Business Services : Residential Leasehold : Selling your or acquiring a freehold interest?

Your Freehold Interest

Selling Or Acquiring Your Freehold Interest

What Is Freehold Interest?

Freehold interest is the term used to describe the landlord’s interest in the property. In this example, the freehold interest refers to the freehold ownership (rights over the land).

I Want To Sell My Freehold Interest

If you decide to sell your freehold interest, you are legally obligated to give the leaseholders of the building the Right of First Refusal (RFR).

Whenever there is a possible sale of the freehold, the Landlord and Tenant Act 1987 and Housing Act 1996 give explicit rights to the current leaseholders, as will as imposing legal duties on the freeholder to ensure these rights are met.

What Is RFR?

If you wish to sell your freehold interest, the Right of First Refusal means that you must offer it to the existing leaseholders before anyone else. You can only sell your leasehold privately, or on the open market, if the leaseholders decide they don’t want to buy it themselves.

Leaseholders can’t force you to sell your freehold interest. However, if you have already decided to sell it, the leaseholders must have first refusal.

In order for the RFR to apply to leaseholders, there are some qualifying factors:

  • The right of first refusal applies to all privately rented or leasehold properties, as long as the property is not a single dwelling
  • The building must contain at least two individual flats AND
  • no more than 50% of the building is in non-residential use AND
  • more than 50% of the flats must be occupied or held by leaseholders who qualify for potential purchase (this applies to most fixed or periodic tenancies; not short-hold or assured tenancies).

RFR does not apply to housing authorities, social landlords, charitable housing trusts or residential freeholders who also live in the building if it is a converted house and not a purpose-built block of flats.

Is RFR Different From Freehold Enfranchisement?

Yes, it is.

Freehold enfranchisement allows leaseholders to force freeholders to sell their freehold interest. This isn’t how RFR works.

RFR is an opportunity for those leaseholders to buy that interest before the freeholder offers it to a third party. Only the freeholder can initiate this process.

How Do I Advise Leaseholders That The Freehold Interest Is For Sale?

You must serve a formal Offer Notice on the leaseholders, informing them that you intend to sell the freehold. You must give them enough time to consider making an offer themselves, before proceeding to the private or open market.

The Offer Notice must be served on at least 90% of qualifying leaseholders and, if the right to manage has already been exercised, the offer notice must also be served on the RTM company.

What Should The RFR Offer Notice Contain?

The must important information within the notice will be:

  • identification of property involved
  • the proposed price
  • a statement that the offer notice is the legal offer by the landlord to enter into a contract
  •  the date by which the purchase offer must be accepted (this must be within two months of the date of the offer notice).

The Offer Notice is a legal document and it’s important that all the required details are present and correct. The notice should be drawn up by a specialist lawyer to ensure that you have fulfilled your legal obligations as the freeholder.

How Do Leaseholders Accept The RFR Offer?

The qualifying leaseholders will have one vote per flat. To accept the RFR offer, 50% of the qualifying tenants must write an Acceptance Notice, before the deadline that the Offer Notice specified.

To qualify for acceptance, over 50% of the qualifying tenants (on the basis of one vote for each flat) must write back in the form of an Acceptance Notice, within the acceptance date specified in the Offer Notice.

The leaseholders will then have a further two months to identify their Nominated Person, to whom you must send the contract of sale.

The Nominated Person will sign and return the contract. If a deposit is required, they will pay this too (a maximum of 10% of the purchase price).

Once you have received the signed contract, completion must take place within seven days.

What If The Leaseholders Don’t Respond To The RFR Offer?

If the leaseholders don’t respond (or they don’t respond in the right way), you are free to sell the freehold to a third party, as long as it isn’t at a lower price or on different terms to the leaseholder offer.

What If I Don’t Offer RFR?

If you don’t offer RFR, you are breaking the law.

This is punishable, on conviction, with a fine of up to £5,000.

Leaseholders can also demand the full details of the sale from the new owner and act against them, including a forced purchase of the freehold at the price paid.

Valuing Your Freehold Interest

While the RFR is taking place, you can’t sell your property to anyone else, or offer a share at a lower price or on different terms to which you offered the leaseholders.

The price you offer the leaseholders can be no more than the final selling price and, if you do sell to a third party within 12 months, it must be on the same terms as agreed in the RFR.

If the leaseholders with to buy the freehold and you can’t agree on a price, the issue can resolved by the First-Tier Property Tribunal.

Selling Your Freehold Interest? You Need To Speak To The Experts.

Leasehold law is extremely complex. The Coles Miller residential leasehold team are extremely experienced in acting for both leaseholders and freeholders, meaning they have expert knowledge on all angles of the process.

Why not arrange a free chat with us by completing the enquiry form below…

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