The leaseholder’s right of first refusal in a freehold sale
Whether you are the freeholder looking to sell your freehold interest, or a leaseholder who wants to jointly buy the freehold of your current leasehold property, either through collective enfranchisement or otherwise, both the Landlord and Tenant Act 1987 and Housing Act 1996 give explicit rights to the current leaseholders (as well as imposing legal duties on the freeholder) when it comes to any possible sale of a freehold. These legal rights are known as the Right of First Refusal or RFR.
Got a question about the Right of First Refusal? Call our specialist solicitors on FREEPHONE 0800 1404544 for FREE initial phone advice – with no strings attached.
Why you need a leasehold specialist – and how we can help.
Here at Bonallack and Bishop the situation is different. We are unusual – we have a team of five dedicated to this area – RFR, freehold purchase and extending leases is all they do, for clients throughout England and Wales. So when you instruct us, you know you’re going to get a genuine leasehold specialist on your side.
What’s more, we have plenty of experience in acting for both leaseholders and freeholders on a regular basis. So we are well aware of the potential tactics of the other side.
What is the right of first refusal?
If your freeholder tries to sell the freehold of your block of flats, then provided you qualify for the Right of First Refusal (see below) , they are compelled by law to offer that freehold to you and any other existing leaseholders before putting it up for sale on the open market, or trying to sell it privately.
These rights don’t mean that a leaseholder can force the sale of the freehold, but it does mean that if the freeholder was planning on selling anyway, the leaseholders are given the chance of purchasing it.
Is RFR different from Freehold Enfranchisement?
Yes – with enfranchisement, leaseholders can force freeholders to sell their freehold interest. RFR is an opportunity for those leaseholders to buy that interest before the freeholder offers it to a third party. Unlike enfranchisement, leaseholders cannot initiate the action – they can only respond under RFR.
Although the process and circumstances are different – the outcome is the same. Leaseholders buy the freehold of their block.
Click here to read more about Lease Enfranchisement.
The Right of First Refusal – Do I Qualify?
The right of first refusal applies to all privately rented or leasehold properties, as long as the property is not a single dwelling.
It can therefore be applied to flats (whether leasehold or rented), maisonettes, apartments and all other types of buildings which are more than just a single dwelling.
In particular there are certain further requirements which must be met in order for RFR to apply which are as follows;
- the building must contain at least two individual flats AND
- no more than 50% of the building is in non-residential use AND
- more than 50% of the flats must be occupied or held by leaseholders who qualify for potential purchase (this applies to most fixed or periodic tenancies; not short-hold or assured tenancies).
NB When calculating the size of the building in residential use, common parts of the residential building, including staircase and landings, are excluded
Are there any buildings where the Right of First Refusal does not apply?
Yes – RFR does not apply to housing authorities, social landlords, charitable housing trusts or residential freeholders who also live in the building if it is a converted house and not a purpose-built block of flats.
NB If there is a head lease over the building the Right of First Refusal may not apply. We can check this for you and advise you regarding your options.
Receipt of formal notification from your freeholder
Your freeholder must serve a formal Offer Notice on the leaseholders with the information that that they intend to sell the freehold – they must also give you enough time to consider making an offer.
The law states that the Offer Notice has to be served on at least 90% of qualifying leaseholders. So, for example, if there are ten qualifying leaseholders, then notice has to be served on at least everyone except one.
NB if the right to manage has already been exercised, the offer notice must additionally be served on the RTM company.
What should the RFR Offer Notice contain?
The notice is required to include various information – the most important of which is as follows:
1) identification of property involved
2) the proposed price
3) a statement that the offer notice is the legal offer by the landlord to enter into a contract
4) the date by which the purchase offer must be accepted. This acceptance notice must be within two months of the date of the offer notice
An Offer Notice should always be drawn up by specialist property lawyer with plenty of experience of freehold purchase. It should contain all of the details about the proposed sale, the deadlines and procedure to be followed and all of the terms of the sale.
How do we accept the RFR Offer?
To qualify for acceptance, over 50% of the qualifying tenants (on the basis of one vote for each flat) must write back in the form of an Acceptance Notice, within the acceptance date specified in the Offer Notice.
Leaseholders then have a further couple of months in which to identify their Nominated Person and notify the freeholder accordingly. The Nominated Person can be an individual – or a dedicated company purchased by the participating leaseholders to own the freehold.
The freeholder then has a further month to send the contract of sale to the Nominated Person.
The Nominated Person then has a couple of months to sign and return the contract and pay any required deposit – a maximum of 10% of the purchase price. Completion of sale must occur within seven days of receipt by the freeholder of that signed contract to exchange.
If the qualifying leaseholders fail to respond in this way, the freeholder can then sell the freehold reversion on the open market – although it cannot be at a lower price or different terms from that set out in the Offer Notice.
How does RFR affect the price we are going to have to pay to buy the freehold?
During this period, your freeholder cannot sell the property to anyone else or offer their share to anyone else at a lower price or on different terms than those which were proposed to you and the other leaseholders.
The price offered to the leaseholders for the purchase of the lease has to be no more than the final selling price. And any sale to a third party within 12 months cannot be on different terms to those offered to the leaseholders.
If, for example, the freeholder tells the leaseholders it will cost them £500,000 to buy the freehold of the block, the freeholder cannot then go on and start negotiations with a third party to sell the freehold for say £250,000.
This makes sure that leaseholders will be offered as good a deal, or better, than any third party.
It also stops the freeholder from setting an artificially high sale price in the hope of putting the leaseholders off.
Again unlike enfranchisement, if the two parties cannot agree on the price of the freehold, there is no opportunity to apply for the issue to be decided by the First-Tier Property Tribunal.
What if my freeholder failed to offer me the right of first refusal?
If your freeholder should fail to do so, you may be surprised to hear that, in doing so, they will have committed a criminal offence – which is punishable, on conviction, with a fine of up to £5,000.
If the freeholder does try to sell the property without first offering the Right of First Refusal to you, the tenants can serve notice on the new owner demanding full details of the sale and take action against the new owner, forcing them to sell the freehold to the leaseholders at the same price as was paid for it. This action has the effect of making the first property sale null and void.
It is worth noting that RFR does not give you as one of the leaseholders the right to force your freeholder to sell the property. That’s where enfranchisement comes in. RFR only applies if the freeholder has expressed an intention to sell the property anyway. The offer can be withdrawn by your freeholder at any time and leaseholders are free to reject the offer if they see fit.
If you and your fellow leaseholders decide that the offer is not worth accepting, the freeholder cannot then offer the property to another party at a lower price or on different terms within a year of the original notice – unless it is again offered to the tenants at the reduced price or new terms.
RFR deadlines – why they’re so important
Throughout the process, there are a number of deadlines which have to be met, or the deal could fall apart. Hitting deadlines is crucial, as if negotiations collapse, then you cannot restart them until a year has passed, meaning you will have to start again from scratch after this period. That’s one of the reasons why making sure you have one of the few solicitors with plenty of experience of this area of law is absolutely essential.
What is a participation agreement?
Right of first refusal applications can be tricky to run – especially in large blocks where there will be a number of participating leaseholders. The active involvement of each and every participating leaseholder is crucial, not least because of the tight deadlines involved.
As a result we would strongly recommend that all involved sign a participation agreement. Our team can draft one of these agreements for you. This legally enforceable document binds participants to the process once it has begun. This avoids the risk of people pulling out and leaving the other leaseholders unable to proceed.
Click here to read more about Participation Agreements, including the kind of provisions that a well drafted agreement should contain.
Can either party pull out during negotiations?
Parties have the right to withdraw from negotiations, but if the freeholder does so, they cannot then try to sell the freehold at a lower price later on. If the leaseholders withdraw, then they cannot immediately restart negotiations to buy the freehold as a year has to pass first.
Because of these reasons, having the right property lawyer with plenty of experience of the Right of First Refusal on board can make sure that everything runs to plan. Any hitches or delays can put a halt to the negotiations before they’ve even got underway.
What happens if we can’t arrange for enough of the leaseholders to agree in time?
If not enough of you wish to participate, you would be able to agree to buy the freehold yourself once the relevant acceptance period has elapsed (two months from the Offer Notice), at which time your freeholder would be free to sell to whoever he likes, including you
Right of First Refusal – Summary of The Legal Process for leaseholders
- Once you have received an Offer Notice from your freeholder, giving you and your neighbours the right to purchase the freehold for a specified figure, plus costs, you will have the option to accept that offer within a prescribed period.
- If instructed, we will consider the validity of the Notice and then, if it is valid and has been properly served you will have two months from the date that you received that Notice, to accept the offer.
- We would need to represent all of the tenants who want to participate and to prepare an Acceptance Notice on their behalf within the relevant period, so that we can meet the deadline.
- Once we have done this, we will have a further two months in which to advise the freeholder of your nominated person (in your case that means the name of the Company which you intend to use as the vehicle to purchase the freehold).
- It is within this two month period that we can attend to the incorporation of the Company and put together your Enfranchisement Participation Agreement, if you would like one – which we highly recommended.
- Once the freeholder has been notified of your nominated person, they must provide us with a contract within one month. (Unless the Notice has been served upon you in a form which allows us to move straight to transfer, which is often the case). If a contract has been provided, your company will then have two months in which to sign and return the contract and pay a 10% deposit to the freeholder. The freeholder then has seven days from the date he receives the contract to exchange.
- Alternatively, if the Offer Notice was served in the form allowing us to move straight to transfer, then once we have advised them of your nominated person, your freeholder will provide us with the draft transfer and we will negotiate and agree wording.
- The transfer, once agreed, will be sent out to you for signature on behalf of the Company and then we will ask you for completion monies (including the premium and costs). We can then agree completion of the freehold purchase and register the same at the Land Registry for you.
Does the same timetable procedure apply if the freeholder wants to sell at auction?
No, the timetable and documentation are both different. So, for example, the offer notice must be served between four and six months before the auction takes place.
But the principle is the same – leaseholders still have the right of first refusal.
Does RFR apply when the freehold reversion is being sold either by a 3rd party?
Yes, the right still applies if the freehold is being sold by either a receiver, trustee in bankruptcy or by an executor of the deceased’s estate, following grant of probate.
What happens where the freeholder wants to sell the freehold of more than one building?
Each sale is dealt with separately – so each building needs to receive its own RFR Offer Notice.
Duties of the new freeholder
As part of their obligations, the new freeholder is required to inform the leaseholders about the sale of the freehold. Again, failure to serve the right notice is a criminal offence – with a fine of up to £2500.
In the event that this is the first time that the leaseholders have heard about the possible sale of the freehold, there is a set process for them to remedy the situation and exercise their right to buy the freehold under RFR.
Disputes between leaseholders and freeholders
Ultimately, any disputes between the leaseholders and the freeholders about conduct, legislation or procedure can be heard by a property tribunal or court, where a judge will decide the outcome of the case.
Before things get that far, speak to a specialised property lawyer who has experience in right of first refusal. Your legal expert will be able to tell you which, if any, laws have been broken and what you need to do in terms of getting the freeholder to comply with the legislation or to bring legal action against a freeholder or leaseholder.
The First Tier Property Tribunal has jurisdiction to certain limted disputes about Right of First Refusal. However, it is the County Court which handles any disputes about a landlord’s failure to offer existing leaseholders the right to buy the freehold in the first place.
Click here to read more about how the First Tier Property Tribunal works.
If you have any questions about the right of first refusal, don’t hesitate to get in touch with one of our specialist leasehold enfranchisement team.