What is a 'building'? Court of Appeal ruling could allow residents to unwind property transactions

SGL1 Ltd v FSV Freeholders Ltd [2026] EWCA Civ 267

The Court of Appeal has overruled a longstanding High Court decision made in Long Acre Securities Ltd v Karet [2005] Ch 61 and established a new test for determining what constitutes a "building" under the tenants' right of first refusal provisions in Part 1 of the Landlord and Tenant Act 1987 (the "1987 Act"). 

This decision will have a direct impact on landlords and investors dealing with residential developments comprising multiple blocks and critically, may entitle tenants to now exercise rights to acquire interests, where Long Acre was relied on by the landlord prior to a sale of its interest.

The case

Fox Street Village in Liverpool is a development comprising five blocks (A–E). Block A was a refurbished warehouse with its own utilities, standing separately from the other blocks. Blocks B, C and E shared similar design, utilities, a single plant room in Block C, and one boiler plus CCTV servicing all three. Blocks C and E shared a single entrance and staircase, with access to Block C requiring passage through Block E.

The landlord (acting through administrators) served two section 5 offer notices on the qualifying tenants: one for Block A and one for Blocks B, C and E. The requisite majority of qualifying tenants did not accept either offer, and the freehold was sold to SGL1. The tenants subsequently served a section 12B purchase notice on SGL1 claiming the right to acquire Blocks A, B, C and E.

This case primarily concerns the need for a landlord to sever a transaction to offer buildings separately to tenants, as required by section 5(3) of the 1987 Act.

At first instance, HHJ David Hodge KC, sitting as a High Court judge, followed the decision made in Long Acre and held that Blocks A, B, C and E together constituted a single "building" for the purposes of Part 1 of the 1987 Act, so there was no need to sever the transaction. He therefore held that the service of two section 5 notices was incorrect because on his analysis, there was a single building requiring one notice. The disposal of the freehold to SGL1 was therefore held to have been made in contravention of the provisions of Part 1 of the 1987 Act. SGL1 subsequently applied for permission to appeal the decision.

The Court of Appeal's decision

The Court of Appeal allowed the appeal and held that Long Acre was wrongly decided.

Why Long Acre was overruled

In Long Acre, the deputy High Court judge had concluded that the word "building" under the 1987 Act could mean one or more structures where the occupants of qualifying flats share the use of the same appurtenant premises (yards, gardens, outhouses, etc.). The reasoning behind this was that it would be impractical to require landlords to split shared spaces between different buildings when selling them.

The Court of Appeal rejected this approach for several reasons, but notably, while section 5(3) of the 1987 Act requires a transaction to be severed so as to deal with each building separately, it does not dictate how amenity land must be parcelled. A landlord may choose to include shared amenity land with one building rather than another or split it as he sees fit. Legal easements and quasi-easements over shared amenity areas will pass with the land thus protecting the tenants.

The Court acknowledged that the primary purpose of section 5(3) of the Act is to ensure that tenants of one block are not deprived of their right to acquire the freehold reversion because tenants of a different block do not wish to do so.

The correct test: functionally integrated built envelope

The Court noted that it was difficult to formulate a single test to establish when separate structures constitute one “building” but held that the central question is whether structures are within a "functionally integrated built envelope". This test focuses on functional integration rather than shared use of appurtenant premises or amenity land. 

Application to Fox Street Village

Applying this test, the Court held that:

Block A was a separate building: it had its own services and utilities and was physically and functionally separate from the other blocks.

Blocks C and E constituted a single building: they shared a single entrance and staircase, a common plant room, and utilities, and were within a functionally integrated built envelope.

Block B was part of the same building as Blocks C and E: Block B had no plant room of its own and relied entirely on the plant room under Blocks C and E. For Block B to function independently, it would require installation of new plant and facilities.

The Court therefore held that the section 5 notice for Block A was valid, and the section 5 notice for Blocks B, C and E was also valid. The appeal was allowed.

What this means for landlords and investors

This decision brings some clarity and flexibility for landlords looking to dispose of residential blocks subject to the 1987 Act.

Greater certainty when structuring sales

The complex evaluation of what constitutes a ‘building’ following Long Acre is no longer required. The test of a "functionally integrated built envelope" is a more straightforward, objective assessment based on physical and functional characteristics rather than the previous focus on shared amenity areas.

Flexibility in parcelling assets

Landlords now have greater control over how they structure disposals. The mere fact that occupants of different structures share the use of yards, gardens, car parks, or other appurtenant premises does not mean those structures must be treated as a single "building". When serving section 5 notices, the landlord decides what to include and may parcel shared amenity land with one building rather than another or split it as commercial considerations dictate. This allows landlords to market blocks individually to different purchasers. 

Unintended consequences

Splitting up buildings and amenity areas might cause an intended transaction to fall through. If, for example, a third party purchaser has agreed to purchase an estate with an amenity area it has earmarked for development, and the tenants of one building accept a notice including part of the earmarked land, the landlord may lose that buyer along with being faced with difficulty selling the remainder.

Landlords will need to be quite tactical about the splitting up of the amenity areas to avoid onward risk in this respect, but of course that then brings into question whether such tactical considerations were really what parliament had intended.

Due diligence for investors

Investors acquiring residential blocks should review any section 5 notices served previously and ensure that they are satisfied as to their validity. Any notices served which were reliant on Long Acre may now give rise to purchase rights for the residential tenants. 

Possible future reform

The 1987 Act is famously “ill-drafted, complicated and confused” (Denetower Ltd v Toop and others [1991] 3 All ER 661. 

In the Court of Appeal’s judgment, Lewison LJ noted that section 5(3) as drafted produces no entirely satisfactory interpretation and called on the Secretary of State to consider exercising the power under section 20(4) of the 1987 Act to modify the relevant provisions by regulations. Landlords and investors should monitor any regulatory developments in this area.

Conclusion

This decision provides a degree of clarity by establishing the "functionally integrated built envelope" test as the correct approach for determining what constitutes a "building" under Part 1 of the 1987 Act. The overruling of Long Acre removes the uncertainty caused by the previous focus on shared appurtenant premises and gives landlords greater flexibility in structuring disposals of multi-block residential developments. Parties should carefully assess the physical and functional characteristics of structures when preparing or reviewing section 5 notices.