Your legal right
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.
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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 us
- More than 50% of the flats have to be owned by qualifying leaseholders
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 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
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.
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.
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.
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 freeholder ignores the right of first refusal?
It is a criminal offence for a freeholder not to give leaseholders 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.
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.