Leaseholders right of first refusal to buy freehold

Part I of the Landlord and Tenant Act 1987 provides that where a freeholder of a flat wishes to sell the freehold, they must notify the leaseholders and offer them the chance to buy it. The Housing Act 1996 introduced various amendments to clarify and tighten up procedures, particularly in relation to defaulting freeholders.

There is a framework that the freeholder must follow in notifying the leaseholders, giving time for them to organise themselves and finance the deal.

See the LEASE guide on the right of first refusal for more information.

The provisions apply where:[1]

• the properties are flats and there are at least two of them

• at least two of the flats are held by qualifying tenants

• more than half of the total number of flats in the premises are held by qualifying tenants

• there is a 'relevant disposal'

The provisions do not apply where:[2]

• the flats are not a purpose built block and there is a resident freeholder who has been living there for at least the last 12 months

• the freeholder is an exempt public sector landlord (this includes local authorities, housing associations and Housing Action Trusts)

• at least half the internal floor space is used for non-residential purposes

• preliminary notices having been served, no more than 50 per cent of the leaseholders have expressed a wish to exercise the right of first refusal

The following tenants are excluded from being qualifying tenants:[3]

• protected shorthold tenants

• business tenants

• service tenants

• assured tenants or assured agricultural occupants

Secure tenants are also excluded since their freeholder is an exempt public sector landlord.

Any other tenant qualifies unless they are the tenant of more than two flats in the building, or the landlord is a qualifying tenant.

A relevant disposal is any disposal of all or part of any interest in the building except where it is:[4]

• the grant of a tenancy in a single flat

• for the purposes of a mortgage

• as a result of a property adjustment order in matrimonial proceedings

• because of a compulsory purchase

• a gift to someone in the family of the freeholder or to charity

• a disposal by two or more members of the same family either to fewer of their number or to a different combination of family members (one of which must have been a transferor)

• a disposal by the freeholder's company to another associated company where it has been an associated company for at least two years

• a disposal by a will or through intestacy

In one case, where joint freeholders who were a married couple granted leases to each other for various parts of a block of flats and surrounding areas at no premium and at a peppercorn rent, and did so in order to prevent long leaseholders from purchasing the freehold, it was held that the leases constituted gifts to family members and therefore were not ‘relevant disposals’ for the purposes of the right of first refusal.[5]

The procedure is laid out in the Landlord and Tenant Act 1987.[6]

The freeholder serves an offer notice on the tenants. The notice varies depending on whether the proposed disposal is by conveyance, sale at auction, grant of options or right of pre-emption.

The tenants can accept or decide not to proceed.

Acceptance

Those in favour must serve notice within the time limit of their acceptance, and nominate person(s) to acquire the interest. The freeholder is restricted from selling to anyone else for a specified time. At each stage in the process, the freeholder or nominated person must advance to the next stage within the time limits, or withdraw.

Decision not to proceed

If the tenants do not proceed within the time limit, the freeholder is free to sell but if they sell within 12 months, they must sell on the same terms as the offer to the tenants.

Disputes

Disputes are heard by the Rent Assessment Committee. Enforcement of rights is by the court.

The Housing Act 1996 made it a criminal offence for a freeholder to sell their interest without following the procedure.[7]

In addition, if the freeholder does not follow the procedure and sells the property, the tenants can enforce their rights and buy the property from the new freeholder[8] as long as they act within four months of discovering the breach. To prevent this happening, a prospective purchaser can serve notice on the tenants to find out if the right of first refusal applies.

The tenants must respond within 28 days to say whether they want the right. If either 50 percent do not reply or 50 percent reply saying they do not want the right, then the disposal will fall outside the provisions.

A new freeholder must notify the tenants that a sale has taken place for which they have the right of first refusal. Failure to do so is a criminal offence.

In certain circumstances, the freeholder can be forced to sell the freehold due to their failure to discharge their obligations to repair, maintain, insure or manage the property.[9] This is a provision of 'last resort' and before it can be used an order for the appointment of a manager must have been in force for at least two years.

Compulsory acquisition does not apply where:

• there is a resident landlord

• the landlord is public body (including local authority and private registered providers of housing)

• the premises are within land owned by a charity

• more than 50 per cent of the internal floor area of the building is non-residential

• the total number of flats held by qualifying leaseholders is less than two-thirds of the total number of flats in the building

Only a court can make a compulsory acquisition order,. It only does so if it considers it appropriate.

The procedure is similar to the right of first refusal.