The Right of First Refusal

introduction

The Right of First Refusal is a valuable statutory protection provided to tenants under the Landlord and Tenant Act 1987 in the United Kingdom. This right allows tenants to have the first opportunity to purchase the freehold to their property when the landlord intends to sell it. This article will explore the key aspects of the Right of First Refusal under the Landlord and Tenant Act 1987, including the most common Section 5A Notice, the procedure involved, the price establishment, and the risks associated with this process

What is a Section 5A Notice?

A Section 5A Notice is a formal notice served by the landlord to the tenants, informing them of their right to purchase the property before it is sold on the open market. The notice must comply with specific requirements, including the prescribed form and content. It is crucial for the landlord to serve this notice correctly to ensure the validity of the subsequent steps in the Right of First Refusal process.

Depending on how the landlord wishes to dispose of the property determines what kind of Notice must be used. The second most common type is a Section 5B Notice - this is used if the landlord wishes to sell by Auction, and the processes is somewhat different.

What is the Right of First Refusal Procedure?

Once the tenants receive the Section 5A Notice, they have a limited period, a stated date which cannot be fewer than two months, to respond and indicate their interest in purchasing the property. Importantly, it is the majority of qualifying tenants who are able to collectively accept the Notice.  An acceptance by a mere single party will not have any effect.  Typically upon receiving such a Notice, if the group of leaseholders comprising more than half of the leasehold flats in the building decide to exercise their right, they will usually appoint a Solicitor to act on their collective behalf.  They must serve an acceptance notice to the landlord within the specified time frame. Failure to respond within the given period will result in their pre-emption right being lost. In other words, the landlord will then be able to proceed to transfer the property on the open market to whoever he wishes, however importantly, if he does so, he will need to ensure that it is not sold at an undervalue from the terms that were offered within the Notice.

A landlord that fails to either comply with the Right of First Refusal principles, or sells for a discount on the open market without having first offered it to the leaseholders for that price has contravened the legislation, for which there are civil as well as criminal consequences.

Once the Acceptance Notice has been given the leaseholders have a further period of two months, to inform the landlord of their "Nominee Purchaser", this is typically a limited company setup by the participating leaseholders which will act as the means for how the leaseholders will collectively own the Freehold after purchase.

How is the price established?

The price would be required to be stated in the Section 5A Notice. This figure can be whatever sum the landlord decides, it is purely discretionary and does not have to be formulated by any particular method of calculation.  The Right of First Refusal process is essentially a means to prevent a landlord from bypassing the leaseholders as purchasers only without offering that sum first.

Quite often it is unknown by the leaseholders whether the landlord actually has a party able to take up the price offered if the leaseholders do not.

However there is another means by which the leaseholders are able to purchase the Freehold which *does* provide a means of calculation, which is that of Collective Enfranchisement. Which is a subject we have covered on this website. Unlike the Right of First Refusal, it is one that is initiated by the leaseholders as opposed to the landlord.

It is recommend that if the leaseholders wish to gauge whether the price offered to them is a fair one, that they instruct a Chartered Surveyor who specialists in Enfranchisement valuation to calculate the Freehold value using such calculations in the Enfranchisement legislation.

Since the leaseholders only have 2 months to effectively decide whether they wish to exercise their pre-emption rights, it is highly recommend that they put such investigations into practice in good time.

 

What are the risks/challenges involved?

The main risks to the leaseholders is that by not serving an Acceptance Notice, the Freehold may be transferred to an unknown unpredictable party.  Since Management of the Estate is often controlled by the Freeholder, this can also mean that the management of the building could be in the hands of an unfavourable party.

Furthermore, since the price is discretionary, the landlord could offer an inflated overvalued price to the leaseholders, and if they have not valued the freehold they may be unaware of its true value.

The timeline provided by the legislation may seem generous on first impression, however, coordination between the leaseholders can be time-consuming - particularly when the freehold block is large. Often it can be difficult to get in touch with your neighbours in order to discuss the merits of participating as many leaseholders may let out their flats. Finding out their contacts is not always straightforward, for those that live in the flats, knocking on doors is the simplest solution. For those that do not either a request to the managing agent, or a land registry search to ascertain a correspondence address are possibilities.  We have provided a useful letter that leaseholders could use in order to elicit participation from their neighbours at the top of this page. 

The main risks to the Landlord concern failure to fulfill the duties of offering the rights in the first place, or transferring the property at a discount to another party are offering a higher price to the leaseholders.  In such a case, the leaseholders effectively have the ability to force the sale of the freehold to them on the same terms that the price was sold to that party.

 

 

Conclusion

The Right of First Refusal under the Landlord and Tenant Act 1987 offers tenants a valuable opportunity to purchase their rented property before it is sold on the open market. Understanding the Section 5A Notice, the procedure involved, the price establishment, and the risks associated with this process is crucial for both landlords and tenants. Seeking professional advice and carefully considering the financial implications are essential steps to ensure a successful and fair Right of First Refusal process

 

 

 

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