Right of First Refusal
Under the provisions of the Landlord and Tenant Act 1987 (“the 1987 Act”) qualifying tenants of flats have a right to buy their freehold on a proposed disposal of the landlord's interest to a third party. That right is known as “a right of first refusal”.
Why buy your freehold?
Freehold purchase gives leaseholders more control over managing and maintaining their building.
Following completion of the freehold purchase, the leaseholders will have the ability to grant themselves 999 year leases at a peppercorn rent which can be expected to increase the value of their flats.
Who is a qualifying tenant?
For the purpose of a right of first refusal, a person is a qualifying tenant if he or she is a tenant of a flat under a tenancy. The right of first refusal applies equally to tenants under a long lease or a short lease. However, the right of first refusal does not apply to an assured shorthold tenancy.
If a person owns three or more flats in the building, he or she will not be a qualifying tenant in respect of any of those flats.
How is the right claimed?
Following the service of the landlord's Offer Notice (also known as a "Section 5 Notice"), the landlord's offer must be accepted by qualifying tenants representing more than 50 per cent of the flats in the building.
An Acceptance Notice must be served within the period specified in the Offer Notice. The qualifying tenants must act together and not independently. This means that one Acceptance Notice must be served by all the qualifying tenants who wish to participate in the right of first refusal.
What happens next?
If it is intended to proceed, the qualifying tenants then have a further period of at least two months in which to serve a Nomination Notice on the landlord notifying the landlord of their nominated person to conduct the proceedings on their behalf. This is normally a limited company formed specifically to act as such.
What if no Acceptance Notice or no Nomination Notice is served?
If no Acceptance Notice is served within the acceptance period and/or no Nomination Notice is served within the nomination period, the landlord is then free to proceed with his proposed disposal within the next 12 months on the terms set out in the Offer Notice. The landlord cannot dispose of his interest for less than the price quoted in the Offer Notice.
Can a qualifying tenant withdraw his or her acceptance?
A qualifying tenant who accepts the landlord's offer may withdraw his or her acceptance at any time until a binding contract has been entered into for the purchase of the freehold. If the number of qualifying tenants falls below the minimum number of qualifying tenants required to proceed, the Acceptance Notice must be withdrawn immediately.
Can the landlord withdraw the offer?
The landlord may withdraw his offer following the service of an Acceptance Notice at any time until a binding contract has been entered into for the purchase of the freehold.
What about costs?
If a Notice of Withdrawal is served by the nominated person within the first four weeks of the nomination period, neither the nominated person nor the qualifying tenants are liable for any costs incurred by the landlord. If the Notice of Withdrawal is served later, the landlord may recover his reasonable costs from the nominated person and the qualifying tenants who served the Acceptance Notice.
If the landlord serves a Notice of Withdrawal before the end of the first four weeks of the nomination period, the landlord is not liable for any costs incurred by the qualifying tenants. If the Notice of Withdrawal is served later, the landlord is responsible for any costs reasonably incurred in connection with the proposed disposal.
These notes are intended for general guidance only and individual advice should be sought as appropriate.
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