The Right of First Refusal

Long leaseholders qualify for the right of first refusal of their freehold, subject to some exemptions.  This means the freeholder must offer the freehold to the leaseholders before selling the freehold to a third party to avoid committing a criminal offence.

The right of first refusal applies to the disposal of any property (not just a purpose built block) containing 2 or more flats held by qualifying tenants, provided that more than 50% of the flats in the property are held by qualifying tenants. Where a property being sold contains a mixture of flats and non-residential accommodation, such as shops or offices, the qualifying tenants (but not the others such as business tenants) have the right of first refusal if no more than 50% of the internal floor area (not counting the common parts-staircases, landings etc) is in non-residential use. Properties held by resident or exempt landlord are not subject to this right.

Landlords Exempt to the Right of First Refusal

  1. Resident landlords in non-purpose built blocks of flats (such as a house converted into flats) who occupy a flat in the premises as their only or principal residence and have done so for at least 12 months ending at the date of the disposal; and
  2. Registered housing associations and local authorities.

What must a Landlord Do If he wants to Sell the Freehold?

A landlord can obtain a valuation from a valuer and serve a section 5 notice on the leaseholders asking them to accept within a 2 month period.  Alternatively the landlord may feel that a better price can be achieved at auction. Both options have differing strict procedures that the landlord and tenants need to observe to ensure the transaction completes smoothly. Both procedures are discussed below.

Points to Consider, Where the Landlord decides to sell the Freehold on the open market:

  1. The landlord should serve a valid section 5 notice on at least 90% of the qualifying tenants.
  2. More than 50% of the qualifying tenants must accept the offer within an initial period of at least 2 months from the service of the section 5 notice (the Initial Period).
  3. The tenants have a further 2 months period from the Initial Period to nominate a purchaser. Where there are more than 4 named purchasers a company may be set up and its name at this point is nominated as the purchaser.
  4. The Landlord must issue to the tenant, the contract for disposing of the freehold within 1 month of the service of the nomination notice.
  5. The Nominated Person has 2 months from the date of receipt of the contract to exchange and pay the deposit (not more than 10% of the agreed price). The landlord and tenant can extend this time limit by agreement.
  6. Completion follows per the contract.

Points to Consider Where the Landlord Wishes to Dispose of the Freehold at Auction

  1. The landlord must serve a valid section 5 notice on the tenants between 4 and 6 months before the auction.
  2. Tenants to accept the offer within 2 months of a valid notice if they want to reserve their right to participate in purchasing the freehold.
  3. An additional 28 days is given to nominate who will acquire the property if this is not completed in the first 2 months.
  4. Once the landlord receives valid notices from the leaseholders, they must include in the seller’s pack at auction a notice in the conditions of sale that the freehold is being sold subject to the right of first refusal of the leaseholders.
  5. Leaseholders can attend the auction but should NOT bid as this will increase the price which is not what they would want!
  6. If the property is sold at auction, and a conditional contract is concluded with the successful bidder, the landlord must send a copy of the contract to the nominated person’s solicitor within 7 days of the auction.
  7. The nominated person then has 28 days to accept the contract and fulfil any conditions, such as pay a deposit.  The contract then has effect as if the nominated person and not the successful bidder had entered in to it.

Withdrawing from the Process

  1. Either party can withdraw from the process at any time before the contract is entered in to by serving a notice on the other party.  In addition, failure to proceed is a deemed withdrawal.
  2. The withdrawing party is liable for the costs incurred for the period starting four weeks after the end of the “initial period” until withdrawal.  The initial period is the 2 month period in the notice. If the tenant withdraws, the landlord has a period of 12 months when they are free to sell on the open market on the same terms offered to the tenants and at no lower price. If the landlord does sell to a third party on better (ie cheaper) terms than were offered to the tenants then he commits a criminal offence.
  3. If the landlord withdraws he cannot sell his interest unless he starts the first refusal process afresh.

If you would like to discuss the above points do not hesitate to contact our property team who are very experienced in this area and able to help.

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