BuildingUp - Chapter 6: Existing tenants - What do I need to consider before developing the airspace?

Aside from considering the practicalities of airspace development such as funding and construction, one of the aspects that developers and building owners alike need to consider early on, is whether the tenants of residential  space in the building have a right of first refusal to purchase the proposed airspace lease.

What does that mean?

• Under the Landlord and Tenant Act 1987 (the "1987 Act"), if the proposed disposal (such as the grant of an airspace lease to a developer) meets certain criteria, the party granting the lease must follow a strict procedure prescribed by the 1987 Act and must serve on the existing flat tenants formal notice offering them a right to purchase the airspace lease on the same terms as that being offered to the developer (the "Notice") before the parties enter into an agreement for the grant of the airspace lease.

Is there a way to avoid having to serve a Notice?

• There are a number of 'exempt disposals' permitted under the 1987 Act and these need to be considered carefully.
• For example, disposals to a family member are exempt. Similarly, if the lease is being granted to a company associated with the party making the disposal (for example the building owner) then this will also be exempt from the procedure set out in the 1987 Act, so long as the companies have been associated for more than two years. It is common for building owners and developers to  rely on this exemption when embarking on airspace development; not only does it save costs in preparing and serving the Notices, it also saves time, as there is no need to wait for the two month acceptance period to expire following service of the Notice before the airspace lease can be granted.

How does this affect developers?

• Firstly, if the existing tenants decide to accept the offer, the developer will not be in a position to take the airspace lease. This could result in wasted costs already incurred by the developer, such as planning or in connection with the engagement of surveyors/surveys.
• Secondly, this will impact on timing of delivery of the development. The flat owners have two months to respond to the Notice; a prudent and well-advised developer should wait until that two month period has elapsed and the agreement for the grant of the airspace lease completed before expending any further time or money on the project.

How does this affect building owners?

• If a building owner fails to comply with their obligations under the 1987 Act, they may face either or both a criminal prosecution, and civil action.
• A retrospective Notice cannot be served once the disposal has taken place.
• The provisions of the 1987 Act are complex and Notices must be prepared and served correctly to avoid falling foul of the 1987 Act.
• However, there are various ways to structure the transaction to circumvent the 1987 Act and the need to serve Notices.

It is therefore essential for anyone embarking upon an airspace development to seek legal advice on the 1987 Act at the earliest opportunity.

Look out for our next post when we consider the impact of rights of light on airspace developments.