Could Refinancing Your Mixed-Use Property Trigger Tenants’ Rights?

For owners of mixed-use buildings, refinancing can often involve transferring ownership of a property into a newly incorporated limited company. While this may offer commercial or tax planning advantages, landlords should be aware that such a transfer can have unintended consequences.

One key consideration is the tenants’ right of first refusal under the Landlord and Tenant Act 1987. If the legislation applies, landlords may be legally required to offer qualifying leaseholders the opportunity to purchase the freehold before it is transferred. Failing to do so can result in significant delays, legal complications and potentially serious financial consequences.

When Does the Right of First Refusal Apply?

The provisions of the Landlord and Tenant Act 1987 apply to many mixed-use residential buildings, but not all. Whether the legislation applies will depend on the specific characteristics of the property and its occupants.

Broadly, the right of first refusal may apply where:

• The building contains two or more flats.
• More than half of those flats are held by qualifying tenants under long leases, typically leases originally granted for more than 21 years.
• The commercial element of the property occupies no more than 50% of the total internal floor area.
• Individual leaseholders do not own more than two flats in the building.

There are also important exemptions. For example, the legislation generally does not apply where the landlord occupies the property as their principal residence and has done so for at least one year.

Given the complexity of the qualifying criteria, landlords should seek advice before proceeding with any proposed transfer.

The Risks of Non-Compliance

The consequences of failing to comply with the right of first refusal procedure can be significant.
A landlord who disposes of a qualifying interest without first offering it to the residential leaseholders may commit a criminal offence and face an unlimited fine.

The risks do not end there. If the transfer proceeds without the correct procedure being followed, a majority of the qualifying tenants may have the right to compel the new owner to transfer the freehold to them on the same terms and for the same price paid in the original transaction. This right can generally be exercised within six months of the tenants becoming aware of the disposal.

For landlords seeking to refinance, this can create uncertainty, delay funding arrangements and potentially undermine the entire transaction.

Practical Solutions for Landlords

Where there is a risk that the legislation may apply, proactive planning is essential.

One option is to follow the statutory process from the outset by serving a Section 5 Notice on the qualifying tenants. This formal notice must be served on at least 90% of the qualifying leaseholders and include details of the proposed disposal. Tenants are then typically given two months to decide whether they wish to exercise their rights.

If the tenants decline the offer, the landlord will generally have a 12-month window in which to complete the transfer on substantially the same terms.

Depending on the circumstances, landlords may also consider:

• Retaining ownership in their personal name rather than transferring to a limited company.
• Excluding the residential element from the refinancing structure where commercially viable.
• Exercising caution when extending or varying headleases, as certain lease extensions may themselves constitute a relevant disposal capable of triggering the legislation.

Each option requires careful consideration of both commercial objectives and legal obligations.

What Does the Case Law Say?

Recent and historic cases highlight the importance of understanding how the legislation operates in practice.

In Artist Court Collective Ltd v Khan (2015), a landlord transferred a property to a newly incorporated company as part of a restructuring exercise. The court found that the transfer triggered the tenants’ right of first refusal because the company did not qualify as an associated company for the purposes of the legislation. The tenants were therefore entitled to require the company to transfer the freehold to them.

By contrast, in York House (Chelsea) Ltd v Thompson & Thompson [2019], the court held that a transfer from joint ownership into sole ownership did not trigger the right of first refusal. The case confirmed that changes between existing co-owners do not necessarily constitute a relevant disposal under the Act.

More recently, SGL 1 Ltd v FSV Freeholders Ltd [2026] highlighted the importance of complying strictly with procedural requirements. Although Section 5 Notices had been served, the court held that they had been served incorrectly because they were addressed to separate blocks rather than individual flats. As a result, the notices were invalid.

These cases demonstrate that even where landlords are aware of their obligations, technical errors can have significant consequences.

Take Advice Before Refinancing

For owners of mixed-use properties, the tenants’ right of first refusal is an issue that should be considered at an early stage of any refinancing or restructuring exercise.

Where a mortgage application has been submitted, funding approved and legal due diligence is already underway, discovering that the legislation applies can cause substantial delays and potentially jeopardise the transaction altogether.

Taking specialist legal advice before proceeding can help identify potential risks, ensure compliance with the statutory requirements and avoid expensive disputes further down the line.

If you are considering refinancing a mixed-use property or transferring ownership as part of a restructuring exercise, the Property team at Swinburne Maddison can advise on whether the Landlord and Tenant Act 1987 applies and help you navigate the process.