Clarification given by the Court of Appeal on rights of first refusal under the Landlord and Tenant Act 1987

A recent Court of Appeal decision in the case of SGL 1 Limited and FSV Freeholders Limited handed down on 13 March 2026 has clarified how a transaction must be severed to comply with rights of first refusal under the Landlord and Tenant Act 1987 (“the LTA 1987”). The decision is significant because the Court of Appeal has overruled an earlier High Court decision from 2004 which suggested that a building for the purposes of the LTA 1987 can include more than one separate structure where the occupants of the flats within those structures share the use of common parts.

What is the background to the decision?

Landlords must comply with a statutory process prescribed by the LTA 1987 to offer rights of first refusal to tenants where they propose to dispose of an estate or interest in a qualifying residential or mixed-use building. In addition, where the transaction involves a disposal of an estate or interest in more than one building, the landlord must sever the transaction so as to offer rights of first refusal in relation to each building separately. Where this applies, the landlord must serve notices on qualifying tenants in relation to each building separately.

In the earlier decision of Long Acre Securities Ltd v. Karet [2004] EWHC 442 which was concerned with the proposed disposal of an interest in a residential estate comprising a number of separate structures, the High Court held that where there were shared areas used by qualifying tenants in one or more structures and a number of buildings were run as an estate, those structures could be regarded as one “building” for the purposes of the LTA 1987. Karet permitted service of one offer notice in respect of the proposed disposal of an interest in the estate as a whole.

What were the facts of the recent Court of Appeal decision?

Notices offering rights of first refusal had been served on the qualifying tenants of an estate comprising blocks A, B, C and E. One set of notices was served in respect of Block A and another set of notices for Blocks B, C and E together. Block D had been substantially damaged by fire and partially demolished so no notices needed to be served in respect of that block.

Block A was a refurbished warehouse building with its own utilities, redeveloped before the other buildings were built. Blocks B, C and E were then built as “Phase 2” of the development at the same time and with the same materials. Blocks B, C and E all shared a car park, access points and refuse storage bins. Blocks C and E had a single staircase and access to Block C was through Block E. Blocks B, C and E were all serviced by a single plant room located in Block C and shared utilities (gas, electricity and water). Vehicles accessed all blocks from one street which ran between Blocks A and E.

What decision did the Court of Appeal reach?

The Court of Appeal held that Karet was wrongly decided but that is not to say that there will not be circumstances in which separate structures may be one building. The key test was whether the structures were within a “functionally integrated built envelope”.

Applying that test, they found that service of one set of notices on Block A was correct because it was a separate structure. The set of notices served in relation to Blocks B, C and E was also right because they shared a single plant room located in Block C and could not function independently, so that they were a functionally integrated built envelope. This decision was reached even though Block B shared no physical connection with Blocks C and E.

How will the decision impact disposals to the statutory rights of first refusal apply?

The decision changes the test which must be applied to determine how a transaction is to be severed in respect of the disposal of an estate to comply with the rights of first refusal in the LTA 1987.

This will be relevant to how transactions are structured to ensure compliance with the LTA 1987 or to determine that a transaction falls outside of the scope of the rights of refusal regime.

This Insight does not constitute legal advice and you should seek advice on the specific circumstances of your case. Please contact Natalie Deuchar, Laura Bushaway or your usual Charles Russell Speechlys contact if you have any queries.