Leaseholders of qualifying property have the right of first refusal to purchase the freehold of their block when the landlord wishes to sell. Owning the freehold can offer leaseholders the freedom to appoint managing agents, deal with lease extensions, control the purchase of buildings insurance and maintenance contracts.
The right of first refusal (RFR) is governed by Part 1 of the Landlord and Tenant Act 1987 (“the Act”). Where a landlord who is the immediate landlord proposes to sell the freehold interest in a block of flats, by law, he must first offer to sell to the leaseholders. This is achieved by following a notice procedure set down by the Act.
For landlords, it is a very important process. Failure to follow the notice procedure is a criminal offence and landlords are liable to a fine of up to £5,000. Therefore, it is important to ensure that the correct procedure is put in place.
Who qualifies for the right of first refusal?
In order to qualify for the right of first refusal, certain conditions must be met. The building itself must contain at least two flats, more than 50% of the flats in the building must be owned by “qualifying tenants” and no more than 50% of the building must be used for non-residential use.
A qualifying tenant is a leaseholder of a long lease (i.e. more than 21 years) and also fixed or periodic tenants. Tenants occupying under Assured Shorthold Tenancies (and some other exceptions) do not qualify.
The RFR does not apply where the landlord is a registered social landlord or local authority.
The notice procedure will vary depending on whether the landlord proposes to sell by contract, or by auction, but the basics are the same.
The landlord must serve a notice setting out:
- The terms of the proposed sale, including the sale price and any deposit required. It is the landlord who sets the purchase price; this is not open for negotiation.
- A statement that the notice is an offer from the landlord to the tenants to purchase on the terms set out in the notice
- The date by which the offer should be accepted. This must be at least two months from the date of the notice.
- The date by which the leaseholders must nominate the actual purchaser. This must be at least four months from the date of the notice.
At least 50% of the qualifying tenants in the block must accept the offer.
If the offer is accepted, the leaseholders can either nominate one of their number to purchase the freehold or, as is more usual, incorporate a limited company to purchase the freehold interest.
The landlord must then send a contract to the nominee purchaser who has two months to sign it and pay the 10% deposit. Contracts for the sale are exchanged and completion takes place on the date stated in the contract.
What happens if no-one accepts the offer to purchase?
If none of the leaseholders respond to the offer, or an insufficient percentage accept the offer, the landlord can then sell the building to any third party, provided that the sale price is not lower than that set out in the offer notice to the leaseholders.
If, for example, the landlord finds that he cannot sell the building without dropping the sale price, then the offer procedure must be completed again at the lower price.
What happens if the procedure is not followed?
If the landlord does not follow the correct notice procedure and sells the building to a third party, he can be found liable for a Level 5 criminal offence, and have to pay a fine of up to £5,000. In addition, the leaseholders can force the purchaser to sell the building to them for the same amount paid.
- The right of first refusal is not a means of forcing a landlord to sell its freehold interest; the right only arises if the landlord intends to sell in the first place.
- The landlord may withdraw the offer to the leaseholders at any point, provided it does not sell to a third party afterwards.
- The price is set by the landlord; there is no opportunity for the leaseholders to negotiate.
- The procedure must be strictly adhered to; if a landlord fails to follow the procedure, he is not only liable for a large fine, but the sale may be set aside or the purchaser forced to sell to the leaseholders.
The above is not a detailed explanation of the law of the Right of First Refusal but intended to give readers an idea of the process involved.