What is the Right of First Refusal when buying freehold?

When trying to buy the freehold of their building, qualifying tenants may come across something called the right of first refusal. Freehold right of first refusal applies directly to the immediate landlord, and is written into the Landlord and Tenant Act of 1987.

Whilst the right of first refusal might sound like a negative thing, it is actually a very useful act for a prospective purchaser when intending to buy the freehold of a building.

But if you’re a qualifying tenant who has only just come across the term, you’ll be wondering what it is, and how it works. We answer some of the most common queries below.

What is the right of first refusal?

Where a landlord intends to sell his interest in a building with flats in relation to which a right to first refusal exists, he must, by law, first offer it to the tenants before selling it on the open market. Any property (not simply a purpose-built block) containing 2 or more flats occupied by qualifying tenants, provided that 50% of the flats in the property are held by the same qualifying tenants, is subject to the right of first refusal.

Where a property is being sold and there is a mixture of flats and non-residential usage, such as shops or offices, qualifying tenants have the first refusal if at least 50% of the interior floor surface area (not including common areas, like staircases or gardens) is used for non-residential purposes. Resident or exempt landlord properties are not affected.

The immediate landlord must serve formal notices to the tenants informing them of their intentions and allowing the qualifying tenants two months to consider and respond to the offer, though the freehold may not be sold to another party during that period or offered at a price less than that which was offered to the tenants.

If a landlord fails to meet these legal obligations, it is considered a criminal offence. If the landlord sells the freehold and fails to offer the Right of First Refusal, qualifying tenants can serve a notice on the new landlord which demands details of the transaction, including the price which was paid. The same tenants can then take legal action to force the new landlord to sell the freehold to them using the same terms with which it was purchased.

What landlord properties are exempt to the right of first refusal?

Properties held by a resident or exempt landlord are not subject to the right of first refusal. Resident landlords who live in non-purpose built blocks of flats (for example, a converted house), who own a flat within the premises which is their registered only or principal residence, and which has been their only residence for at least 12 months ending at the date of the disposal are exempt to the right of first refusal. This is provided they are registered with the housing authorities, correct local authorities and any other housing associations.

Likewise the right of first refusal does not apply to landlords from housing authorities such as local Councils, New Towns and Development Corporations, and charitable housing trusts.

Alternatively, if the Landlord is a company and if the freehold will be transferred to an associated company instead, then this is also exempt from the right to first refusal offer set out in the Act, provided that the companies have been associated for more than two years.

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

If a landlord proposes to sell the freehold, the landlord may get a quote from a valuer, serve the leaseholders with a section 5 notice, and request that they accept within two months. Alternatively, the landlord may believe that an auction will result in a better price. Alternatively the Landlord may have a buyer in the wings and set the price according to what they have agreed. All methods have distinct requirements that the landlord and leaseholders must follow to ensure the relevant disposal runs smoothly.

Been issued with a section 5 notice? Read our advice here.

Where the landlord proposes to sell the freehold on the open market

If a landlord decides to sell on the open market, the issuing notice must include the following:

A written offer and terms of the proposed disposal: the property and interest being sold (the freehold), price, and any deposit that may be required;
a statement that the notice constitutes an offer by the landlord to enter into a contract on the terms set out in the notice;
A date by which the offer must be accepted (the initial period) – which must also not be less than two months from the date of the notice; and
A date for the nomination by the tenants of a purchaser (the nominated person), which must not be less than a further two months.

If the qualifying tenants want to accept the offer, they must write a letter to do so. The required majority is more than 50 percent of the qualifying tenants (one vote per flat). Those tenants must give notice to accept the landlord’s offer by the deadline stated in his notice (unless he agrees to a longer time period).

If the qualifying tenants do not receive the acceptance notice within the offer period, or serve it after that time, the landlord is authorised to sell their interest on the open market but not at a lower price than what was offered in the Offer Notice.

The qualifying tenants have a second period of at least two months in which to notify the landlord of their nominated person. This is the person, group, or company that the qualifying tenants want to acquire the freehold interest in question. If the qualifying tenants already had a nominated person in mind upon acceptance of the offer, they do not need to wait until service of this second notice. They can notify the freeholder of their nominated person at any time after acceptance of the offer.

Then, if all the qualifying tenants have accepted the offer and nominated a person within this four month period, they may serve notice on the landlord stating that they wish to acquire the interest in question together with their nominee or nominees.

Where Right to Manage (RTM) has been exercised in respect of the premises, a copy of the offer notice must also be served on the RTM company.

Where the landlord proposes to sell the freehold by auction

If a landlord wishes to sell a freehold by auction, the notice must be served between four and six months ahead of the date of the auction and the notice must include the following:

the principal terms of the proposed disposal, the property and the interest. However, there will be no price or deposit mentioned (nor is the landlord required to divulge the reserve price);
that the disposal is to be by public auction;
that the notice is an offer by the landlord for the contract (if any) entered into by the landlord at the auction with the purchaser, to have effect as if the nominated person had entered into it;
the initial period for acceptance of at least two months. This initial period must end at least two months before the date of the auction; and
a further period of 28 days for the nomination of a purchaser (note, not two months, as in S5A notice). This period must end at least 28 days before the date of the auction.

If the qualifying tenants decide to accept the offer, they must do so during the first period set forth in the landlord’s notice (unless he agrees to a longer term). After this period, the tenant must notify the landlord of their nominated person within a further 28-day period.

At least 28 days before the auction, the tenants nominated person must correspond with the landlord and state that he or she wants all of the procedures to be followed.

At the auction, the interest is offered. The tenants are welcome to attend or not; they are not compelled to do so. Similarly, they are not required to make a bid and would be unwise to do so since doing so will cause the price to rise. If a winning bid at the auction is confirmed, the landlord must deliver a copy of the contract to the nominated person within 7 days.

The nominated person then has 28 days to accept the offer and pay any deposit required. This means that the nominated person, and not the successful bidder, enters into a signed contract for the right to own the freehold.

Can a freeholder refuse to sell freehold?

A freeholder may only reject a sale if the required criteria are not met. For example, leaseholders who enquire after a freehold despite more than half of the leaseholders not wanting to participate. Leaseholders willing to purchase the freehold must also be qualifying tenants, which means that they hold a long lease. Those holding leases which are under 21 years are exempt from making an approach to purchase the freehold, and can be rejected from a freehold sale.

Can I force my freeholder to sell freehold?

The only ways in which a freeholder can be forced into a sale is by collective enfranchisement. Collective enfranchisement involves qualifying tenants coming together to form a collective group, which then mounts a legal process using the help of a managing agent (like us at The Freehold Collective!). Altogether, the process seeks to force the sale of a freehold at a fair price.

Collective enfranchisement differs entirely however from Right of first refusal. First refusal applies only to a freeholder already looking to sell. If a sale of the freehold is forced by a collective enfranchisement or right to manage group, the right of first refusal no longer applies.

What are the rights of a freeholder?

Predominantly, a freeholder will take charge of the management of a property or residential building. They will be responsible for the upkeep and management of the property, as well as setting rules for the block, and collecting ground rent, if applicable.

You can read more freeholder rights and responsibilities here.

To summarise

The right of first refusal is a legal requirement that must be issued by a landlord under the tenant act, and which allows qualifying tenants to purchase the freehold before it is offered to an external sale. Failure to provide this is a criminal offence, and can end in legal action.

If you are a leaseholder who has been offered the right of first refusal, or if you are a leaseholder who has not been offered the right of first refusal when you should have, get in touch with one of our team for some initial advice.