Right of first refusal on sale of freehold

Last updated: July 2023 | 5 min read

Explaining the right of first refusal on sale of freehold

What is right of first refusal?

Under the Landlord and Tenant Act of 1987, qualifying tenants have a legally protected privilege known as the right of first refusal.

Essentially, this right mandates that when a landlord decides to sell their freehold interest, the qualifying tenants must be offered the opportunity to buy it before it's offered on the open market.

This right empowers leaseholders, providing them with a degree of control over their property's future.

The differences between right of first refusal and collective enfranchisement

It's prudent to distinguish between the right of first refusal and collective enfranchisement. While both processes involve leaseholders acquiring the freehold, the circumstances and mechanisms differ significantly.

Collective enfranchisement is a proactive procedure initiated by leaseholders under the Leasehold Reform, Housing and Urban Development Act 1993.

In contrast, the right of first refusal is a reactive process initiated when a landlord proposes to sell.

Why right of first refusal matters to qualifying tenants

The right of first refusal can be a significant boon for qualifying tenants.

By exercising this right, leaseholders can exert control over their building, deciding matters like ground rent and maintenance cost, and potentially increasing their property's value.

With the right of first refusal, a leaseholder's future isn't subject to the whims of a potentially indifferent new landlord.

Where the right of first refusal applies

The right of first refusal applies across the entirety of England and Wales, where the laws around leasehold properties are consistent.

It's pertinent to properties with at least two flats, where a majority of tenants are qualifying leaseholders.

It is a right embedded in the fabric of leasehold law, helping to balance the scales of power between landlords and leaseholders.

Qualifying for the right of first refusal

What defines a qualifying tenant?

A 'qualifying tenant' is a term often used in leasehold law.

To qualify, a tenant must hold what would have been a long lease of over 21 years when it was first granted, regardless of how many years remain.

Companies, trust corporations, housing authorities, and certain others are excluded from this definition.

The role of only or principal residence in qualification

The 'only or principal residence' rule is pivotal in the application of the right of first refusal. For buildings with fewer than four flats, at least one flat must be occupied by a leaseholder as their principal residence for the right of first refusal to apply.

However, in larger buildings with four or more flats, this rule is not applicable.

How to determine if your building qualifies

A qualifying building for the right of first refusal must meet several specific criteria. Generally, it must be a building with at least two flats, a majority of which are held by qualifying tenants.

Interpreting the 'three or more flats' rule

A peculiar facet of the right of first refusal legislation is the 'three or more flats' rule. Essentially, if a property has been converted into three or more flats, and is not a purpose-built block, it can qualify for the right of first refusal even if the landlord genuinely lives in one of the flats, breaking the usual 'resident landlord' exception.

Exceptions for resident landlords and associated companies

The resident landlord is an exception to the right of first refusal legislation. If the landlord genuinely lives in the building as their principal residence, and has done so for the last twelve months or more, the right of first refusal may not apply. Similarly, if the immediate landlord is an associated company, the right may not apply.

Implications for converted houses and purpose-built blocks

Converted houses and purpose-built blocks of flats have distinct considerations under the right of first refusal legislation. In converted houses with three or more flats, the right of first refusal applies regardless of whether the landlord lives in one of the flats. However, in a purpose-built block, the right of first refusal is unlikely to apply if the landlord resides in the building.

Landlord's responsibilities when deciding to sell

Deciding to sell a freehold property carries specific responsibilities for the landlord. As soon as the landlord intends to sell the freehold interest, UK law mandates that they must first offer it to the qualifying leaseholders in the building. This right of first refusal applies whether the landlord wishes to sell on the open market, at auction, or to a specific individual or company.

The importance of an offer notice in freehold sale

Offer notice plays an integral part in the process when a landlord sells the freehold. Once the landlord proposes to dispose of the freehold, they must serve notice to each qualifying tenant. This landlord's notice, known formally as the 'Section 5 notice', provides details of the proposed disposal, including the price, any deposit required, and the terms of the sale.

Required components of a valid offer notice

A valid offer notice should entail all necessary details that inform the tenants about the proposed disposal. These details include the price, terms, and conditions under which the landlord proposes to dispose of the freehold. The offer notice also needs to outline the initial period, usually two months, within which the tenants must assert their right of first refusal.

How to serve formal notices and their role in the process

Serving formal notices is a core aspect of the freehold sale process. The landlord's notice to qualifying leaseholders must be in writing and delivered either in person or by post. A single notice constitutes an offer to all qualifying leaseholders, outlining the terms of the freehold sale and opening a window for them to collectively respond.

Consequences if the landlord fails to meet obligations

A landlord's failure to meet obligations under the Tenant Act could lead to significant ramifications. If the landlord sells the freehold without offering first refusal to qualifying tenants, it may constitute a criminal offence, subject to penalties including fines.

Potential criminal offence

Selling a freehold without first offering it to qualifying leaseholders is considered a criminal offence under UK law. This step in the process is not just a formality. The failure to serve an offer notice or serving an invalid notice can lead to legal consequences, including prosecution.

Enforcement by the first-tier property tribunal

The first-tier property tribunal plays a crucial role in enforcing the right of first refusal. If the landlord disregards their obligations and sells the freehold, the tribunal can assist tenants in purchasing the freehold on the same terms that it was sold. The tribunal can order the new owner to sell the freehold to the tenants, ensuring the enforcement of their rights.

Responding to a freehold sale offer as a tenant

Understanding the terms of the landlord's offer

When your landlord decides to sell the freehold and issues a formal notice, it's essential to understand the terms of the offer. From the asking price to other stipulated terms, these details will inform your decision whether to accept or decline the offer.

How the purchase price is determined

The purchase price in the landlord's offer plays a critical role in a freehold sale. Typically, the price is either determined by the landlord, reflecting what they consider to be the open market value, or agreed upon following a valuation. It's important to note that the landlord cannot ask for a higher price from the leaseholders than they would accept from a third party.

Additional legal fees and costs involved

Apart from the purchase price, tenants need to consider additional costs involved in a freehold acquisition.

Legal costs for conveyancing and potential valuation fees can significantly impact the overall cost of the purchase. However, keep in mind that collectively acquiring the freehold might lead to cost savings in the long run.

Procedure for accepting or refusing the offer

Once the landlord's offer is understood, tenants need to collectively decide whether to accept or refuse it. This decision-making process should take place within the specified initial period and is essential for making the most of the right of first refusal.

Sending an acceptance notice

Accepting the landlord's offer entails sending an acceptance notice. This notice must be sent by at least half of the qualifying tenants and within the timeframe specified in the landlord's notice. An acceptance notice is a commitment to buy the freehold on the terms proposed in the landlord's offer, and it triggers the next stages of the sale process.

Implications of deemed withdrawal and refusal notice

Deemed withdrawal and refusal notice are two outcomes that can occur if the tenants fail to respond adequately to the landlord's offer. If the tenants don't send an acceptance notice within the initial period, they are deemed to have withdrawn their right of first refusal. Alternatively, they can actively send a refusal notice, officially declining the landlord's offer.

Consulting a specialist property lawyer: getting the right advice

When dealing with a freehold purchase, obtaining advice from a specialist property lawyer is highly beneficial. Their expert advice can help tenants understand the nuances of the process, ensure that the terms are fair and legal, and potentially save both time and money.

Importance of valuation advice

Obtaining valuation advice is crucial in a freehold purchase. An expert valuer can provide an accurate assessment of the freehold's value, helping tenants ensure they are not paying over the odds and strengthening their negotiating position if they decide to proceed with the purchase.

Seeking free initial phone advice

For tenants uncertain about how to proceed, many property lawyers offer free initial phone advice. This initial consultation can provide a helpful overview of the process, and help tenants understand whether investing in professional assistance would be beneficial.

Working collectively with other leaseholders

Collective effort among leaseholders plays a pivotal role in a successful freehold acquisition. The Tenant Act fosters an environment where leaseholders can collaborate and negotiate their right of first refusal on a more equitable footing.

Role of a nominated person in freehold purchase

In freehold right discussions, qualifying tenants often appoint a nominated person to represent their interests. This individual acts as the collective voice and point of contact with the landlord or prospective purchaser. To nominate a person, the leaseholders serve notice detailing their selection, ensuring a cohesive and united front throughout the process.

How tenants nominate a person for purchase

Qualifying tenants select their nominated person via democratic vote, involving all interested leaseholders. The person chosen could be a leaseholder, solicitor, or professional property manager. The nomination process is best formalised in writing and provided to all parties involved, fostering a sense of transparency and mutual agreement.

Responsibilities of the tenants' nominated person

The nominated person shoulders various responsibilities, including liaising with the landlord, arranging valuations, and communicating with the other leaseholders. This individual also has the crucial task of verifying the offer notice and coordinating the response. The chosen person may want to consider engaging professional services to ensure they competently navigate the process, reduce risk, and save time.

Creating a participation agreement among leaseholders

A participation agreement is a legal contract between leaseholders, outlining the terms of their cooperation in a freehold purchase. This document helps manage disputes, sets out contributions towards costs, and maps out the decision-making process. It can be drafted with the help of a solicitor to ensure all parties are well-protected.

What happens if not all leaseholders agree

Should some leaseholders decline participation, the remaining tenants can still move forward if they meet the "three or more flats" rule. In this instance, the participating leaseholders would buy the freehold collectively, and the non-participating leaseholders would become their tenants.

Scenario-specific considerations for right of first refusal

Certain scenarios in the freehold sale process demand unique considerations. A clear understanding of these situations can empower leaseholders to effectively exercise their right of first refusal.

Case of a landlord selling at auction

If a landlord plans to sell at auction, they must still serve an offer notice to the qualifying tenants. However, as auctions often have a shorter timeframe, leaseholders must act promptly to nominate a representative, respond to the offer, and arrange finances.

Where the freehold of multiple buildings is involved

When a landlord aims to sell the freehold of multiple buildings, complexities can arise. The landlord required to provide separate offer notices for each building, and the tenants of each building must independently decide whether to exercise their right of first refusal.

Special cases: local authorities, housing associations, and charitable housing trusts

In cases involving housing authorities, local councils, housing associations, or charitable housing trusts, the right of first refusal is not typically applicable. However, there may be alternative rights available to tenants, and advice should be sought from a property law professional to clarify their options.

Life after successful freehold purchase

Upon freehold acquisition, leasehold homeowners step into a fresh chapter of property management. Their new role as freeholders calls for increased responsibilities and significant alterations to the individual flats.

Duties of the new freeholder

As the freeholder, one becomes the de facto custodian of the building. Ground rent concerns and the upkeep of the residential property become their primary obligations.

Ground rent considerations

With the change in ownership, the practice of ground rent, which was once an obligation, may be entirely waived. The erasure of this financial liability is one of the tangible benefits of freehold purchase. It's worth noting, though, that this is a decision made at the discretion of the new freeholder.

Maintenance of the residential building

A building doesn't maintain itself. As the new freeholder, upkeep of the common parts and exterior becomes a major task. From small repairs to significant renovation projects, the building’s health now rests on your shoulders.

Impact on individual flats

Every flat owner benefits from the purchase of the freehold. The newfound control can lead to improved management of the building, potential abolition of ground rent, and enhancement of each flat's market value.

Disagreements can arise and rights may be challenged in any property transaction. The role of professional bodies in dispute resolution and the enforcement of rights after sale to a new freeholder are critical in these situations.

Dispute resolution: the role of the First tier Property Tribunal

The First-tier Property Tribunal in the UK serves as the arbitrator in property-related disputes. Be it a disagreement over the purchase price or the terms of the offer, this judicial body helps restore balance.

Enforcing rights after sale to a new freeholder

When the freehold is sold to a new landlord without the qualifying tenants being offered the right of first refusal, they can enforce their rights. By serving a purchase notice on the new freeholder, they can buy the freehold at the same price the new freeholder paid. An application to the Land Registry can also be made to protect the right and delay further sales.

A summarised walkthrough of the right of first refusal process

The right of first refusal process unfolds over a series of systematic steps. From the time the immediate landlord decides to sell to when the qualifying tenants become the new freeholders, every stage is pivotal.

  1. Landlord's decision to sell: When the landlord decides to sell the freehold of a property, the right of first refusal process is initiated. The landlord must offer the freehold to the qualifying tenants before it can be offered on the open market or to a third party.
  2. Offer notice: The landlord serves an offer notice on the qualifying tenants, outlining the terms of sale, including the price.
  3. Tenants' response: Qualifying tenants can accept the offer as a collective, nominate a representative for purchase, or decline the offer. If the majority accept, they move to the contract phase.
  4. Contract stage: The nominated person signs a contract with the landlord. The tenants pay a deposit (usually 10% of the price) and have a further period to complete the purchase.
  5. Completion: On the agreed completion date, the remaining balance is paid, and the freehold is transferred to the tenants. The tenants become the new freeholders, concluding the right of first refusal process.

Remember that each leaseholder's circumstances are unique. It's always a good idea to consult a legal professional who specialises in leasehold law for personalised advice.

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