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.
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.
APRIL 2022 GROUND RENT BAN UPDATE: the UK government have now confirmed that Leasehold Reform (Ground Rent) Act 2022 comes into force on June 30, 2022. This introduces a ground rent ban under which any new lease can only include a peppercorn ( i.e. nil) ground rent. Owning a freehold (unless you’re also a leaseholder) will probably become much less popular as a result. If you are a freeholder, who is considering selling, it’s critical that you understand the Right of 1st Refusal
Freehold Right of first refusal – why you need a specialist solicitor
The critical thing with buying your freehold as a result of being offered the right of first refusal is speed. You have a very short timetable to complete the purchase. And if there are a number of leaseholders involved, this can create problems for your solicitor, if they don’t have a team to back them up.
Our team of 6 lease extension and enfranchisement experts have the capacity for the biggest freehold purchase. Currently, for example, we are running a RFR case for 93 leaseholders in a block of over 150 flats. We are aware that a number of solicitors turned that block down, because they simply couldn’t cope with so much both complicated and extensive work in such a short period.
Enfranchisement is tricky – the Right of 1st Refusal is trickier still. Need specialist advice? Call us on FREEPHONE 0800 1404544 for FREE Initial Phone Advice
The right of first refusal – Important – don’t delay – there is a strict deadline
Please note that the Right of First Refusal Offer Notice must usually be accepted within two months of service upon you, unless your freeholder has agreed to extend this deadline. So, it’s really important that you instruct a solicitor as soon as possible if an Offer has been made and you are considering taking the opportunity to enfranchise.
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. And that offence is punishable, on conviction, with a level 5 fine on the standard scale (up to £5,000)
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. It also ensures that the freeholder cannot put a punitive price tag on the freehold in order to simply put the leaseholders off.
Right of First Refusal to Buy Your Freehold – Getting the Right Valuation
As with leasehold enfranchisement, our very strong advice is that you need to get your own specialist valuation – so you know whether the offer price but forward by your freeholder is reasonable.
Here at Bonallack & Bishop, as part of our one-stop shop service, we can, if you wish, both introduce you to, and instruct on your behalf, a specialist surveyor to value the premium.
Over the last 20 years, as specialists in this area, we have built up an informal network of a small number of surveyors nationwide who really understand this complex area and who we rely on to provide responsible valuations.
Click here to read more about enfranchisement valuations.
Right of First Refusal – What Can I Do If I Think The Offer Price Is Simply Too High?
The Offer Price is a figure set by your freeholder and is in theory non-negotiable – unless by agreement with your freeholder.
There is no mechanism to force your freeholder to charge a reasonable price through the First Tier Property Tribunal.
However, freeholders are discouraged, in practice, from over charging because they are not allowed to sell for better terms to anyone else.
If the figure being charged is too high, and if you qualify for collective enfranchisement, you have the option to serve a Notice of Claim of your own. That forces your freeholder to sell the freehold to you and your your fellow leaseholders.
Click here to learn more about leasehold enfranchisement.
Is the price for exercising the right of first refusal the same as if we had gone through the enfranchisement process?
No. The price for RFR is set by the freeholder, or by auction where the landlord decides to sell that way. RFR does not give the right for that price to be set by the First-tier Property Tribunal.
But the freehold cannot be offered, or sold to someone else at a lower price than that originally offered within 1 year of the notice – unless that new lower price had already been offered to the leaseholders.
What Kind of Buildings Does the Freehold 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 to Buy Your Freehold – 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. That’s why 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
unless your block is a very small one and therefore you only need 1 or 2 other people to support the freehold purchase project, it’s well worth considering getting all participating leaseholders to sign what is known as a participation agreement – a legally binding document. We can help you with that.
Click here to read more about enfranchisement participation agreements.
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. If you fail to do so, you will be legally deemed to have passed on the chance to buy the freehold. And that means 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 – but only 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. And that 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.
Right of first refusal – can either party withdraw at any time?
Yes. At any stage in the Right of First Refusal process, either party may withdraw at any time, up to exchange of contracts, or where no contract has been used, before completion of the transfer of your block..
However if your freeholder does withdraw, 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.
If withdrawal takes place more than four weeks into the two month nomination period, then there could be cost consequences however. The party who pulls out may be liable to pay the other side’s costs. This is to deter people from pulling out once parties have begun the process and invested time and costs.
Missing deadlines can also lead to a deemed withdrawal with the same costs consequences. If the deadline is missed, or if not enough of the qualifying tenants wish to go ahead, your freeholder will be free to sell the freehold to anyone they like after the relevant period (two months) has elapsed. Although they would not be allowed to sell it for a lower price or on better terms than those offered to you in the Offer Notice, until at least 12 months have passed.
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.
The Right of First Refusal – What will it cost?
The largest expense overall is, course, the premium you will need to pay to your freeholder, together with the other leaseholders, to buy your freehold. That’s not the only expense. In addition to our legal costs, and the costs of the specialist surveyor you are going to need to value that premium, you also need to budget for the following costs of buying the freehold:
- Freeholder’s own legal fees
- Freeholder’s valuation fees (possibly)
- 3rd Party Expenses
- Land Registry fees
- Fees for Incorporation of the Company
- Special delivery fees for serving the relevant Notices
We are not able to predict what your freeholder’s solicitor is likely to charge. However, we should be informed of their fees fairly early on in the transaction. Your freeholder may not instruct a valuer, but if they do, they are likely to want you to pay for these costs as well.
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. That’s why it’s so critical that you get the right expert advice.
For a FREE initial phone consultation from one of our specialist freehold purchase team;
- Call us today on FREEPHONE 0800 1404544 or
- Email us using our contact form for FREE initial advice and a FREE quote.