SGL 1’s building blocks to interpreting rights of first refusal under the 1987 Act
On 8 January 2025, the judgement in the case of SGL 1 Ltd v FSV Freeholders Ltd & Others [2025] EWHC 3 (Ch) (‘SGL 1’) was handed down by the High Court. It is a rare case on the interpretation of the tenants’ right of first refusal under Part 1 of the Landlord and Tenant Act 1987 (‘the Act’) and provides helpful guidance on the interpretation of the term ‘building’ for the purposes of the Act.
The Law
Under Section 5(3) of the Act, where a landlord proposes to affect a transaction involving the disposal of an estate or interest in more than one building, they shall sever the transaction so as to deal with each building separately. This means that it is necessary to serve a separate Section 5 Notice offering the right of first refusal to the qualifying lessees in respect of each building individually.
The Act does not explicitly define the term ‘building’, and as such has caused much confusion for landlords who are looking to comply with statute yet are left unsure as to what their notice obligations are.
Existing case law has gone some way in clarifying the term. Long Acre Securities Ltd v Karet in 2004 set out that a ‘building’ can either mean (i) a single building, or (ii) one or more buildings where the occupants of the qualifying flats in each of those buildings share the use of the same appurtenant premises. Despite this, ambiguities as to what constitutes a ‘building’ remain and put landlords, even those who are well advised, in a testing position when complying with the Act’s notice obligations.
The Guidance from SGL 1
SGL 1 helpfully addresses the Act’s ambiguity. The case concerned the question of whether four blocks, known as Blocks A, B, C, and E, located at 30 Fox Street, Liverpool, constituted one, two, or more ‘buildings’ for the purposes of Section 5(3) of the Act, and therefore whether one, two or more section 5 notices were required. The landlord served two Section 5 offer notices on qualifying tenants (one covering Block A and the other the remaining three blocks).
The Court emphasised that weighing and balancing a number of competing factors is required when determining whether more than one structure(s) constitutes a single ‘building’. The following list of non-exhaustive factors were cited in the judgement as points to consider:
- Plans of the structures
- Underlying structural support
- Lessees' rights to use appurtenant premises
- Connections at any levels
- Dates of construction
- Management of structures
- Service charge operation
- Visual impressions
- Means of access
- Servicing of structures
- Sharing of common facilities
- Planning history
- Compliance with housing legislation
The Court considered that it was a “multi-factorial evaluation exercise”. However, a particular factor or factors may exert a “magnetic attraction” pointing towards a certain conclusion. In this case, the Court found that the shared use of a street known as “Back Beau Street” for access to all blocks pointed towards the four blocks being considered as a single ‘building’. The conclusion was therefore that the Section 5 notices served on the qualifying tenants were invalid as they should have been served as one notice covering all four blocks.
The Takeaways
The guidance provided by SGL 1 will be welcomed by many practitioners who are advising clients on their obligations under the Act. It underscores the importance of analysing the specific facts and provides helpful framework for applying these in practice. It also highlights the need for landlords to seek specialist advice to ensure they are complying with the Act's requirements. It remains to be seen whether this is the final word in this case as the criticism of Karet leaves the door wide open for an appeal.
