Q&A - Section 5 Notice

Can such a decision be approved by a simple majority of shareholders and would we have to serve a Section 5 Notice under the Landlord and Tenants Act 1987 again on the residents on the estate?

ANSWER

Maybe No, Maybe Yes But . . .  

MAYBE such a decision can be approved by a simple majority of shareholders and NO the Company would not have to serve a Section 5 Notice under the Landlord and Tenants Act 1987 again on the residents on the estate

If there is no restriction on the sale of the shares in your company and if you can procure voluntarily or involuntarily pursuant to any participation / shareholder agreement all of the shareholders to sell their shares in the company, then you can simply sell the company to a third party for market value and this will not constitute a transfer of the freehold because the company will own the freehold at all relevant times, before and after completion of the share transfer. Subject to your your company's constitutional documents ("the Mem and Arts") and the terms of any relevant agreement(s), you might be able to achieve this by a simple majority but it is possible (and I can't say without further information about your company) that you will need a 75% majority or even, 100% of the members to approve any sale.

However, proceeding on the basis that can't be achieved or that it is not desirable, possibly due to issues with management of the estate and / or the common parts, MAYBE such a decision can be approved by a simple majority of shareholders and MAYBE the Company would have to serve a Section 5 Notice under the Landlord and Tenants Act 1987 but if a Section 5 Notice was required, YES it would have to be served on the residents on the estate . . . BUT not all of them.

First, there are matters of company law to address, including what the Mem and Arts say about any future disposal of the company and / or the freehold, if indeed they permit the same.

Assuming the Mem and Arts and / or any relevant agreement(s) allow for the sale of the freehold, you must have a formal board meeting and a general meeting of your members to approve the proposed disposal as a concept and not simply to rubber-stamp a done-deal. In the interest of transparency and good practice, you might consider coopting any interested members onto a sub-committee of the board, chaired by one of the directors, to oversee the sale and report to the board. A second board meeting will be required at the time of the sale and further board and general meetings will be required in the future to deal with apportionment of the proceeds of sale and the winding-up of the company (75% majority). (Incidentally, some of these procedural steps ought to be adopted if you are selling the company, as suggested above.)

Second, assuming the members of your company resolve that the directors are authorised to sell the freehold, we turn to landlord and tenant law because the company must determine whether or not it is necessary to serve a Section 5 Notice ("the Notice") under the Landlord and Tenants Act 1987 ("the 1987 Act"). The fact you say a Notice was served on tenants in 2007 does not mean that the then-landlord was obligated to serve one pursuant to the 1987 Act or that your company must do so now. Consider whether or not a sale of the freehold of your estate triggers a Right of First Refusal for the purposes of Section 5. If you are advised that it does in your case (and I can't say without further information about your estate), remember these key points:

A.     The right applies to buildings containing two or more flats but does not apply to houses that are single dwellings;

B.     Although you do not say whether or not the thirty flats are contained in one building or split between two or more buildings, if the second scenario applies, you must consider the relevance of Long Acre Securities Ltd v Karet [2004] EWHC 442 Ch;

C.     even if each building holds two or more flats, you must consider the percentage of non-residential use of each building and the percentage of flats held by qualifying tenants; and

D.     tenants qualify if they own less than three flats in the building and include some tenants on fixed or periodic tenancies but not inter alia ASTs.

Third, assuming the members of your company resolve that the directors are authorised to sell the freehold ANDassuming the proposed disposal of the freehold is subject to a Right of First Refusal, the company must serve a Notice on all the qualifying tenants on the estate, including all the members of your company. The reason for this is as follows:

1.      all the people entitled to vote at a general meeting of your company are so entitled because they are and strictly in their capacity as members (shareholders), including any members who are directors (subject to the Mem and Arts);

2.      none of the people entitled to vote a a general meeting of your company are so entitled because they are and they are not voting in their capacity as tenants; and

3.      all of the tenants who qualify pursuant to the relevant provisions of the 1987 Act, irrespective of whether or not they are directors and / or members of your company are entitled to exercise their right of first refusal in respect of the new transaction, in any qualifying combination and this might mean the freehold will be acquired by a group of qualifying tenants that may or may not include people who are directors and / or members of your company.

Finally, the company must be avail itself of independent legal advice, separate to any advice that any director / shareholder / leaseholder receives. Directors must always be mindful of their fiduciary duties, in particular to act in the best interests of the company.

Shmuli Simon, Consultant Solicitor at Integrity Property Management Ltd