Know your rights

A pre-emption right is a right to acquire certain property in preference to another party. In property terms it is a right of first refusal to buy a property ahead of a buyer on the open market. It is not unusual for either a tenant or a landlord to grant one another pre-emption rights, because if one wants to sell its interest there is often a natural marriage value to be achieved by the other in acquiring the other’s interests.  However, pre-emption rights can come with conflicting interests, so a detailed knowledge of the workings is crucial to ensure paths are not crossed.

Validity of the rights
Section 2 of the Law Property (Miscellaneous Provisions) Act 1989 must be complied with for the sale of an interest in land to be enforceable.  In addition to the normal requirements for a contract, an agreement for the sale of land must be set out in writing, incorporate all the terms that both parties have expressly agreed in one document and be signed on behalf of each party. There is some debate as to whether a pre-emption agreement needs to comply with Section 2, but the advice and safe practice is that the document containing the right of pre-emption should also comply with Section 2 of the Law Property Act so as to ensure that the agreement is completely enforceable.

Tenant granting landlord pre-emption rights
In many standard leases, pre-emption rights will usually favour the landlord in the event of the tenant wishing to trade its leasehold interest.  These are usually triggered by assignment and state that if the tenant wishes to assign its interest after it has agreed terms with a proposed party then it must first offer to surrender its lease to the landlord on the same terms and conditions as the offer to assign. The landlord also has a specific time period in which to accept the surrender.  If the landlord chooses not to accept, then it leaves the tenant free to discuss terms with the interested party, as long as alienation provisions in the lease are properly adhered to.

In most of these cases the tenant stands to loose very little, as it would need to obtain the landlord’s consent to the assignment and would probably need to produce the same information for an assignment application. If the landlord or its managing agents know the property well, then they will have a good idea whether they can re-let the premises on more advantageous terms and therefore be able to quickly assess whether they want the premises back. There is therefore very little disadvantage from the tenant’s point of view, unless the landlord is not quite sure whether they actually want the premises back.  However, if there is a set timetable for a decision the tenant will not be disadvantaged.  From the tenant’s point of view the key is to drive the timetable to ensure that the landlord gives a response within an acceptable timeframe.

The landlord granting pre-emption rights
If a tenant is carrying out major reconstructive work to the premises, like an extensive fit-out, they may want the protection of buying the freehold if the landlord decides to sell.  This is particularly relevant if the tenant has no security of tenure of the property at the end of its contractual term of the lease.  In such cases, the landlord may agree a right of pre-emption in return for the tenant agreeing to carry out and pay for the works.  However, in such cases the landlord needs to consider what they stand to give away.

A right of pre-emption should have a strict timetable in which the offer must be made and then accepted by the tenant.

In a recent case that we looked at, the pre-emption provisions and a landlord’s break clause both cancelled out the other, which was probably not the intention of either party.  This example meant that the landlord was deprived of a quick sale at a premium.  Therefore, it is really important to look at how the pre-emption provisions work with other clauses contained within the lease.

The other issue to consider are the interests of the parties changing as the lease progresses and therefore the position at the beginning of the lease may be significantly different at a later point in the term. Some clients also love formulas for determining the price to be paid. By all means have a formula, but if you do, please also attach a worked example, so that there is no doubt when the formula is being operated what the intention of the parties was at the time of the transaction. Often formulas are not worked out correctly and produce widely different results then intended by the parties.

Method of valuation
The method of valuation is also hugely important in arriving at the price to be paid by the tenant or the Landlord. In many cases the tenant will push the landlord during the drafting stage for the price to be determined by an open market valuation by a valuer either pre-agreed or appointed at the time when the price has to be determined. From the landlord’s point of view, an open market valuation will deprive them of a quick sale or a bonanza sale at a premium. Therefore, careful thought needs to be given at the time when the pre-emption provisions are drafted whether any offer for the property should be matched by the tenant or whether an open valuation is to be agreed.

Protecting a right of pre-emption
A buyer or tenant having the benefit of pre-emption rights should always ensure that those rights are protected by registration at either the Land Charges Department or at the Land Registry.  Since the Land Registration Act 2002, a right of pre-emption in relation to registered land has effect from the time of creation as an interest capable of binding successors in title. With unregistered land there is still some debate as to whether the pre-emption right creates an interest in land, but there is nothing to prevent a buyer from registering a land charge immediately following exchange of the pre-emption agreement and the advice is that the buyer or tenant should ensure that this is done.

Conclusions
Ultimately, pre-emption rights are a good way of protecting one party against a sale which that they may not want. However the party giving those rights must be clear about what they are prepared to give away, and that the appropriate protection is built into any clauses which are drafted.  Those provisions also need to be closely examined to ensure that they will stand the test of the whole term of a lease, or the period agreed for any sale caught by the provisions.