Your legal right – the 1st opportunity to buy your freehold
Before even starting the process of negotiating a sale with any third parties, the freeholder has to offer the leaseholders the opportunity to buy the freehold reversion.
If the freeholder doesn’t do this, they are actually committing a criminal offence.
And whether you’re a freeholder thinking of selling your freehold, or and of a number of leaseholders who want to take up the offer of right of 1st refusal, then you can rely on our specialist Right of First Refusal Solicitors. Our 6 strong leasehold team handle nothing but lease extension, freehold purchase, right to manage and right of 1st refusal applications – and over the last 20 years or so we have assisted around 10,000 people extend their leases, or buy or sell their freeholds. And we are the only solicitors recommended for freehold purchase and RFR work by the HomeOwners Alliance – the U.K.’s leading organisation representing the countries homeowners.
Want to know more about the Right of First Refusal? Call our specialist solicitors on FREEPHONE 0800 1404544 for FREE initial phone advice.
What the Right of First Refusal means in practice
This doesn’t automatically give the leaseholders the right to force the freeholder to sell. The Right of first refusal means though that if the freeholder is considering selling anyway, that the leaseholders must be given the first chance to buy the freehold – a process also known as freehold, leasehold or collective enfranchisement. Leaseholders can only respond to an offer made by the freeholder.
NB this does not affect enfranchisement – the right for leaseholders to come together to jointly buy the freehold regardless of whether or not the freeholder wants to sell. These rights are similar, but different.
Click here to read more about lease enfranchisement
What will be the price of buying the freehold?
There is a very real limit on the price imposed by the freeholder. In particular the purchase price stated to the leaseholders by the freeholder cannot be more than the sum the building eventually sells for.
For example, a freeholder cannot enter into negotiations with a third party to sell a building for £500,000 if he told the leaseholders that the “first refusal” offer was for £1 million.
This requirement means that leaseholders always get as good a deal, or a better deal, than any third party. It also makes sure that the freeholder can’t bump up the price of the freehold unrealistically to deter the leaseholders.
First Refusal – what sort of buildings does this apply to?
As long as it is not a single dwelling, the right of first refusal applies to any privately rented or leasehold property such as apartments, flats, maisonettes and any other sort of building with more than a single dwelling.
It therefore doesn’t apply to a leasehold house. The building must:
- Have at least two flats
- Have less than 50% of the total area given to non-residential use
- More than 50% of the flats have to be owned by qualifying leaseholders
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.
What does “qualifying leaseholder” mean?
Generally, a qualifying leaseholder means the owner of a long lease – i.e. a lease that was originally granted for at least 21 years, regardless of how many years left on the term.
This excludes shorter residential tenancies, business tenancies or any tenancies which depend on employment. If your property it’s 1 of these categories, then your freeholder can refuse to sell the freehold to you.
If you are the leaseholder of three of more flats in a single building, this also rules you out from being considered a qualifying leaseholder.
When is the right of first refusal triggered?
Right of first refusal kicks in when the freeholder wants to sell the building’s freehold to a third party.
Before they start negotiating with a third party, they have to send a formal Offer Notice to qualifying leaseholders which gives them the opportunity to use their right of first refusal to buy the leasehold.
To comply with the law, the freeholder has to serve the notice to at least 90% of the leaseholders who qualify. If there are fewer than ten leaseholders, the notice has to be served to all but one of them.
Serving the offer
It is important to get the Offer Notice right. Therefore, it really does need to be drawn up by solicitors who really understand both freehold purchase (often referred to as enfranchisement), and the right of first refusal itself. Few solicitors specialise in this area. We do.
The Offer Notice must contain the relevant deadlines, terms of the proposed sale and any other relevant details.
Is the offer price negotiable?
Probably not. Whilst the freeholder can agree an alternative price, it is unusual. In most cases it’s a simple “take it or leave it” deal. and unlike enfranchisement, if you are unhappy with the price, you think it’s too high, you cannot take the matter to the First-Tier Property Tribunal to decide.
The leaseholders’ response
Once the leaseholders have received an Offer Notice from their freeholder, giving them and your neighbours the right to purchase the freehold for a specified figure, they will have the option to accept that offer within a prescribed period. And that period is limited – so you need to make sure that you appoint solicitors – making sure they are Right of First Refusal specialists, as a matter of urgency.
Your solicitors will consider the validity of the Offer Notice. Provided that notice is valid and has been properly served, you will have two months from the date that you received that Notice, to accept the offer.
The offer can only be accepted provided a majority of qualifying leaseholders agree. And you need to maintain their agreement – if the number of leaseholders supporting the RFR acceptance drops below 50% at any stage, then you will need to inform the freeholder and withdraw from the transaction.
Your solicitor will 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 they can meet the deadline.
On receipt of the Notice, the leaseholders will have to nominate someone to acquire the freehold on their behalf. This “Nominee Purchaser” can be an individual, but usually it is company limited by guarantee set up for the sole purpose of buying and holding the freehold- referred to by a number of alternative names including the Residents Management Company or freehold management company.
This two month period is the right time to and to get your solicitor draft your Participation Agreement, get all participants to sign up. If your block is anything other than a very small one, we strongly recommend a legally binding participation agreement to bind all participating leaseholders into the enfranchisement process. A participation agreement is the best way of avoiding the risk of people pulling out and leaving the other tenants unable to proceed due to insufficient participation.
Click here to read more about the advantages of a Enfranchisement Participation Agreement
Good organisational skills are critical in ensuring the smooth progress of the purchase. It is not unknown for badly organised leaseholders to throw away their right to first refusal by getting the procedure wrong, allowing the freeholder to sell the building to a third party.
Right of 1st refusal – completing the legal transaction
Once the freeholder has been notified of your nominated person, they must provide your solicitor with a contract within one month (unless the Notice has been served upon you in a form which allows your solicitors to move straight to transfer).
If a contract has been provided, your the freehold 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 solicitors to move straight to transfer, then once you have advised them of your nominated person, your freeholder will provide the draft transfer and if necessary solicitors can then negotiate and agree wording.
The transfer, once agreed, will be sent out to you for signature on behalf of the Company and you will then need to provide completion monies (including the premium and costs). Your solicitor will then agree completion of the freehold purchase and register the transaction at the Land Registry.
And finally, Section 3 notices will need to be served on all of the leaseholders to let everyone in the block know who they should now pay their ground rent to etc. A Section 3 Notice informs leaseholders of a change of landlord/freehold owner and provides the new landlord’s details. The new landlord is obliged to notify the tenants of their details within two months or no later than the next rent due date.
Strict time limits
Exercising the right of first refusal involves a strict timetable. Deadlines are important and must be adhered to. Negotiations which collapse cannot then start again for a full year, meaning you will have to start again after 12 months has passed.
Any hitches or interruptions can put an end to the negotiations before they have started.
Withdrawing from the procedure
If the freeholder withdraws from the procedure part way through, then they cannot sell the leasehold at a lower price or on different terms than the price initially discussed – without offering it first once more to the leaseholders.
Furthermore, if they choose to withdraw from the process, the leaseholders cannot start to negotiate to buy the leasehold for another year – by which time the freeholder may well have sold the freehold reversion to a third party.
What happens if the freehold is sold without providing notice to the leaseholders?
It is a criminal offence for a freehold to be sold without notice to the leaseholders under the right of first refusal. The leaseholders have the right to serve notice on the new owner and demand to see all the details of the transaction.
They can also then force the new freeholder to sell the building to the leaseholders at whatever price they paid.
This has the effect of rendering that first sale null and void.
How much does exercising the right of 1st refusal cost?
You will need to budget for the following:
- the premium to buy the freehold
- your legal fees
- the valuation costs of your surveyor
- your freeholder’s legal fees
- your freeholder’s valuation fees
- the costs of setting up your new freehold company
While we are not not able to predict what your freeholder’s solicitor is likely to charge, both charges have to be reasonable. And in any event if we are acting for you in buying your freehold, we should be informed of your freeholder’s legal fees fairly early on in the transaction, particularly if they seek our undertaking to pay these.
We haven’t managed to find the Requisite Majority of leaseholders – what are our options?
Enough of you must participate to be able to accept the offer within the relevant period. If not, then the only other option is to see whether the freeholder will sell to those of you who would like to go ahead, after the relevant period has passed.but that’s entirely up to your freeholder, who might prefer to sell to a third party.
Disputes between leaseholders and freeholders
If the leaseholders and freeholders find themselves in a dispute over either party’s behaviour or a failure to stick to the correct procedure, then they can make an application to the First-Tier Property Tribunal for a decision.
Click here to read more about how the First-Tier Property Tribunal works.