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High Court rules that exception to Right of first Refusal applies and defeats purchase notice

By Nicholas Kissen, Senior Legal Adviser

October 2016

On 7 October 2016 judgment was handed down by the High Court in Artist Court Collective Limited v Khan[2016] EWHC 2453 (Ch.), an appeal from a decision of the Central London County Court.

In this summary we touch on one of the subjects arising from the judgment, namely whether a transfer of a freehold interest in favour of a sole beneficiary under a trust, leading to the termination of the trust and the discharge of the trustee, is caught by the right of first refusal requirements of Part I of the Landlord and Tenant Act 1987 (the 1987 Act).

Watch out for an article discussing the legal issues arising from this case on our website soon.

The Law:

By Part I of the 1987 Act qualifying tenants of flats, which includes leaseholders, in a building have a right of first refusal when the freehold interest is sold, termed as a ‘disposal’ in the 1987 Act. This entitles them to buy their landlord’s interest in the building (typically the freehold) when he or she proposes to transfer it to a third party purchaser.

Essentially, with some exceptions, the landlord cannot sell without first serving a notice on the ‘qualifying tenants’ offering to sell to them on the same terms (including the price) as the intended transfer.

There are serious consequences for failing to comply with this Act:

  1. Unless they have a reasonable excuse the landlord would be committing a criminal offence; and
  2. The qualifying tenants are entitled to reverse the transfer and have the freehold interest transferred to them on the same terms including at the same price.

Background facts:

This case involved a building comprising leasehold flats and commercial units. In 2011 the landlord, Mr Khan, transferred his freehold interest to a recently created company controlled by him for the sum of £225,000. No offer notices were served on the qualifying tenants, who were in ignorance of the transfer until the middle of the following year when a fish and chip shop opened in one of the commercial units, which led to the residential leaseholders taking advice on their legal position.

Upon discovering the transfer the majority of the leaseholders formed a company and served a purchase notice seeking the transfer of the freehold interest to their company at the same price.

Mr Khan tried to resolve the position by transferring the freehold interest back into his personal name for nothing. When the matter was pursued in the County Court the leaseholders alleged that this transfer broke the provisions of the 1987 Act. The judge in County Court agreed and ruled that the leaseholders’ company could acquire the freehold for nothing.

The Appeal:

Mr Khan appealed to the High Court who found in his favour and decided, among other issues, that the transfer of the freehold back to him fitted one of the exceptions in the 1987 Act to the requirement to follow its provisions.

Under section 4(2)(g) of the 1987 Act, a disposal is exempt from the right of first refusal requirements if it consists of the transfer of an estate or interest held on trust for any person where the disposal is made in connection with the appointment of a new trustee or in connection with the discharge of any trustee.

On the facts, the company was holding the freehold on trust for Mr Khan and therefore the disposal of the freehold by the company as trustee to him as the sole beneficiary brought the trust to an end. The High Court found that the transfer of the freehold back to Mr Khan was in connection with the discharge of a trustee, so offer notices did not have to be served on the qualifying tenants, nor did they have a right to serve a purchase notice on him if the transfer went ahead without such notices being served.

Related information

LEASE is governed by a board, appointed as individuals by the Secretary of State for the Department for Levelling Up, Housing & Communities.