The right of first refusal is a crucial concept in property law that can have a significant impact on leaseholders’ rights and options. This legal provision gives tenants the first opportunity to purchase their rented property if the landlord decides to sell. It’s a safeguard that can provide tenants with more control over their living situation and potentially lead to property ownership.
This guide will explore the ins and outs of the right of first refusal, breaking down its key elements and implications. We’ll look at who qualifies for this right, how the offer process works, and what happens if landlords don’t follow the rules. Whether you’re a leaseholder curious about your rights or a property owner wanting to understand your obligations, this article aims to give you a clear picture of this important legal concept.
What is the Right of First Refusal?
The right of first refusal (ROFR) is a crucial legal provision in property law that grants certain individuals or entities the first opportunity to purchase a property before it’s offered to others. This contractual right is often included in lease agreements, real estate contracts, and other formal property arrangements.
Legal basis
The legal foundation for the right of first refusal in the UK is primarily established by the Landlord and Tenant Act 1987 (LTA 1987). This Act aims to give residential tenants the right of first refusal when their landlord intends to dispose of the freehold or head leasehold interest in the property. It’s important to note that tenants cannot compel a landlord to sell; they simply have the right to acquire the interest before it’s sold to any other party.
Purpose of the right
The main purpose of the right of first refusal is to provide tenants with more control over their living situation and potentially lead to property ownership. It serves as a safeguard for tenants, giving them the opportunity to purchase the freehold or head leasehold interest in their building, rather than having it sold to a third party. This right can be particularly beneficial for long-term tenants who have invested time and resources in their rented property.
When it applies
The right of first refusal applies in specific circumstances:
- It’s relevant when a landlord proposes to make a relevant disposal of the freehold or head leasehold interest in a building containing two or more flats , with at least two of these flats let on long leases.
- Before disposing of their interest, landlords must serve formal notices under the LTA 1987 to all qualifying tenants, providing specific information such as the purchase price and what’s included in the sale.
- If qualifying tenants don’t exercise their rights within two months of the notice being served, the landlord can then dispose of the interest to the proposed purchaser on the same terms as stated in the notice.
It’s crucial to note that not all buildings are subject to the right of first refusal, and certain criteria must be met for it to apply.
Qualifying Criteria
Premises requirements
For the right of first refusal to apply, certain premises requirements must be met. The property must contain at least two residential flats held by qualifying tenants on long leases. Additionally, more than 50% of the flats in the building must be held by qualifying tenants for the Act to apply. If the premises are partly residential, the internal floor area of the residential part must represent 50% or more of the total internal floor area, excluding common parts.
Landlord requirements
Most landlords must comply with the right of first refusal procedure when disposing of their interest in a qualifying building. However, there are some exceptions:
- Resident landlords in non-purpose built blocks of flats who have occupied a flat as their only residence for at least 12 months prior to the disposal.
- Local authorities, registered housing authorities, and housing trusts.
- Exempt public sector landlords, including housing associations and Housing Action Trusts.
Tenant requirements
To be considered a qualifying tenant, an individual must hold a long leasehold or be a regulated tenant with a lease directly from the person wishing to sell their interest. However, certain tenants are excluded from being qualifying tenants:
- Protected shorthold tenants
- Business tenants
- Service tenants
- Assured tenants or assured agricultural occupants
- Secure tenants (as their freeholder is an exempt public sector landlord)
It’s important to note that a tenant who owns three or more flats in the same building will not be considered a qualifying tenant for any of those flats. This provision ensures that the right of first refusal is primarily available to individual leaseholders rather than those with multiple property interests within the same building.
The Offer Process
Landlord’s obligations
When a landlord intends to dispose of their interest in a qualifying building, they must follow a strict procedure outlined in the Landlord and Tenant Act 1987. The landlord is required to serve a Section 5 notice to at least 90% of the qualifying tenants, or all but one if there are fewer than 10. This notice must include specific details such as the terms of the proposed sale, including the purchase price and any deposit required. It’s important to note that the landlord sets the purchase price, which is not open for negotiation.
Tenant response timeframes
The Section 5 notice must provide tenants with at least two months to respond to the offer. During this period, the landlord cannot sell the property to anyone else . For the offer to be accepted, more than 50% of the qualifying tenants must agree to proceed. If the qualifying tenants wish to accept the offer, they must serve a Section 6 notice within the given time period.
Nomination of a purchaser
If the tenants accept the landlord’s offer, they have an additional two months to nominate a purchaser . This nominee can be either one of the individuals or, more commonly, a specially incorporated management company. Once the landlord has been notified of the nominated person, they must send a contract within one month. The nominated person then has two months to sign and return the contract and pay a deposit, which must not exceed 10% of the price.
If the qualifying tenants do not serve the acceptance notice or serve it outside the offer period, the landlord is free to dispose of the interest on the open market. However, they cannot sell on different terms or at a lower price than what was proposed to the tenants in the offer notice.
Consequences of Non-Compliance
Criminal offences
Failing to comply with the Right of First Refusal provisions can lead to serious consequences for landlords. It’s considered a criminal offence, and landlords who deliberately disregard these legal obligations may face prosecution. The penalties can be severe, with fines of up to £5,000 for failing to give Notice of First Refusal. Additionally, landlords who breach the requirement to serve a Section 3 notice may be subject to a fine of up to £2,500.
Tenant remedies
Tenants have several remedies available if a landlord fails to offer their interest in the property as required by the Act. They can initiate civil proceedings against the landlord, and the court may issue an order forcing compliance with the Act’s provisions. In cases where the landlord has already sold the property without providing the Right of First Refusal, tenants can serve a notice on the new owner demanding details of the transaction, including the price paid. Importantly, tenants can then take action to force the new owner to sell to them at the price they paid. This right can be enforced against subsequent purchasers should the new landlord sell on, providing significant protection for qualifying tenants .
Conclusion
The right of first refusal has a significant impact on the property market, giving leaseholders more control over their living situations. This legal provision offers tenants the chance to buy their rented property before it’s sold to others, potentially leading to property ownership. It’s a safeguard that benefits long-term tenants who’ve invested time and resources in their homes, while also placing certain obligations on landlords to follow specific procedures when selling.
Understanding the right of first refusal is crucial for both tenants and landlords to navigate the property market effectively. For tenants, it opens up opportunities to secure their homes and possibly become homeowners. For landlords, it’s essential to grasp the legal requirements to avoid hefty fines and potential legal action. In the end, this provision aims to create a fairer balance in the property market, giving tenants a voice in the future of their living spaces.
FAQs
What does the right of first refusal mean in the context of a leasehold?The right of first refusal in a leasehold context mandates that the freehold must be offered for sale to qualifying leaseholders before it can be offered to anyone else. It is unlawful to bypass this requirement, so it’s crucial to verify whether leaseholders qualify for this right.
Can you explain the right of first refusal under the Landlord and Tenant Act 1987?Under Part 1 of the Landlord and Tenant Act 1987 (LTA 1987), certain residential tenants are granted the right of first refusal if their landlord intends to make a “relevant disposal”. This provision applies only if specific qualifying criteria are met.
What is the general principle behind the right of first refusal?The right of first refusal (ROFR), also known as the first right of refusal, is a contractual right allowing a person to either match or decline an offer for an asset after other offers have been considered. The holder of this right has the priority to engage in a transaction before anyone else.
What exemptions exist regarding the right of first refusal?An exemption to the right of first refusal exists if the freehold property has been your sole principal residence for the past 12 months. In such cases, you are not required to offer the right of first refusal.
