Residential Leasehold Property : Right of First Refusal

Right of First Refusal

Right Of First Refusal Leasehold Solicitors

What Is The Right Of First Refusal?

Qualifying tenants (leaseholders) of flats must by law be offered the first opportunity to buy the freehold when the landlord (freeholder) decides to sell it. This legal Right of First Refusal (RFR) is enshrined in the Landlord and Tenant Act 1987. It is initiated by a Section 5 Notice.

This important legal protection prevents the landlord from selling the freehold without first informing the qualifying tenants who live there. It gives the leaseholders first chance to buy the freehold on the same terms as an open market sale.

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How Can The Right Of First Refusal Benefit Me?

You and your fellow leaseholders will have the opportunity to buy jointly the freehold of your block so that you – and not the landlord – will own the land under your flats.

There are lots of benefits to this. You will safeguard (and possibly increase) the value of your property, make it more saleable when the time comes to move and also (usually) stop paying ground rent.

You may not have to renew your lease again – saving you thousands of pounds. And with no landlord, you will also have more control over how your block is run.

For a full list of benefits, view our Buying The Freehold page.


The Aim Of This Right

The aim is to buy the freehold of the block. Each leaseholder will then own a share in the company that owns the freehold or head leasehold interest. This can enable the company to:


Who Has The Right Of First Refusal?

A freeholder (or the owner of a head lease) proposing to sell their interest in the flats must first offer it to the qualifying leaseholders before selling it on the open market.

It applies when:

  • the premises are the whole or part of a building
  • the premises contain at least two flats
  • no more than 50 per cent of the premises are non-residential
  • more than 50 per cent of the flats are held by qualifying tenants.

This Right of First Refusal can be accepted only by more than 50 per cent of the leaseholders. If the participating leaseholders fall to 50 per cent or less, the nominated company (or person) must advise the landlord and the leaseholders must withdraw from the purchase.


Who Is Excluded From The Right?

There are a few exceptions to the right. A freeholder is not put through this Right of First Refusal process in the following circumstances:

  • more than 50 per cent of the building is used for non-residential (commercial) use
  • a tenancy has been granted with employment
  • the tenancy is assured (or is assured agricultural occupancy)
  • you are a tenant of three or more flats in the block
  • you are a sub-tenant
  • the freeholder is a local authority
  • the freeholder is a registered social landlord
  • the freeholder is selling the building between certain family members.

Most sales of a freehold will trigger the Right of First Refusal but some will not. These include:

  • grant of single tenancies (individual flats)
  • grant of a mortgage or a loan on the security of the freehold/head lease
  • disposal to a receiver or trustee in bankruptcy (the transfer of the estate to the receiver, liquidator or trustee in the first instance is an exempt disposal but any subsequent disposal by the receiver, liquidator or trustee will not be exempt and the tenants must be served notice of their rights)
  • disposal to an associated company – where the freehold/head lease is transferred to another company associated with the parent company for at least two years
  • disposals arising from collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993
  • disposals arising from compulsory purchase orders
  • sales by charities to other charities
  • certain sales in connection with matrimonial and family proceedings
  • a sale by two or more members of the same family to other members of the same family (or a transfer by family members to fewer of their number)
  • sales to the Crown or to Government departments.


Right Of First Refusal Process: How Does It Work?

You cannot use the Right of First Refusal to force the landlord to sell the freehold if they do not wish to do so. That is a different right under the collective enfranchisement provisions of the 1993 Act.

Right of First Refusal merely obliges a freeholder/head leaseholder selling their interest in the property to offer it first to the qualifying leaseholders.

The process is simpler than it sounds. It involves three main stages:

  1. The Offer Notice – The freeholder or head leaseholder must serve a formal notice on the leaseholders offering the interest to them first.

    This Offer Notice will state the terms of the proposed disposal of the interest, in particular the sale price (although there are separate provisions for a sale by auction).

    The Offer Notice will state:
    - a date by which the offer can be accepted – which must be not less than two months from the date of the Offer Notice
    - a further date by which the leaseholders must serve a Nomination Notice.
     
  2. The Nomination Notice nominates the company (or person) to acquire the landlord’s interests on behalf of the leaseholders. It must be served not less than two months after the date the leaseholders comply with the Offer Notice. The leaseholders serve an Acceptance Notice.

    The participating leaseholders normally incorporate (create) a company as their nominee to buy the freehold on their behalf. After this, the leaseholders will send their Nomination Notice.
     
  3. Exchange of Contracts. Either party can withdraw at any time before contracts are exchanged. After the participating leaseholders have served the Nomination Notice, the legislation sets out a timetable for:

    - provision of a draft contract
    - agreement of the form of contract
    - exchange of contracts (which is the point when neither party can withdraw).

    When contracts are exchanged a completion date will be agreed and added to the contract.


What If The Landlord/Freeholder Refuses To Offer The Right?

It is a serious matter if a freeholder (or head leaseholder) fails to offer Right of First Refusal to their leaseholders. It is a criminal offence with a level 5 fine on conviction.

In addition, the leaseholders can enforce a procedure requiring the new owner of the freehold or head lease to sell it to them on the same terms as they acquired it from the original landlord/head leaseholder.

A landlord who serves an Offer Notice will sometimes, but not always, have a prospective purchaser lined up at the price stated in the Offer Notice. If leaseholders do not accept the Right of First Refusal, the landlord can sell his interest at the price offered (or higher) to the buyer waiting in the wings or by way of a sale on the open market.

But the landlord cannot sell the interest within 12 months at a lower price than that offered – nor can they offer it on different terms.


How Long Does It Take To Exercise The Right Of First Refusal?

The offer must be accepted within the timeframe set out in the notice – no less than two months.

Within the next two months, the leaseholders must serve a Nomination Notice (nominating a purchaser) if they intend to proceed.

The landlord must then provide a contract and this must be accepted by the nominee purchaser within two months.

Failure to comply with the steps within the timeframes will amount to a withdrawal – leaving the landlord free to sell on the open market on the terms set out (or for more, but no less).

When passing through Parliament, the process was described as ‘advance or withdraw’, ensuring there is no barrier to the landlord selling the freehold on the open market otherwise.


How Much Does It Cost?

You are buying the freehold and how much you pay will depend on a wide range of factors – find out more here.

The largest part of the cost will always be the freehold itself, rather than any legal or valuation fees associated with the process.

It is up to the landlord to set the price of the freehold. You and your fellow leaseholders can take it, leave it or try to negotiate.

The landlord may wish to accept a counter-offer from your side (or you could negotiate further) but they are under no legal obligation to do so. You cannot take them to a tribunal over this.

Also, there is no extra cost associated with the fact that the landlord must by law offer you first refusal. The cost of serving an Offer Notice is down to them.

You are not legally obliged to pay the landlord’s legal and valuation costs – that is because they are choosing to sell the freehold; you are not forcing them to do so under collective enfranchisement rules.

What if the landlord already has a preferred buyer in mind? What is to stop them offering you the freehold at an artificially high price as a token gesture, simply to comply with the letter of the law?

As leaseholders, you have protection because the law prevents the sale of the freehold within 12 months on different terms or at a lower price. Also, you can refuse their artificially high price…and then force them to sell the freehold using your ‘right to buy’ under collective enfranchisement (provided the block qualifies).

Normally, the leaseholders are not obliged to pay the landlord’s costs – unless it is offered as a set term in the Section 5 Notice.

However, if you and the other leaseholders pull out of the deal after a certain point (such as after contracts have been exchanged) then you would collectively be liable for some of the landlord’s costs.


What If There Is A Head Lease In Place?

A head lease is an extra tier of ownership that sits between the freeholder and the leaseholders:

  • freehold
  • head lease
  • leases.

Head leases are more common in certain parts of the country (London and Bournemouth for example).

What’s the point of a head lease? The original purpose was to save the landlord the bother of collecting rents from lots of leaseholders; instead they collect it from the head leaseholder…who then has the task of collecting the rents from the tenants. This further layer of title also allows a freeholder to avoid management responsibilities if they wish.

The right of first refusal applies only to the head lessee – not the other leaseholders.

In this situation, there is no legal obligation for the freeholder or the head lessee to offer the freehold to the leaseholders lower down the chain. If the head lessee wishes to sell their head lease, they must first offer it to the leaseholders. If the freeholder wishes to sell in such circumstances, there is unlikely to be a requirement to serve a Section 5 Notice. 


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