The Court of Appeal decision in SGL 1 Ltd v FSV Freeholders Ltd is an important development for landlords, investors, developers and advisers dealing with residential leasehold property and rights of first refusal under Part I of the Landlord and Tenant Act 1987 (LTA 1987).
The case considered a practical but difficult question: what is a ‘building’ for the purposes of section 5(3)?
Part I of the act gives qualifying tenants of flats a right of first refusal where a landlord proposes to dispose of the relevant freehold or other interest. Section 5(3) requires a landlord, where a transaction involves more than one building, to sever the transaction so as to deal with each building separately. The difficulty is that the act does not define what a ‘building’ actually is.
The appeal arose from a development in Liverpool in which the freehold title encompassed multiple blocks on a single Land Registry title. Notices had been served on the basis that block A was one building, and blocks B, C and E were another (block D had been demolished following a fire).
At first instance, however, the court had concluded that blocks A, B, C and E together constituted a single building for the purposes of Part I of the 1987 act, rendering the notices invalid.
The issue for the Court of Appeal was to determine how one decides whether the disposal of a freehold under the 1987 act is a disposal of more than one building; and, if it is, then how should one decide on the number of buildings comprised within the disposal?
The Court of Appeal overturned the first instance judgment. It held that the earlier legal test had been applied incorrectly, allowed the appeal, and decided that block A was a separate building, while blocks B, C and E together formed another building. Block A was a refurbished and redeveloped warehouse building which stood on its own and had its own supply of services, whereas blocks B, C and E had shared services. On that basis, the section 5 notices were valid.
One of the most notable aspects of the judgment is the Court of Appeal’s treatment of the earlier case law in this area. The court made clear that previous authority had taken the law in the wrong direction and that a different approach was required.
The court accepted that it is difficult to formulate one universal test for what amounts to a building. However, it said that the central question is likely to be whether the structures are within a ‘functionally integrated built envelope’.
Applying that approach, block A was treated as a separate structure with its own services and utilities, whereas blocks B, C and E were sufficiently integrated, including through shared access arrangements, plant and servicing, to be treated as one building.
Importantly, the court also made clear that the existence of shared amenity areas or rights over common parts does not necessarily mean that otherwise separate structures must be treated as a single building.
This decision is important because it provides clearer guidance to those structuring transactions involving mixed or multi-block residential developments.
It suggests that the focus should be less on broad estate-wide connections and more on whether the structures in question are physically and functionally integrated as part of the same built envelope.
That said, the judgment does not remove all uncertainty. The court acknowledged that the legislation is difficult to interpret and indicated that there is a strong case for the secretary of state to use existing powers to provide a clearer definition.
From our perspective, the decision is a timely reminder that investors, developers and landlords need to think carefully about how multi-block sites are configured, managed and ultimately disposed of.
Particular care is needed where:
- multiple buildings sit within a single freehold title;
- there are shared facilities, plant, accessways or utility arrangements;
- common parts or external areas are used by occupiers across different blocks; and
- a future sale of the freehold may engage the rights of first refusal regime under the 1987 act (including the transfer of the freehold to a residents’ management company, which is common upon completion of a development).
Those acquiring, developing or restructuring residential estates should not assume that title boundaries alone will answer the question. Equally, shared amenity arrangements will not automatically mean that several structures amount to a single building.
The analysis is likely to remain highly fact-sensitive, but the Court of Appeal’s ‘functionally integrated built envelope’ test will now be central.
Unless and until the legislation is clarified, this is an area where careful early advice is essential.
The consequences of getting it wrong can be serious. If a freeholder transfers the freehold without serving notices upon the qualifying tenants pursuant to section 5 of the LTA 1987, then they may be guilty of a criminal offence under section 10A of the LTA 1987, punishable by a fine. The qualifying tenants would also acquire statutory rights against the purchaser to obtain information about the disposal and to compel the purchaser to transfer the property to them on the same terms. It is also possible that property disposed of in breach of the LTA 1987 could be ‘criminal property’, as defined under section 340 of the Proceeds of Crime Act 2002.
For those involved in acquiring or disposing of freehold interests in residential estates, SGL 1 Ltd v FSV Freeholders Ltd is an important case. It provides welcome appellate guidance, but it also underlines the continuing need for caution where developments involve multiple buildings and shared infrastructure.
James Holton is a senior associate in the property litigation team at DTM Legal, Chester. Philip Byrne is a barrister at St John’s Buildings, Manchester. He was instructed as counsel at first instance and successfully obtained permission to appeal
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