Court of Appeal redefines ‘building’ under the Landlord and Tenant Act 1987
If you own or are looking to acquire a multi-block residential development, the recent Court of Appeal decision in SGL1 Ltd v FSV Freeholders Ltd [2026] has changed the rules on when you must offer tenants the right to buy the freehold before you sell it. As B P Collins’ property disputes team explains, the court has overruled twenty years of established authority and introduced a new test that could affect both the way you structure future disposals and the validity of section 5 notices already served.
The right of first refusal: what the 1987 Act requires
Part 1 of the Landlord and Tenant Act 1987 gives residential tenants of flats the right of first refusal when their landlord proposes to sell its freehold interest. Before completing a sale to a third party, the landlord must serve a section 5 notice offering the premises to the qualifying tenants on the same terms. If the requisite majority of the tenants do not accept within the statutory period, the landlord may proceed to sell to the third party – but if it sells without serving valid notices, the tenants can compel the buyer to transfer the freehold to them.
Where a development spans more than one building, section 5(3) of the 1987 Act requires the landlord to sever the transaction and deal with each building separately. The purpose is straightforward: the tenants of one block should not lose their right simply because the tenants of a different block have no interest in buying.
The question that has generated repeated litigation is what counts as a ‘building’ when a development contains several structures. Until now, the answer was governed by Long Acre Securities Ltd v Karet [2005], which held that separate structures could form a single ‘building’ if their occupants shared the same areas, such as communal gardens, car parks and similar amenity land.
What the SGL1 case decided
Fox Street Village is a residential development in Liverpool comprising five blocks. Block D had been demolished. The administrators of the original landlord served two section 5 notices in 2020: one for Block A alone and one for Blocks B, C and E together. The tenants did not accept either notice and the freehold was sold to SGL1. The tenants subsequently sought to compel SGL1 to transfer the freehold to them on the basis that the notices were invalid, arguing that all four blocks together formed a single building, so only one notice should have been served.
At first instance, the judge applied Long Acre and agreed with the tenants. The Court of Appeal allowed SGL1’s appeal and subsequently overruled Long Acre.
The court held that the correct question is whether the structures are within a “functionally integrated built envelope”. This focuses on physical and functional integration rather than shared amenity land. A structure is a separate building unless it is in practice indivisible from another; because physical separation is impossible or would require significant new works to achieve independent operation.
Applying that test: Block A was a separate building, with its own utilities and services. Blocks C and E formed a single building, sharing a single entrance, staircase, plant room and integrated utilities. Block B was part of the same building as Blocks C and E, because it relied entirely on the plant room beneath those blocks and could not function independently without major installation works. The two notices were therefore correctly structured and both valid.
What this means in practice
The decision has immediate consequences for anyone involved in multi-block residential property:
- A clearer test going forward: The question is now whether each structure can operate independently. Does it have its own entrance, plant, utilities, no structural dependency on another block? If blocks share a single plant room, a single entrance or integrated services from which they cannot be separated without significant works, they are likely to be a single building for section 5 purposes.
- More flexibility in structuring disposals: Shared amenity land (communal gardens, car parks, external open spaces) no longer determines whether structures are one building or several. Landlords can parcel that land as commercial considerations dictate, giving greater freedom to market individual blocks separately or structure phased sales.
- Retrospective risk on existing transactions: Any disposal completed since 2005, where section 5 notices were structured on the basis that physically separate and functionally independent blocks formed a single building under Long Acre, may now be open to challenge. If those blocks are separate buildings under the new test, the notices may have been deficient, and the tenants may still have the right to acquire the freehold. This is an immediate due diligence priority for anyone holding or considering acquiring a multi-block residential freehold.
- Due diligence on acquisition: Buyers should review any section 5 notices served by a previous landlord and confirm they correctly identified each building under the new functionally integrated test. A deficient notice is a material title risk that should be assessed before exchange.
A call for legislative reform
Lewison LJ’s judgment includes a notable observation: that section 5(3) as drafted “produces no entirely satisfactory interpretation”. He invited the Secretary of State to consider amending the provision by regulation. The 1987 Act has long been described as “ill-drafted, complicated and confused”. Whether or not the invitation produces a regulatory response, anyone advising on multi-block residential property should monitor developments in this area, particularly given the Commonhold and Leasehold Reform Bill currently before Parliament.
Get in touch
Working in conjunction with the firm’s residential property solicitors, the property disputes team advises landlords, investors and tenant groups on all aspects of the right of first refusal under the 1987 Act, including the validity of section 5 notices, disputes arising from defective notices, and freehold acquisitions by tenant nominees. If you own a multi-block residential development and need to assess the impact of this decision on past or future transactions, we can help. Call us on 01753 889995 or email enquiries@bpcollins.co.uk.
The team’s ethos is simple: solve the problem.
