Court of Appeal Provides Clarity on “Building” Definition for Rights of First Refusal Under the Landlord and Tenant Act 1987

Mark Forman and David Tarttelin of MSB’s Litigation Department successfully acted for the Appellant in the recent Court of Appeal decision SGL 1 Limited v FSV Freeholders Limited [2026] EWCA Civ 267. This judgment provides important clarity on what constitutes a “building” for the purposes of tenants’ rights of first refusal under the Landlord and Tenant Act 1987 (“the 1987 Act”).

The case concerned a Liverpool development sold by Joint Administrators. In doing so, the Administrators served Section 5 Notices on leaseholders, severing the transaction into what they considered to be two distinct “buildings” within the larger development of four blocks. The High Court found that severance to be incorrect, relying on the long‑standing authority of Long Acre Securities Ltd v Karet [2005] Ch 61.

MSB, instructing John de Waal KC and Gemma de Cordova of Gatehouse Chambers, successfully appealed the decision on the basis that Long Acre required reconsideration. The Court of Appeal agreed, confirming that the Section 5 Notices had been correctly served and providing long‑awaited guidance for developers, insolvency practitioners and leaseholders.

The new approach focuses on whether structures form a “functionally integrated built envelope”, rather than the older, broader approach that gave weight to shared areas or amenities.

Understanding the Section 5 Process

To appreciate the significance of the Court of Appeal’s decision, it is helpful to understand how the Section 5 process operates under the 1987 Act.

What Is a Section 5 Notice?

A Section 5 Notice is the mechanism through which qualifying tenants must be given the right of first refusal when a landlord intends to dispose of their interest in a property. In broad terms, the notice must:

·       Identify the building or property being sold;

·       Set out the terms of the proposed disposal;

·       Give tenants the opportunity to accept those terms; and

·       Allow tenants to nominate a purchaser, usually through a company formed by the tenants.

Failure to serve a valid Section 5 Notice can invalidate the disposal and expose the landlord (or, in administration cases, office‑holders) to significant legal consequences.

Why the Definition of “Building” Matters

Section 5 rights arise only where there is a “building” to which the 1987 Act applies. Where developments consist of multiple blocks, podiums or structurally linked components, a key question arises:

Is the development one “building” for the purposes of the Act—or several?

This question directly affects:

·       How many notices must be served

·       How the transaction may be structured

·       Which tenants must be offered rights of first refusal

·       Whether a disposal is valid

Until now, the leading authority was Long Acre, which adopted a broad, somewhat flexible interpretation based heavily on shared amenities and facilities.

How the Court of Appeal Decision Affects the Section 5 Process

The Court of Appeal’s judgment fundamentally refines the test applied when determining what constitutes a “building” under the 1987 Act.

1. A New Focus on Structural Integration

The Court held that the correct test is whether the relevant parts of the development form a “functionally integrated built envelope”. In practical terms, this means examining:

·       Structural interdependence

·       Shared foundations or load‑bearing elements

·       Physical contiguity and construction

·       Whether the units are designed as a single physical entity

This moves away from the previous emphasis on shared services (such as heating systems, security arrangements or common management structures).

2. Consequences for Administrators and Developers

For office‑holders, developers and landlords involved in disposals of mixed‑block or multi‑phase developments, the judgment provides:

·       Greater certainty on how to structure disposals

·       Reduced risk of challenges based on alleged misidentification of the “building”

·       Clarity on how severance of large developments should be approached

Transactions involving complex sites—especially those with podiums, linked blocks or phased construction—will now be assessed primarily by reference to physical construction rather than management arrangements.

3. Implications for Leaseholders

Leaseholders benefit from:

·       A clearer understanding of when they are entitled to a right of first refusal

·       More predictable outcomes in disputes concerning multi‑block developments

·       Reduced litigation over whether notices have been correctly served

However, the refined test may mean that in some developments, tenants receive Section 5 rights in relation to a smaller part of a site than under the previous approach.

4. Practical Impact on Validity of Section 5 Notices

The decision confirms that:

·       Developers and administrators may sever transactions legitimately where the physical structure supports it;

·       Notices will remain valid provided the “building” has been properly identified using the structural integration test;

·       Challenges based solely on shared amenities or services are less likely to succeed.

This provides a more objective and consistent basis for compliance.

How MSB Solicitors Can Help

MSB Solicitors acted for the successful Appellant in this landmark case and have deep expertise in advising on rights of first refusal under the 1987 Act. Our team supports landlords, tenants, developers and insolvency practitioners with:

·       Preparing and serving valid Section 5 Notices

·       Advising tenants on acceptance and nomination processes

·       Managing disputes involving complex, multi‑block developments

·       Structuring disposals and development projects to ensure compliance with statutory requirements

·       Acting in high‑value and appellate‑level litigation involving the 1987 Act

Our experience—now including one of the most significant appellate decisions on the Act in decades—allows us to provide clear, practical, commercially informed advice.

If you have any queries regarding leaseholders’ right of first refusal, please contact MSB’s Litigation Department at:

civilitigation@msbsolicitors.co.uk