is operated
8. Visual impressions
9. Means of access to the structures and any appurtenant premises
10. How the structures are serviced
11. The sharing of common facilities and amenities
12. The planning history of the structures, and any enforcement action taken in relation to planning requirements and conditions
13. The requirements of housing legislation, and building and other applicable regulations, and the measures considered necessary to enforce compliance with them

In his judgment, the judge conducted a careful review of each factor, setting out the conclusion that each factor tended towards, and then using these within the balancing exercise. The court felt that the most persuasive factor in this case was the shared means of access between all four of the blocks and that the weight attached to this factor tipped the balance to the conclusion that there was one building for the purpose of the Act.

Key Points

• the decision provides a helpful framework for those tasked with drafting s.5 notices for a landlord wanting to dispose of an interest in a residential estate consisting of more than one block
• the issue of whether the transaction would be severed to result in sales of multiple buildings, or a single building, is one which might have an appreciable impact on valuation of relevant assets – is the whole greater than the sum of its parts?
• whilst a helpful decision, it underscores the difficulty that there can be when seeking to identify what the relevant ‘building’ is for the purposes of the 1987 Act, the level of scrutiny that might need to be given to doing so - with the issue ultimately decided by an individual judge subjectively considering and weighing various (on the face of it) objective factors
• whilst they felt bound by the Long Acre decision, the judge did express some doubt about the correctness of that decision; perhaps opening the door for a challenge of it in the future