Planning Ahead When Developing Mixed-Use Premises

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17 August 2022

Commercial property lawyer Sophie Bedwell explains the importance of planning ahead for landlords of mixed-use premises, to avoid falling foul of legislation that means qualifying owners of leasehold flats have the first right of refusal to purchase the freehold.

Sophie is an Associate in the Commercial Property team at Clarke Willmott LLP, specialising in landlord and tenant work. Sophie joined Clarke Willmott in 2017 after training at a small firm in Norfolk. She has experience in a range of property-related matters, dealing with the grant of new leases, lease renewals and the agreement of licences from both a landlord and tenant perspective.

Offering Leaseholders a Chance to Purchase

Landlords of mixed-use premises should engage in forward planning on the position of what are known as "qualifying tenants" when it comes to eventually disposing of the property.

Disposing of something over which tenants have rights could trigger a Section 5 Notice of the 1987 Landlord and Tenant Act leaving the landlord at risk of criminal prosecution and/or civil proceedings.

The legislation means qualifying owners of leasehold flats have the right of first refusal to purchase the freehold – this means that if the freeholder wishes to sell the building, they must first offer the leaseholders the chance to purchase.

There are practical ways to avoid the 1987 Act, but these require forward planning. The right of first refusal applies where premises consist of the whole or part of a building; contain two or more flats held by qualifying tenants; and the number of flats held by qualifying tenants exceeds 50% of the total number of flats contained in the premises (with some exceptions relating to mixed-use premises).

The Section 5 notice must specify a period of not less than two months from the date of service of the notice within which a requisite majority of the qualifying tenants may accept the offer plus a further two-month period in which to nominate a purchaser.

Avoiding the 1987 Act

1. Timing of sale of flats – a disposal prior to the exchange of contracts for the flat which would take the number of Qualifying Tenants over the 50 per cent threshold.
2. Pre-existing contractual obligation – a disposal pursuant to a contract entered prior to 50% of the flats being held by qualifying tenants is an exempt disposal under the 1987 Act.
3. Disposal to an associated company – a disposal to a company which has been associate of the seller for at least two years is also an exempt disposal.
4. Creation of a headlease – the grant of a lease superior to the qualifying tenants’ leases may allow disposal of the commercial premises without triggering the 1987 Act.
5. Mixed use development – a developer could plan a mixed-use development to ensure greater than 50 per cent of each building on the development is non-residential.
6. In new developments – an agreement for sale before any flats are subject to leases or agreements for lease; or using a special purpose vehicle to hold the premises.
7. Plan the tenant profile to reduce the number of qualifying tenants in the premises.
8. Another way of avoiding a disposal being caught by the Act is if the disposal is the grant of a tenancy of a single flat.
9. A disposal by one charity to another might not be caught by the Act.

Picture: a photograph of Sophie Bedwell. Image Credit: Clarke Willmott LLP

Article written by Sophie Bedwell | Published 17 August 2022

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