What Is The Right Of First Refusal?

The Right of First Refusal (RFR) is a piece of legislation governed by the Landlord and Tenant Act 1987 (LTA 1987).  Under the provisions of the LTA1987, a freeholder wishing to dispose of his interest in the “relevant premises” (the building) must give the flat tenants first refusal to purchase the freehold interest before he can dispose of the same to a third party.  Failure of the landlord to do so is a criminal offence and he can be subject to criminal and civil prosecution.

Qualification

There are certain qualifying criteria for both the building and the tenants:

Qualifying Premises

The premises must contain 2 or more residential flats held by qualifying tenants.

A qualifying tenant must hold a long lease of their flat and excludes a business tenancy or AST (Assured Shorthold Tenancy).  If a tenant owns three or more flats in the premises, then they are excluded from being a qualifying tenant” and their premises are excluded from being qualifying premises.

Relevant Disposal

A relevant disposal is most commonly the sale of the freehold, although it could be the grant or surrender of a lease.  Transfers within families, transfers due to divorce or a landlord company disposing to an associated company are exempt from the Right to First Refusal.

Section 5 Notice

The Landlord must serve a Section 5 Notice on at least 90% of the “qualifying tenants” (or all but 1 of the tenants if there are less than 10 qualifying tenants in the building) and the Notice must set out the terms on which the freeholder is disposing of the freehold and must be served to at least.   The Notice will also state the period in which the qualifying tenants can serve an Acceptance Notice, which must not be less than 2 months from the date of service of the Notice.

Procedure

If the qualifying tenants wish to accept the offer they will serve an Acceptance Notice (Section 6 Notice) and there is then a further 2-month period within which the qualifying tenants can nominate the entity who will purchase the freehold interest (i.e. whether it be individuals or the tenants may wish to set up a freehold company under which the freehold will be held).

Thereafter, there is a one-month period within which the Contract must be produced and a further 2‑month period within which the nominated purchaser will sign the contract and pay a 10% deposit.  Completion will usually then take place 7 days later, unless a further period is agreed between the parties.

What if the Qualifying Tenants do not wish to accept the Offer?

If the tenants do not wish to (or cannot) accept the Offer, then the landlord is free to dispose of the freehold to a third party within 12 months of his Notice, however he must do so on no worse terms than stated in the Notice, i.e. no lesser premium.  If he does not dispose of the premises within that 12 month period and wishes to change the terms, he must serve a fresh Section 5 Notice on the qualifying tenants.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2023.