What Is the Right of First Refusal?
The right of first refusal allows you, as the leaseholders of the building, to bid for the right to buy the freehold if the freeholder wishes to sell it.
It doesn’t mean that the leaseholders can force the freeholder to sell the freehold [that right of enfranchisement is provided by in the Leasehold Reform, Housing and Urban Development Act 1993]. Instead, the leaseholders are given the opportunity to buy it if the freeholder has the intention of selling it anyway. The leaseholders can only react to the freeholder’s offer.
Consequences of Any Breach
In practice, the freeholder must offer the right to buy to the leaseholders before even beginning to negotiate to sell the freehold to a third party.
If the freeholder fails to do this, he or she will be in breach of the law and is actually committing a criminal offence.
Selling the Freehold – Setting the Right Price
Whatever offer the freeholder makes to the leaseholders in terms of the purchase price must be no less than what the building is eventually sold for.
In other words, the freeholder can’t negotiate to sell the building for £500,000, for example, if his ‘first refusal’ offer to the leaseholders was that they could buy it for £1,000,000.
This ensures that the leaseholders will always get the same, or better deal, than the ultimate third party buyer and also ensures that the freeholder cannot put a punitive price tag on the freehold in order to simply put the leaseholders off.
What Kind of Buildings Does the Right to First Refusal Apply to?
The right to first refusal applies to any leasehold or privately rented property – so long as it’s not a single dwelling.
In other words, it applies to leasehold and rented flats, apartments, maisonettes and any other buildings which contain more than a single dwelling. It would not, then, apply to a single rented house. Specifically, the building must:
• Contain at least two flats
• Have no more than 50% of its area in non-residential use
• Have more than 50% of the flats being held by qualifying leaseholders
What is a ‘qualifying leaseholder’?
A qualifying leaseholder is, in general terms, a leaseholder – but does not include any tenants with short-hold or assured tenancies, business tenancies or tenancies which are dependent upon employment.
It also worth noting that if you are a leaseholder of three or more flats in the building, you will not be considered a qualifying leaseholder.
What Triggers the Right of First Refusal?
The right is triggered when the freeholder intends to sell the freehold on a building to a third party.
Before he or she does so, they must send a formal Offer Notice on the qualifying leaseholders, giving them the chance to purchase the freehold using their right of first refusal.
Any qualifying leaseholder can own a maximum of two ‘long leases’ in the building (i.e. owns fewer than three of the flats with leases longer than 21 years).
In order to comply, the freeholder must serve notice on at least 90% of the qualifying leaseholders, unless there are fewer than ten leaseholders, in which case it must be served on all but one.
The Right of First Refusal – Getting the Procedure Right
The Offer Notice [often referred to as a section 5 Notice] served by the freeholder must include;
- the terms of the proposed sale
- the date for deadlines and
- procedures to be carried out and other details of the proposed sale of the freehold
It’s really important for the freeholder to get the Offer Notice right in the first place – so the offer notice should always be drafted by a specialist property lawyer with plenty of experience of freehold purchase work.
The right of first refusal – can I automatically buy my freehold?
Service on you and fellow leaseholders of the right of first refusal by your freeholder does not, however, mean that you can automatically buy the freehold.
Once the right of first refusal notice is served, more than 50% of the qualifying tenants must participate in the process in order for it to go ahead. For example, if your block of flats has forty qualifying tenants and only fifteen of them agree to participate in the process, the freehold purchase will not be able to go ahead in this way and the landlord will be free to sell to whoever they please.
Exercising Your Right – the Next Steps
If you want to buy the freehold using your right of first refusal, you will need to send a Residents’ Notice of Acceptance to your landlord within two months of the date of the Section 5 Notice, or you will be legally deemed to have passed on the chance to buy the freehold and your freeholder will be perfectly free to sell to another party if they wish.
Leaseholders can’t directly challenge the freeholder’s valuation price.
However it is worth noting that if you and your fellow leaseholders do turn down the chance to buy the freehold at the price stated as it is too expensive, the freeholder must then sell the freehold at only this price, and no less, to the original party or any other party within the next twelve months.
If the freeholder wishes to sell to someone else for a lower price, he must also offer it again to the leaseholders at this new reduced price.
Alternatives to exercising your right of first refusal
If you feel that the asking price in the Section 5 Notice is unreasonably high, then you have 2 options
- ignore the notice and let the freehold be sold to a third party OR
- make a collective enfranchisement application – this will probably have to to go to the First Tier Property Tribunal ( previously known as the LVT or Leasehold Valuation Tribunal), which will set a fair valuation for the freehold which binds all parties.
What if we were going to enfranchise anyway?
If you’re already planning on collective enfranchisement and you receive a right of first refusal notice first, this could save you a lot of time and money – if the price is right.
Exercising Your Right – take care
If enough of the leaseholders decide they want to take up the offer, and take the opportunity to purchase the freehold of their block, they will need to nominate a person to buy the freehold on behalf of the leaseholders – and, it’s worth pointing out, proper organisation from the outset is vital to ensuring that the process goes ahead smoothly.
Too often, poorly organised groups of leaseholders accidentally lose their right to buy the freehold of their block by taking up the option of first refusal, simply by not following the correct procedures – which effectively allows the freeholder to sell the property to a third party with relative ease.
There are a number of time restrictions and deadlines which must be kept to by both parties, or the deal can easily fall through. This is really important because collapsed negotiations may not be restarted for twelve months, meaning the process will effectively have to start again not less than a year later.
This is particularly bad news if the freeholder changes his mind in the meantime or if a buoyant property market means that the valuation of the freehold itself is rising – it means, of course, that you will need to pay more to purchase your freehold in this way.
Can Either Party Withdraw Partway through the Procedure?
Yes – but if the freeholder withdraws, they can’t then sell the leasehold on different terms or at a price lower than initially proposed. In addition, the leaseholders simply won’t be able to negotiate a sale of the freehold for a year, as the process cannot be restarted immediately.
It is for these reasons that it is important the right lawyer with plenty of relevant experience of freehold purchase is on board to ensure that the process goes ahead smoothly.
Any interruptions or withdrawals could end negotiations before they’ve even properly begun.
What Happens When the Freeholder Fails to Offer the Right of First Refusal?
If the freeholder fails to offer the right of first refusal, he or she is committing a criminal offence.
The leaseholders can serve notice on the new owner which demands the details of the transaction.
They can then force the new owner to sell the building to the leaseholders at the price he or she paid for it, effectively making their initial transaction null and void.
What Happens If There Is a Dispute between Freeholder and Leaseholder?
If there is a dispute between the freeholder and the leaseholder over their conduct or failure to comply with the legislation and procedure, the First Tier Property Tribunal can ultimately hear the case and has the jurisdiction to determine outcomes.
However if you have appointed the right lawyer in the first place, and some form of dispute does arise, they can advise you as to what rules have been broken and what you need to do to ensure compliance or or to commence legal proceedings against your freeholder or leaseholder.
Looking to exercise your Right of First Refusal to Buy Your Freehold? Contact Our Specialist Solicitors Today
Exercising the Right of First Refusal to Buy Your Freehold involves a really difficult of law – so it’s critical that you get the right expert advice.
For a FREE initial phone consultation from one of our specialist freehold purchase team;
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