What could the Law Commission’s proposals on the rights of first refusal mean for office occupiers?

The Law Commission is reviewing whether the grant of a lease of premises which are exclusively occupied or used for non-residential purposes in a mixed-use building which is otherwise caught by the Landlord and Tenant Act 1987 (“the LTA 1987”) should be excluded from rights of first refusal. 

What are the rights of first refusal?

The LTA 1987 gives residential flat owners’ rights of first refusal when their landlord proposes to dispose of the freehold or another relevant interest in their building.

The LTA 1987 as drafted contains a number of exemptions, but there is no specific exemption where the disposal concerns the grant of a lease of commercial (or non-residential) premises. This has caused particular issues in mixed-use developments since the decision in Dartmouth Court Blackheath Limited v. Berisworth [2008] EWHC 350 (Ch). In that case, the High Court interpreted the legislation as meaning that a relevant disposal included the grant of a commercial lease in a qualifying building, such as an office lease. This means that, under the current law, a landlord must serve Section 5 Notices offering rights of first refusal to the residential flat owners before being in a position to grant a lease to a commercial tenant such as an office occupier, where the other qualifying criteria are met.

How do rights of first refusal impact the grant of an office lease?

The LTA 1987 does contain a threshold so that where more than 50% of the internal floor area of the premises is occupied for non-residential purposes, the rights of first refusal do not apply. However, this still means many modern mixed-use developments are caught.

The consequence is additional time and expense for both landlords and commercial tenants wishing to enter into a commercial lease within a qualifying mixed-use development. Although the decision in Dartmouth has been criticised, it has not been overturned. 

For an office tenant looking to take space in a mixed-use development, the consequences of the rights of first refusal being triggered are practical and immediate. Before a landlord can grant a new commercial lease, they may first need to serve an offer notice on every qualifying residential leaseholder, then allow a statutory period to expire prior to being in a position to progress the disposal. If the process is not followed, the landlord risks criminal prosecution and the residential tenants have the right to compel the landlord to grant the commercial lease to them on the same terms.

There are some specific exemptions and structures which can be set up to minimise the risk of the LTA 1987 applying but this is not something over which office occupiers have control.

What are the Law Commission’s proposals?

The Law Commission has opened a consultation on commercial leasehold and is recommending that the grant of a lease of any part of the premises that is exclusively occupied or used, or intended to be exclusively occupied or used, for non-residential purposes should be excluded from the rights of first refusal.

The exclusion would apply only to disposals by way of the grant of a lease—not to sales of freeholds or other interests—and only where the relevant premises are used exclusively for non-residential purposes. Where residential tenants share the use of premises, such as a communal lobby serving both flats and offices, those shared areas would remain protected. The proposals do not seek to alter the existing 50% threshold nor make any other changes to the rights of first refusal legislation.

How could the Law Commission’s proposals impact office occupiers?

In practice, this would mean that a landlord granting an office lease in a mixed-use building could proceed without needing to serve Section 5 Notices, even if the building would have otherwise qualified. 

For office tenants, the benefits of this proposal could extend beyond faster transactions. Removing the uncertainty about whether a commercial letting triggers a right of first refusal is likely to reduce legal costs on both sides.
  
The consultation runs until 16 September 2026. The Law Commission has indicated that it intends to publish final recommendations alongside those from its parallel review of business lease renewals under the Landlord and Tenant Act 1954, with the aim of presenting a single draft Bill addressing multiple areas of commercial leasehold reform.

For office occupiers and their advisers, this is an opportunity to shape a reform that could permanently remove an issue which frequently arises when taking space in mixed-use developments.

Please contact David Haines, Natalie Deuchar, Laura Bushaway, or your usual Charles Russell Speechlys contact if you have any queries.