Court of Appeal provides clarification on Section 5 Notices- A welcome decision for developers

In a recent case, Associate David Tarttelin and Partner Mark Forman from MSB’s Litigation Department, acted for the Respondent in a Court of Appeal decision regarding what needs to be included in a Section 5 Notice.

A Section 5 Notice is what needs to be served on qualifying Leaseholders by a Freeholder who is looking to dispose of the freehold title. There is no prescribed form of a Section 5 Notice, but the required contents are set out in Section 5 of the Landlord and Tenant Act 1987. In particular, it requires the Freeholder to set out the principal terms of the contract, including the premium and any deposit payable, and to also ‘sever’ the transaction when the freehold is comprised of more than one ‘building’. The severance of the transaction is key, as qualifying Leaseholders only have the right to purchase the freehold of the building in which their interest lies.

In this case, the Appellant, being a company set up by several qualifying leaseholders, were arguing the case that the Section 5 Notice served on them by the Freeholder was not compliant with the LTA 1987 on the basis that it did not include the overall price the freehold was being sold for (arguing that it was a principal term of the contract). Instead, it had, in compliance with the Act, severed the transaction with regards to the separate buildings in the freehold.

Further, the Appellant argued that other principal terms had not been included. This included the fact that the freehold title could only be sold for a minimum amount pursuant to a Court Order, due to it being sold out of insolvency.

The Lords and Lady Justices hearing the case in the Court of Appeal unanimously agreed with the Respondent’s case that the Section 5 Notices were indeed valid. In particular, they agreed that the overall price the freehold is intending to be sold for does not need to be included in the Notice. This is because the qualifying leaseholders did not have a right to purchase the freehold title of a building in which they did not have an interest. In fact, there was a building which had no qualifying leaseholders at all and so they had no right to purchase the freehold title to it, and the price which it was being sold for held no relevance. Moreover, the Lords and Lady Justices agreed that the Court Order setting a minimum price for the freehold was not a principal term of the contract and so did not have to be included in the Notice.

This decision was welcomed by the Litigation Department as it will provide further clarity to Freeholders who are seeking to dispose of their freehold title and want to ensure they do not fall foul of Section 5 of the LTA 1987.

If you would like to read the Judgment in its entirety, then you can search for it using the Neutral Citation Number [2023] EWCA Civ 1318.

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