The right of first refusal: an introduction for leaseholders

If you own a leasehold flat, there are plenty of reasons why you might want to get possession of the freehold, and several ways to do it. One of these methods is called the right of first refusal.


What is the right of first refusal?

If your immediate landlord or freeholder wants to sell their stake in your building for whatever reason, they are bound by law to offer it to you first. There are formal procedures to follow, and they have to give tenants plenty of time to consider their options. Most significantly, they can’t subsequently sell the freehold to anyone else at a better price without taking the offer back to you first.

Who qualifies?

Not everyone has the right of first refusal. The main qualifying factors are that there have to be at least two flats in the building, that at least half the building has to be in residential use, and that at least half the tenants are ‘qualifying’ (which has a fiddly definition but includes leaseholders). There are quite a lot of other exemptions too, including housing authority properties, social housing, charitable trusts and (under some circumstances) properties with resident landlords.

Right of first refusal also only applies to the next monkey above you on the ladder. So if you pay your ground rent to an immediate landlord who’s bought a head lease from the freeholder then that immediate landlord would have to offer you his interest if he wanted to sell it but the freeholder wouldn’t.

What are the pros and cons?

Primarily, you have to be confident you’re paying a reasonable price. If the sale is by contract (rather than auction) then it’s up to the freeholder to set the price and the terms of the sale, and unlike with collective enfranchisement (where you force the landlord to sell you the freehold), you can’t get the First-tier Tribunal to step in and make sure it’s a fair deal. You have no right to negotiate unless the landlord wants to.

Generally it’s in the landlord’s interests not to go wild, since if they set the value too high and you turn it down then chances are buyers on the open market will do the same, but as with any situation where someone is selling you something they know you really want, buyer beware.

How does it work?

It starts with an offer notice, couched in legalese. This will vary a bit depending on whether the landlord is selling their interest or auctioning it, but it will inform you what the landlord is selling (freehold, head lease or whatever) and how they plan to do it. If they’re selling by contract then the price and terms of sale will be included, and you’ll have at least two months to make up your mind and respond.

For the sale to go ahead, at least half the flats with qualifying tenants need to be on board. Once you’ve accepted the offer, you’ll then get a further two months to nominate who the landlord’s interest is going to be sold to, and this may well be a company formed by the various flat owners. The landlord then has a month to provide a contract, and after that the nominated person or company has two months to sign it and stump up the deposit (which can’t be more than 10% of the purchase price). Then the landlord has seven days to exchange. The time windows built into the process are pretty spacious, but it’s worth being proactive all the same.

A sale by auction works a bit differently. In this case, if you decide to go ahead and buy your landlord’s interest, you instead give yourself the option to step into the shoes of the winning bidder at the auction. As above, there are generous timescales for accepting the offer and nominating the buyer, and you’ll also need to send an additional letter of intent to the landlord at least 28 days before the auction. The length of the process means that the initial offer letter from the landlord needs to go out at least four months before the auction takes place.

You won’t need to attend or bid at the auction, but once it’s taken place the landlord will inform you within a week of the winning bidder’s price and terms. If you want to take their place then you’ll have 28 days to accept and pay any deposit necessary.

What if my landlord has sold their interest without telling me?

Then they’ve committed a criminal offence, and can be fined. More importantly, you can remedy the situation. Any new landlord is obliged to write to you letting you know that they have acquired your lease and reminding you of your rights, and if it’s the first you’ve heard of it, then you can force them to sell their interest to you for the same price they bought it for. All is not lost.


Further information


The Leasehold Advisory Service provides a detailed guide to the right of first refusal.


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