Rights of first refusal and conveyance not preceded by contract

This article was first published in Lexis PSL Property.

Where a notice under 5D of the LTA 1987 has been served on the qualifying tenants and this notice has now expired and the offer was not accepted, can the buyer and seller still exchange contracts and then complete some days later, or must the parties go straight to completion? In the circumstances, can the parties use a parol agreement that will set out certain terms that were agreed between the parties?

Right of first refusal and conveyance not preceded by contract

This response deals with the question of the procedure to be adopted where a landlord wishes to dispose of premises to a third party buyer after the expiry of an offer notice served under section 5D of the Landlord and Tenant Act 1987 (LTA 1987) to qualifying tenants of flats which have not been accepted.

Some long leaseholders qualify for a right of first refusal of their freehold under LTA 1987. The seller is obliged to serve an offer notice to the leaseholders before selling the freehold to a third party buyer. More than one offer notice may be served by the seller.

Following the expiry of the time specified for the service of an acceptance notice or the appointment of a nominee, the landlord may dispose of the premises within the period of 12 months to a third party buyer (LTA 1987, s7(1)). The landlord must not however accept a lower consideration than that specified in the notice to the tenants nor may the landlord dispose of the premises on different terms from those specified (LTA 1987, s7(3)). The landlord is however free to accept a higher offer for the premises from a third party buyer.

It is appropriate to serve a section 5D notice where the proposed disposal is not made subject to a contract or option or right of pre-emption and is proceeding straight to the conveyance. An offer notice under section 5D must include the principal terms of the proposal including the consideration required for the disposal. The notice must give not less than two months’ notice from the date of service of the notice. The notice must also specify a further period of not less than two months within which a person or persons may be nominated by the tenant under section 6. See Precedent: Landlord and Tenant Act 1987 offer notice (no prior contract).

The buyer cannot lawfully secure a binding conditional contract for the premises at the original price while they are waiting for the four month protected period to expire. A third party buyer and seller cannot enter into a contract for the disposal, conditional on the LTA 1987, s5 notices being served and the tenants failing to take up their right of first refusal. The provisions of LTA 1987, Pt 1 apply to a contract to create or transfer an interest in land, whether conditional or unconditional and whether or not enforceable by specific performance (LTA 1987, s4A(1)). The Act also applies to contracts to make an assignment of rights under such a contract (LTA 1987, s 4A(3)). In Mainwaring v Henry Smith’s Charity Trustees, it was held that a landlord proposed to make a relevant disposal when he contractually bound himself to sell. This was so even though the contract was conditional and was one in respect of which specific performance could not be granted. It is likely that negotiations which have been concluded but which remain 'subject to contract' between the seller and the third party buyer, would amount to a disposal within LTA 1987. See Practice Note: LTA 1987—pitfalls and practical tips.

It is therefore only after the expiry of the relevant time limit that the seller and the third party buyer will be able to enter into a binding agreement. The buyer and third party will be required to reach an agreement in relation to consideration, which will not be less than that offered to the qualifying tenants. The third party buyer will have some security in being aware that the terms of the disposal will be the same as those offered to the qualifying tenants (see Staszewski v Maribella Ltd where the landlord had failed to detail accurately the terms agreed for payment of rent and service charge).

The third party buyer cannot however seek to bind the seller to a price, whether by way of a parol agreement or otherwise, during the protected period. Once the protected period is finished, section 7(3) continues to apply to the seller in terms of his dealings with the third party buyer.