Right of First Refusal

Under the Landlord and Tenant Act 1987, it is often likely that a freeholder (or another landlord) who wishes to dispose of an interest in a block of flats must first serve a Notice (a “Section 5 Notice”) on qualifying leaseholders giving them the opportunity to buy that interest on the terms set out in the Notice. This is known as the Right of First Refusal.

The Notice has to be sent to the Leaseholders setting out certain information about the sale, including the price at which the Freeholder wishes to sell, and other terms.

If a majority (over 50%) of the Leaseholders wish to acquire the Freehold on those terms, then that majority must serve a Counter Notice on the Freeholder to that effect within the time limits set out in the Notice. The Counter Notice must contain certain essential information. If the Counter Notice is not served or is served late, the Freeholder is free to sell the Freehold to anyone else within the following 12 months, provided that the terms are no less favourable than those set out in the Section 5 Notice.

If a Counter Notice is served by a sufficient majority of Leaseholders, they then have a further period within which they can, if they wish, form a Company to purchase the Freehold.

There are further timetables in the 1987 Act dealing with the drafting and preparation of documents leading through to completion. If the Leaseholders do not enter into a binding Contract to acquire the Freehold with a set time period from when the Contract for sale is issued, they will be taken to have withdrawn and the Freeholder is free to sell to someone else.

Normally, the Leaseholders do not have to pay the Landlord’s costs, unless it is a specific term of the deal he offers you in the Section 5 Notice. However, there is an exception if the Leaseholders withdraw, or are taken to have withdrawn, after a set point in the process in which event they would be liable for the Landlord’s costs after that point.

There is a separate procedure to be followed where the Freeholder decides to put the Freehold up for public auction. Further details available on request.

If the Freeholder fails to comply with his obligations to offer the Leaseholders the right of first refusal, and sells to a third party, the Freeholder commits a criminal offence. In addition, the Leaseholders have the right to acquire the Freehold in these circumstances from the third party who bought it, on the same terms.