Wright Hassall acted for a residential landlord in the sale of a block of flats, and dealt with the Right of First Refusal process which was required prior to sale.
The landlord was the liquidator of a company which owned the freehold of a block of 15 flats in Birmingham. The liquidator wanted to realise the asset and was approached by the residents’ management company who made an offer to purchase the freehold.
However, before the sale could take place, the liquidator had to follow the Right of First Refusal process set out in the Landlord and Tenant Act 1987.
What is the Right of First Refusal?
Leaseholders of qualifying property have the right of first refusal to purchase the freehold of their block when it is sold. Even where the freeholder intends to sell to a residents’ management company or selected group of leaseholders, the process must be followed.
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.
In this case, the residents’ management company was keen to purchase the freehold and therefore agreed to pay the liquidator’s legal costs of the process. This was the only way in which it would have been economic for the liquidator to dispose of the property.
What does the procedure involve?
The notice procedure will vary depending on whether the landlord proposes to sell by contract, or by auction, but the basics are the same.
In this case, we served notice on behalf of the liquidator 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. The liquidator had agreed the purchase price with the residents’ management company in advance.
- 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.
In this case, most of the leaseholders were members of the residents’ management company and therefore no individual leaseholders accepted the offer, and the sale was able to proceed smoothly.
- The RFR 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.
- However, in certain situations, such as where the landlord has become insolvent, the leaseholders can take the initiative and offer to purchase.
- 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. Even where the leaseholders agree to the sale, as in the case above, landlords must consider very carefully whether they are willing to take the risk of proceeding with the sale without carrying out the process.