Selling a Freehold? Section 5 Notices After the 2026 Court of Appeal Decision

A Section 5 notice gives qualifying tenants the right of first refusal before a freeholder sells a building. Following the 2026 Court of Appeal ruling, separate notices may be required for each building depending on whether the structures are functionally integrated.

Introduction

If you’re planning to sell the freehold of a block of flats, you must comply with your tenants’ statutory right of first refusal. If you get the Section 5 notice wrong, the qualifying tenants may later be able to force the buyer to sell the freehold on the same terms you agreed with a third-party buyer. 

A recent landmark Court of Appeal ruling, SGL1 Ltd v FSV Freeholders Ltd [2026] EWCA Civ 267, has changed the landscape for these notices. The Court has clarified exactly when one Section 5 notice will cover the entire development and when each block needs its own notice.

In doing so, it has overruled a long-standing High Court decision from Long Acre Securities Ltd v Karet [2005] Ch 61, simplifying what has long been a source of uncertainty for landlords and developers. The judgment introduces a clearer, more practical test for deciding what counts as a “building” under the Landlord and Tenant Act 1987 (LTA 1987).

In short, if your development contains several blocks of flats or shared amenities, this decision affects how you should structure any future freehold sale.

Terminology

In this article, the term “landlord” is used in the statutory sense under the LTA 1987. In practice, the party responsible for serving section 5 notices is usually the freeholder, often a company holding the freehold reversion to a residential development.

Where context requires precision, the term “freeholder” is used.

The Dispute in SGL1 -v- FSV Freeholders Ltd

The case concerned Fox Street Village, a residential development in Liverpool comprising five blocks A, B, C, D and E. Block D is not material to the case; it had largely been demolished following a fire before the hearing.

Following the insolvency of the original freeholder, administrators agreed to sell the freehold reversion to SGL1 Ltd. Before completion, two section 5A offer notices were served – the form of notice applicable where the disposal is to be completed by conveyance, which is the most common form of sale:

• one notice relating to Block A, and
• another relating to Blocks B, C and E.

The qualifying tenants declined both offers and the sale proceeded.

The tenants later sought to exercise their statutory rights under section 12B LTA 1987, arguing that the section 5 notices had been invalid.

The central issue was straightforward but significant:

Did the relevant structures constitute one “building” or several buildings for the purposes of the Act?

The Statutory Framework

Part I of the LTA 1987 grants qualifying tenants a right of first refusal when a landlord proposes to dispose of certain interests in premises consisting of:

• the whole or part of a building,
• containing two or more flats, and
• where qualifying tenants hold more than half of those flats.

Before making a relevant disposal, the landlord must serve an offer notice under section 5. 

Section 5(3) then imposes an important requirement. Where a disposal involves more than one building, the landlord must sever the transaction and deal with each building separately.

Failure to comply can have serious consequences. A defective notice may be treated as invalid, and completing a disposal without complying with the statutory procedure may expose the landlord to liability under section 10A LTA 1987.

Why Karet Was Overruled

The earlier authority of Long Acre Securities Ltd v Karet suggested that several physically separate blocks might still be treated as one “building” where they shared common appurtenant premises, such as gardens or access roads.

The Court of Appeal in SGL1 -v- FSV Freeholders Ltd held that this approach was mistaken. 

Lady Justice Asplin explained that the reasoning in Karet focused on the operation of section 12 (tenant purchase notices) rather than the statutory structure of section 5, where it is the landlord who decides how a disposal is structured.

Lord Justice Lewison also emphasised that the wording of section 5(3) requires transactions to be severed so as to deal with “each building separately”. That language does not readily support treating several separate structures as a single building. He further noted that any legal easements held by leaseholders over shared amenity areas — such as rights of way over access roads or car parks — will remain enforceable against the new owner regardless of how the transaction is severed. The perceived need to “split up” shared amenity land on severance therefore does not in practice arise.

The New Test

The Court of Appeal adopted a simpler and more practical approach.

The question is whether the relevant structures form part of a “functionally integrated built envelope”. In practice, this means:

• physically separate and independently serviceable structures will normally be separate buildings;
• structures that depend on shared essential infrastructure may constitute a single building.

The Court considered that this test should avoid the complex and sometimes unpredictable multi-factor analysis that had developed under Karet.

Application to Fox Street Village

Applying this approach:

Block A, a converted warehouse, was physically separate from the other blocks and had its own utility services. The Court concluded that Block A constituted a separate building. The section 5A notice served in respect of Block A alone was therefore valid.

Blocks C and E shared a single entrance and staircase, and making it impossible to access Block C without using the staircase serving Block E. The plant room — which sits within Block C’s structure — served both Blocks C and E. As such, the Court held that Blocks C and E formed part of a single building. 

Block B had no basement or plant room of its own. All incoming services for Block B were routed through the plant room in Block C, meaning Block B could not function independently. The Court treated Block B as part of the same building as Blocks C and E. 

The Court therefore concluded that the administrators had served valid section 5A notices on Blocks A, B, C, and E, and SGL1 had lawfully acquired the freehold.

Practical Points for Freeholders

The decision highlights a number of issues freeholders should consider before serving section 5 notices.

• Identify the relevant “building” first: The analysis should start with the physical layout and infrastructure of the development, rather than the title structure or planning scheme.
• Consider functional integration: Shared plant rooms, heating systems, main utility connections or internal circulation areas may indicate that structures form part of the same building. 
• Confirm which form of section 5 notice applies: Section 5A governs the most common case of a sale by private contract. Sales by auction require a section 5B notice; options and rights of pre-emption require section 5C; and other disposals fall under section 5D. Serving the wrong form of notice could render it invalid.
• Separate notices may be required: If a disposal involves more than one building, the transaction must be severed and separate section 5 notices served.
• Shared amenity land is not decisive: Communal gardens, parking areas or access roads do not necessarily mean that several blocks form a single building. Existing easements over such areas will continue to bind the purchaser in any event.
• Errors can have serious consequences
  An invalid notice may result in the disposal being challenged and may also expose the landlord to liability under the statutory regime.

Final Observations and How We Can Help

The Court of Appeal’s decision in SGL1 -v- FSV Freeholders Ltd provides a clearer framework for determining what constitutes a building under the right of first refusal provisions. Lord Justice Lewison went further, calling on the Secretary of State to exercise the regulatory power under section 20(4) LTA 1987 to modify section 5(3) by regulation — a signal that this area of law may be subject to further change in due course.

For freeholders and developers dealing with multi-block residential developments, the judgment underlines the importance of careful analysis before section 5 notices are drafted and served.

If you are unsure whether your development is one building or several, our property team can advise before you serve any notices. We offer a no-cost, no-obligation 20-minute introductory call to discuss the position and identify immediate priorities. Where you would like some initial guidance, we sometimes (instead of the free 20-minute call) offer a one-hour fixed fee appointment, typically ranging from £280 plus VAT to £390 plus VAT, depending on complexity and the seniority of the fee earner involved. The initial call is confidential and does not commit you to any course of action.

To arrange an initial discussion, please email wewillhelp@jonathanlea.net with any relevant background information to ensure the call is as productive as possible, or telephone 01444 708640. Following the call, we can provide a clear scope of work, a fee estimate (or fixed-fee quote where appropriate), and confirmation of next steps. 

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.

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