What is Section 5 of the Act?
When a landlord intends to dispose of its reversionary interest in a residential block of flats, they are prohibited from doing so in most circumstances unless they have first served a formal notice, commonly referred to as a “Section 5 Notice”. For those that are not familiar with this area of law, a Section 5 Notice is effectively a notice offering the qualifying tenants of those flats an opportunity to buy the landlord’s interest on set terms which are set out in the notice.
There are various aspects of the transaction that need to be considered including the number of flats, qualifying tenants, and type of building.
Under Section 5(3) of the Act, if the proposed transaction involves the disposal of an estate or interest in more than one building, the landlord must sever the transaction and deal with each building separately. This means that it is necessary to serve a separate Section 5 Notice on the qualifying tenants in respect of each building individually. However, the Act (unhelpfully) does not define the term ‘building’. The definition of ‘building’ was recently considered in the case of SGL 1 Ltd v FSV Freeholders Ltd & Others [2025] EWHC 3 (Ch) (“SGL 1”).
In that case, there were four blocks of flats, known as Blocks A, B, C and E. The landlord had served two Section 5 Notices (one relating to Block A and the other relating to Blocks B, C and E). The question was whether the four blocks constituted one, two, or more ‘buildings’ for the purposes of Section 5(3) of the Act and, therefore, whether one, two or more Section 5 Notices were required.
The Court emphasised that a number of factors were relevant when determining whether more than one structure constitutes a single ‘building’. These include (but are not limited to) matters such as the visual appearance of the buildings, the extent to which they have separate services and utilities, and the history and construction of the development.
The Court considered that it was a “multi-factorial evaluation exercise” and that a particular factor, or factors, may exert a “magnetic attraction” pointing towards a certain conclusion. In the case of SGL 1, the Court found that the shared use of a street for access to the appurtenant car park enjoyed by all four blocks pointed towards the four blocks being considered as a single ‘building’. The conclusion was, therefore, that the two Section 5 Notices served were invalid as only one Section 5 Notice should have been served in relation to all four blocks.
Conclusion
Failing to serve valid Section 5 Notices can result in a landlord facing civil and criminal liability. It can also result in the tenants having the collective right to effectively ‘undo’ the disposal and acquire the property on the same terms as the purchaser.
The case of SGL 1 provides helpful guidance on the interpretation of the term ‘building’ for the purposes of the Act, which does not expressly deal with the common scenario of multiple structures being involved in the sale of a freehold estate. In particular, it offers guidance on how to determine whether multiple structures in fact form only one ‘building’ and highlights the importance of considering relevant factors in order to reach a conclusion.
The guidance will no doubt be welcomed by many who are considering their obligations under the Act.
If you wish to discuss the contents of this blog or have questions about tenants’ rights of first refusal then please feel free to contact one of our expert real estate dispute resolution solicitors by email or call on +44(0) 3333 231 580.
