The Right of First Refusal, otherwise known as the Right of Pre-emption or First Right of Refusal, is given to qualifying leaseholders when their freeholder wishes to sell his/her freehold interest. Under the Right of First Refusal, leaseholders are provided with the opportunity to purchase the freehold of their building before another party. This is a legal right prescribed by the Landlord and Tenant Act 1987 as amended by the Housing Act 1996.
While this resource is focussed on the Right of First Refusal in property, it’s worthwhile noting that the same term can also be used in a business context. The concept remains the same however, whereby the Right of First Refusal is a contractual right to enter into a business transaction with a person or company before anyone else can. It is most commonly seen in situations where there is a joint venture between partners, where one might be given the option to buy the other out, for example.
How does the Right of First Refusal Work?
The Right of First Refusal will only come into force when the property and the leaseholders meet strict qualification criteria set out under Section 5 of the Landlord and Tenant Act 1987.
Property qualification criteria
- Must contain at least two flats
- More than 50% of the flats must be owned by qualifying leaseholders
- No more than 50% of the building must be in non-residential use.
Leaseholder qualification criteria
- Must have a lease term of at least 21 years
- Must not own three or more flats
- Must not have a short-hold or assured tenancy
Right of Refusal exemptions
Freeholders can be exempt from offering the Right of First Refusal if they are a resident landlord whereby the property is their only principal residence and has been for more than 12 months. Registered housing associations and local authorities can also be exempt.
If all of the above requirements are satisfied, the freeholder must issue qualifying leaseholders with a Section 5 Notice to offer them the opportunity to purchase the freehold.
What’s in a Section 5 Notice?
Amongst a variety of legal wording within the Notice, the following basic information will be included:
- The address of the freehold
- Details of where to send any notice of acceptance
- The purchase price for the freehold (not applicable for Section 5B Notices)
- Any deposit that must be paid
- The timeframe for accepting the offer
- A schedule of leases included in the disposal
A Section 5 Notice is a legal document and as such, it is crucial that the prescribed format set out in the Landlord and Tenant Act 1987 is followed correctly.
There are five different Section 5 Notice formats, which relate to the various methods of disposal. These include:
- Section 5A Notice – for a private sale
- Section 5B Notice – for a sale by public auction
- Section 5C Notice – for a grant of an option or right of pre-emption
- Section 5D Notice – for a sale not pursuant to a contract
- Section 5E Notice – for a sale for non-monetary consideration.
The most commonly used notices are Section 5A, which is used when the freeholder intends to sell by simple contract to the open market or a Section 5B, which is used for selling by public auction.
Right of First Refusal process and timeline under Section 5A – private sales
- The freeholder or their representative will issue a Section 5 Notice to all qualifying leaseholders, which will constitute an offer by the freeholder to enter into a contract on the terms set out in the notice.
- Leaseholders will have two months from the date stated in the notice to accept the freeholder’s offer. During this period, the freeholder cannot sell the property to another party.
- If leaseholders do not respond within the two-month time frame, the freeholder can proceed with the disposal of the freehold interest to another party.
- The disposal must take place under the exact same terms as set out in the Section 5 Notice, i.e. the freehold cannot be sold for one penny less than what was offered to leaseholders.
- If leaseholders do accept, they must do so in writing to the freeholder or their representative. They will then have a further two months to nominate a purchaser in writing.
- The nominee must then be sent a contract within one month and has a time frame of two further months to sign and return the contract and pay the deposit.
Right of First Refusal process and timeline under Section 5B – public auction sales
- The freeholder or their representative will issue a Section 5B to Notice to all qualifying leaseholders, which will constitute an offer by the freeholder to enter into a contract on the terms set out in the notice.
- Section 5B Notices must be issued between four and six months before the date of the chosen auction.
- Leaseholders will have two months from the date stated in the notice to accept the freeholder’s offer. During this period, the freeholder cannot sell the property to another party.
- If leaseholders do not respond within the two-month time frame, the freeholder can proceed with the disposal of the freehold interest at the public auction.
- The disposal must take place under the exact same terms as set out in the Section 5 Notice, i.e. the freehold must be entered into the auction and cannot be sold privately.
- If leaseholders do accept, they must do so in writing to the freeholder or their representative. They will then have a further 28 days to nominate a purchaser in writing.
- Once the auction has taken place, the accepting leaseholders will have the opportunity to purchase the freehold at the price achieved by the highest bidder.
- The nominee will then be sent a contract within one month and has a time frame of two further months to sign and return the contract and pay the deposit.
The freeholder has the right to withdraw the offer at any time during the notice period before a contract is made legally binding. When a notice is served it is valid for a period of twelve months. Once served the freehold cannot be offered to anybody else on different terms unless the Landlord serves the notice again and includes the new offer terms.
What if leaseholders don’t receive Right of First Refusal?
Although this shouldn’t ever be the case, unfortunately, it can happen. This can occur unknowingly through basic error, or more commonly where the landlord has limited or no contact with the leaseholder. Sometimes the only accessible address is the one listed on the leasehold title entry and if the leaseholder has not updated the Land Registry with the most up to date postal address this can lead to them not receiving the notice.
Freeholders are legally obligated to offer the Right of First Refusal to their qualifying leaseholders when they wish to sell their freehold. As such, failure to comply is a criminal offence and can result in prosecution and a £5,000 fine.
If this is the case, leaseholders are given the ‘rights of remedy’ to force the new freeholder to transfer the freehold title to them on the same terms for which it was acquired. Thus, an intentional failure by the original freeholder is not only disrespectful to the leaseholders, but also to the person who has unknowingly bought the freehold, as they could potentially lose the property and of course their time and any money spent on legal fees.
Read more on this subject in ‘What happens when you do not comply with the Right of First Refusal.’
Right of First Refusal support for freeholders
To ensure that freeholders are compliant with the Right of First Refusal when selling their Freehold, they should take the following steps:
- Assess your freehold property and the leaseholders against the Right of First Refusal qualification criteria to determine whether you are obligated to offer the Right of First Refusal. You may feel more comfortable talking to a freehold specialist in order to understand your responsibilities when selling your freehold.
- If your property does not qualify for the Right of First Refusal, you can proceed with the sale of your freehold interest without consulting the leaseholders.
- If you are required to offer the Right of First Refusal, you will need to issue qualifying leaseholders with Section 5 Notices. It is advisable to not attempt to do this yourself if you do not have any experience, as any mistakes will render the Notice invalid. An invalid Section 5 Notice can cause severe delays in the sale of your freehold.
Right of First Refusal Service
At Freehold Sale, we offer a fast, professional, and low-cost Right of First Refusal service for freeholders wishing to sell their freehold. Depending on your chosen method of sale, we will efficiently prepare either Section 5A or Section 5B Notices and issue them to leaseholders on your behalf. Our expert team has a wealth of experience in serving Section 5 Notices, ensuring that thorough accuracy checks are carried out at every stage, so you can rest assured that you are fully compliant with the Right of First Refusal.
In many cases, we can even offer our Right of First Refusal service at no cost! Learn more by contacting us here.
This resource was originally published on July 28th 2015 and updated on 14th July 2020
