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Property Litigation column: LTA 1987 - Tenant's right of first refusal

Part 1 of the Landlord and Tenant Act 1987 (LTA 1987) grants certain residential tenants a right of first refusal where their landlord wishes to dispose of some or all of its reversionary interest. If the landlord does not comply with its obligations under Part 1 of the LTA 1987 and disposes of its interest, the tenants can acquire the relevant interest from the purchaser on the same terms. The recent Court of Appeal case Mahmut and another v Jones and others [2017] EWCA Civ 2362) serves as a reminder to purchasers of a reversionary interest that they need to consider LTA 1987 rights prior to purchase.

To initiate the process, the landlord must give the tenant notice of the terms on which the disposal is to take place and offer to enter into a contract with the tenant on those terms. In this case, the landlord gave notice to the tenants but before the two month notice period had expired, the landlord completed the sale to Messrs Mahmut. In these circumstances, section 12B of the LTA 1987 enables the tenants to serve a purchase notice on the new reversioner requiring the new reversioner to dispose of the interest it has acquired to the tenants on the same terms as those on which it acquired that interest.

The effect of section 12B of the LTA 1987 is that if a purchase notice is served on the new reversioner, it has an obligation to comply with it. The tenant served a purchase notice on the new reversioner on 25 June 2013. The LTA 1987 does not lay down any particular procedure or timeframe applicable to compliance with a purchase notice but section 19(1) LTA 1987 provides that:

"the court may on the application of any person interested make an order requiring any person who has made default in complying with any duty imposed on him by any provision of his part to make good the default within such time as is specified in the order".

The tenants applied to the County Court on 19 August 2013 for an order requiring Messrs Mahmut to comply with the purchase notice.

On 29 October 2013, DJ Lightman made an order that Messrs Mahmut dispose of their interest in the property to the tenants on the terms which the property was purchased by Messrs Mahmut. The order further provided that Messrs Mahmut were to execute and deliver the executed transfer to the tenants' solicitor no later than 4pm on 19 December 2013 and in default of them doing so, a District Judge of the Central London County Court was at liberty to sign and execute the transfer on their behalf. Messrs Mahmut did not deliver to the tenants' solicitor an executed transfer by 4pm on 19 December 2013. On 2 January 2014, they confirmed that they held an executed transfer but they did not send it to the tenants.

On 2 April 2014, Messrs Mahmut's solicitors gave notice to the tenants under section 17(4) of the LTA 1987.

Section 17 of the LTA 1987 provides so far as relevant as follows:

"(3) Where a period of three months beginning with the date of service of the notice under section 12A, 12B or 12C on the purchaser has expired (a) without any binding contract having been entered into between the purchaser and the nominated person and (b) without there having been made any application in connection with the notice to the court or to the appropriate tribunal, the purchaser may serve on the nominated person a notice stating that the notice and anything done in pursuance of it is to be treated as not having been served or done.

(4) Where any such application as is mentioned in sub-section (3)(b) was made within the period of three months referred to in that sub-section but (a) a period of two months beginning with a date of the determination of that application has expired (b) no binding contracts has been entered into between the purchaser and the nominate d person and (c) no other such application as is mentioned in subsection (3)(b) is pending, the purchaser may serve on the nominated person a notice stating that any notice served on him under section 12A, 12B or 12C and anything done in pursuance of any such notice is to be treated as not having been served or done.

(5) Where the purchaser serves a notice in accordance with subsection (1), (3) or (4) this Part shall cease to have effect in relation to him in connection with the original disposal."

The tenants' application was made within the period of three months following the service of the purchase notice under section 12B LTA 1987. Two months from DJ Lightman's order expired on 29 December 2013 by which time Messrs Mahmut were in breach of the order (and the contract had not been completed). The question on appeal was whether the notice under section 17(4) of the LTA 1987 was effective to discharge Messrs Mahmut from any obligation to comply with the court order and to relieve them from any further obligation to transfer the freehold to the tenants.

The Court of Appeal accepted that an application under section 19 LTA 1987 is an application of the kind contemplated by section 17 LTA 1987. Lewison LJ noted that in his judgment the main thrust of these provisions is that the LTA 1987 contemplates two ways in which tenants' rights can be vindicated: either by the parties voluntarily entering into a contract following the establishment of the tenants' rights or by the court making an order. Here the Court made an order and Messrs Mahmut did not comply with it. It was open to Messrs Mahmut to apply to discharge the order if there had been culpable delay on the part of the tenants but instead of doing that they gave notice under Section 17(4).

By disobeying the mandatory order to execute the transfer and deliver it to the tenants by 4pm on 19 December 2013 Messrs Mahmut were in contempt of court. The Court of Appeal held that the purpose of the LTA 1987would have been frustrated if by refusing to comply with the mandatory order of the Court Messrs Mahmut could put themselves into a position in which they were entitled to give notice under section 17(4) LTA 1987 and deprive the tenants of their rights under the LTA 1987..

It is perhaps unsurprising that the Court of Appeal did not allow Messrs Mahmut to take advantage of their own breach of the court order but this case serves as a reminder to purchasers of reversions of the importance of compliance with the LTA 1987. It is the seller who risks committing a criminal offence by disposing in breach, but the consequences for the purchaser are almost equally severe: they can be forced to sell the property back to the tenants for the price they paid. A further point to note is that once an order has been made under section 19 of the LTA 1987, the terms of that order govern the way the transfer is to take place; the order is treated in the same way as a contract for sale.

This article first appeared in the PLC property litigation column on 11 May 2018.

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