What happens when you do not comply with the Right of First Refusal?

Illegal and legal written on paper
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The Right of First Refusal in residential property matters provides leaseholders with the contractual right to be offered the opportunity to purchase the freehold of their building. This right is provided by Part 1 of the Landlord and Tenant Act 1987, as amended by the Housing Act 1996. As such, there is a legal requirement for freehold landlords to comply before they sell their freehold interest to another party.

If the freehold seller does not comply with the Right of First Refusal, they will leave themselves liable to criminal prosecution and a fine of up to £5000. But that’s not the end of the matter of course. If qualifying tenants find out that the freehold has been sold without having the opportunity to exercise their Right of First Refusal, they will then have the rights of remedy.

What are qualifying tenants?

Being a tenant in a residential property doesn’t provide automatic entitlement to the Right of First Refusal. Under the 1987 Act, tenants must first qualify by meeting the following criteria:

  • They must be a long leaseholder with an original lease term of more than 21 years
  • Must not own three or more flats in the building
  • Must not be a business tenant
  • Must not be a shorthold tenant
  • Must not be an assured tenant

What are the rights of remedy?

The rights of remedy enable the requisite majority (more than 50%) of qualifying tenants to initially request information about the sale of the freehold from the new landlord when they believe there has been a breach of the Right of First Refusal. Such information includes:

  • The terms under which the freehold disposal was made
  • The purchase price and any deposit paid
  • The date the freehold transfer took place
  • A copy of the contract if one was entered into with the disposal

This request can be made under Section 11A of the 1987 Act and requires a response from the new landlord within one month.

How do you find out who owns the freehold of a property?

It’s easy to find out who owns the freehold of a property by visiting Land Registry and requesting a copy of the title deeds. However, tenants are commonly alerted to the fact that they have a new landlord when they receive a Section 3 Notice. This notice informs tenants of their new landlord and provides his contact details. So, should the tenants wish to action their rights of remedy, they have the necessary information to do so.

The Section 3 Notice must be served to tenants by the new landlord of a residential freehold property within two months of the freehold transfer. This is a legal requirement for landlords and as such, failure to comply can result in a criminal conviction and a fine of up to £2500. Once tenants receive a Section 3 Notice, they will have 4 months in which to serve a Section 11A Notice, regardless of when the freehold transfer took place.

If the qualifying tenants can prove that there has been a breach of the Right of First Refusal legislation, they will be entitled to purchase the freehold to their building under the same terms that it was sold. This means that a new landlord can be forced to sell his newly acquired freehold property or withdraw from a sale contract should the transfer not yet have taken place.

How can tenants buy the freehold?

In order to purchase the freehold, tenants must determine a Nominee Purchaser, who will be the person named in the initial notice to acquire the freehold. The Nominee Purchaser can be either one of the tenants or a company formed by the tenants, however, the company must be established before being put forward in the initial notice.

Under Section 12 of the Landlord and Tenant Act 1987, there are three different procedures for qualifying tenants to acquire the landlord’s interest depending on how it was disposed of. These consist of:

  • Section 12A – The right to take benefit of a contract
  • Section 12B – The right to compel a resale
  • Section 12C – The right to compel the grant of a new tenancy

Section 12A – The right to take benefit of a contract

If the tenants discover that their landlord has entered into a contract to sell the freehold, the requisite majority can take benefit of the contract, so long as the sale has not yet completed. This means that qualifying tenants can notify their landlord to elect that the contract will have effect as if entered into with their Nominee Purchaser rather than with the third-party purchaser. The Nominated Purchaser is required to pay any contractual deposit and to comply with any other specific provisions of the contract.

Section 12B – The right to compel a resale

This procedure applies when the freehold transfer has taken place and either the disposal did not consist of entering into a contract or the qualifying tenants did not serve notice under Section 12A. In this instance, the requisite majority can serve notice on the new landlord to compel him to sell the freehold under the same terms that he acquired it.

The Section 12B Notice must be served within a six-month period from the date that the Section 3 Notice was received, or from the date that the new landlord complied with the Section 11A Notice. Once in receipt of the Section 12B Notice, the new landlord is legally bound to sell the freehold and this is enforceable by the courts.

Section 12C – The right to compel the grant of a new tenancy

When the disposal of the freehold consisted of the surrender of a tenancy held by the landlord e.g. a head-lease over all the flats, Section 12C will apply. Here, the requisite majority can serve notice on the new landlord requiring him to grant a new tenancy to the tenant’s Nominee Purchaser, on the same terms as that which was surrendered.

The Section 12C Notice must be served within a six-month period from the date that the Section 3 Notice was received, or from the date that the new landlord complied with the Section 11A Notice. The new landlord must be reimbursed for any consideration that he paid for the tenancy by the Nominee Purchaser.

Can freehold buyers protect their investment?

Unfortunately, if the Right of First Refusal has been wrongfully avoided there is nothing that a new landlord can do to protect their investment. However, under Section 18 of the Landlord and Tenant Act 1987, freehold buyers can serve notice on the tenants at the property they are buying, to make them aware of the terms of the sale before it takes place. At least 80% of the tenants must receive this notice, for the freehold buyer to be compliant.

The notice would also ask tenants if they have been served a Section 5 Notice offering the Right of First Refusal and if not, whether they consider themselves to be qualifying tenants that would like to exercise their Right of First refusal. This is not a legal requirement for freehold purchasers but a way to ensure that the Right of First Refusal has been complied with. On receipt of the Section 18 Notice, tenants have two months to respond.

Final thoughts

It is abundantly clear that freehold sellers should not attempt to avoid offering the Right of First Refusal to their tenants. Not only could they receive a hefty fine and a criminal conviction to boot but it will also cause a lot of unnecessary stress for tenants and unsuspecting freehold buyers. 

Whether you’re selling a freehold property or buying one, you should always ensure that you comply with the Landlord and Tenant Act and your legal obligations by serving the relevant notices to tenants.

If you’re a freehold seller and require assistance with offering your tenants the Right of First Refusal, Freehold Sale offer a free Right of First Refusal service. Find out more here.

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