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Developers and landowners beware the pitfalls of the Landlord and Tenant Act 1987!

Prospective landlords and developers could face grave consequences if they fail to consider the Landlord and Tenant Act 1987 (“the Act”) when granting commercial leases in a mixed-use building.

What does the Act say?

Subject to narrow and limited exceptions, the Act gives certain residential tenants (i.e. those with long leases) a right of first refusal where their landlord proposes to dispose of all or part of its premises.

The Act applies to a building (or part of a building) which contains at least two flats, held by qualifying tenants where the floor area of the residential parts of the building (excluding common parts) amounts to 50% or more of the building.

Whilst the Act contains some exceptions to the right of first refusal; the grant of a commercial lease, isn’t one of them. Many commentators agree the Act was never intended to capture the grant of a rack rental lease. However, as commercial rack rent leases are not expressly excluded you must first serve notice to offer a proposed commercial lease to your residential tenants.

Following service of the notice, the tenants have two months to decide if they want to take the lease.  Should they accept, you are not obliged to continue with the grant and can withdraw the offer.  If you do choose to continue, you must follow the procedure and timetable set by the Act to grant the lease to a representative of the residential tenants, for example, an incorporated company.

How will this affect me?

In the best-case, the grant of the commercial lease will just have to wait for the notices to expire.  A worse case will be that you are unable to grant the lease to your desired commercial tenant.  It is possible that your residential tenants may purport to accept an offer if they object to the proposed use.

Once a notice has been served you can’t dispose of the property on more favourable terms than those contained in the notice; this will severely limit the scope for renegotiating terms (although this could also be a blessing in disguise as it would also prevent the incoming commercial tenant from trying to renegotiate the transaction at the 11th hour).  Furthermore, you can only serve one notice in any 12-month period, so you will have defer serving a fresh notice if you want to dispose on new terms, with the likelihood that you will lose your prospective tenant.

Finally, it’s a criminal offence if you fail to follow the notice and/or disposal procedures, and whilst your commercial lease will remain valid, your residential tenants will be entitled to acquire the lease from your new commercial tenant.

Is there anything I can do?

If you own or are in the process of acquiring a building which may be caught by the Act there are a number of practical steps you can take to structure the transaction in such a way to prevent the Act from hampering your development plans and disposal strategy:

    • Timing of transactions – ensure you exchange any agreements for lease or grant any commercial leases before you’ve sold more than 50% of the residential elements. Be aware that lease renewals or subsequent grants would still fall within the scope of the Act.


    • Strict rules on future grants – If you intend to grant commercial leases in the future, ensure more than 50% of the building is reserved for commercial use or consider renting flats on assured shorthold tenancies as opposed to qualifying (i.e. long) residential leases.


  • Put the right structure in place – Consider granting a blocking lease over the residential or commercial elements of the building to a subsidiary company. The Act only applies to immediate landlords and so if there is an intervening lease sitting above the residential elements of the building, you will be free to deal with the rest as you see fit.

Although this may lead to additional administration, you could consider whether there will be tax benefits as a result of the income being split between different entities.

You could implement a similar structure after the event if the building is held in a company and you also own another entity that has been in the same group as the first for at least 2 years.

If you have concerns on how the Act may affect your plans our expert Real Estate lawyers can advise and guide you through any steps required to protect your interests.


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