What is the Right of First Refusal?
The Right of First Refusal (RFR) is the term used to described the obligations of a Landlord and the rights of Leaseholders to offer or be offered the reversion to the leases (often the freehold) if the Landlord wishes to dispose of his interest. This situation is regulated by the Landlord and Tenant Act 1987 (“the Act”).
How is the RFR regulated?
Where the landlord of a building, typically the freeholder, but in some cases, intermediate leaseholders, wishes to dispose of their interest, they must consider whether that interest must first be offered to the leaseholders. Not all landlords or buildings or disposals are caught by the Act as there are many exceptions.
If the RFR provisions do apply, there are different procedures depending on whether the landlord intends to dispose of his interest by private treaty or by auction. Both cases involve the service of an offer notice on the leaseholders. Leaseholders only have 2 months to reply with a counter-notice so it is important to act quickly. Leaseholders must act as a majority and your professional advisors need sufficient time to obtain instructions from all leaseholders who wish to participate. The remainder of the procedure is complex and professional advice is essential. If a deadline is missed, the landlord may have not fully complied with the procedure or the leaseholders may lose the right to acquire the interest.
If the premium is specified by the landlord in his notice and the leaseholders wish to accept the offer, then the transaction usually proceeds fairly swiftly.
If the premium is not specified in the offer notice because it is to be determined at auction, there will be a wait to ascertain what the premium will be, until the auction has taken place. Providing the leaseholders served their counter-notice in time, they will then have the opportunity to proceed or not after the auction takes place.
What costs are involved?
Landlords will usually incur the costs of their solicitors preparing and serving notices under the Act. Landlords may also require advice from a professional valuer surveyor to determine the level of premium they wish to offer if the interest is not to be sold at auction. These costs can be passed to the buyers/leaseholders.
A premium is payable to the landlord at a level decided by the landlord. There is no right for the leaseholders to challenge the premium before a Tribunal (unlike in Collective Enfranchisement claims). If the landlord’s interest is to be sold at auction, then the premium is set by the highest auction bid. Professional advice is essential to establish whether leaseholders should accept the Landlords price offered under the RFR provisions of the 1987 Act or whether it will be less expensive to exercise the right to Collective Enfranchisement.
In addition to the premium, you will be responsible for paying your own legal and valuation fees and any disbursements, such as Land Registry fees and any SDLT. You may also be responsible for paying the landlords(s) reasonable legal and valuation fees, if the Landlord specifies the payment of these in the offer notice.
What happens if the Landlord fails to comply?
If you are a landlord and have disposed of your interest in breach of the RFR provisions then you may have committed an offence and may be liable to a fine.
If you have purchased a reversionary interest where the RFR provisions applied but were not complied with, you may have committed an offence and be liable to a fine. In addition you may face a claim by the leaseholders as set out below. These leaseholder claims may be made long into the future.
If you are a leaseholder and the reversionary interest in your flat has been sold in breach of the RFR provisions, then you may collectively be able to acquire that interest on the same terms as your new landlord acquired it. It is important you act quickly to take professional advice if you become aware of a new landlord, as there are time limits on the exercise of this right.
Are there any alternatives?
For a Landlord the short answer is no. If the RFR applies to a disposal then it is a criminal offence if the Landlord, without reasonable excuse, proceeds with disposal without complying with the notice provisions in the Act. There may, however, be alternative disposals which a Landlord should consider making which may not fall within the Act. An offence can also be committed by a buyer of a reversionary interest, if the seller fails to comply with their obligations under the Act.
Leaseholders may have the right to Collective Enfranchisement. The Leasehold Reform Housing and Urban Development Act 1993 Act provides a right for a majority of long lessees who own flats in a building to purchase the freehold of that building. There are strict qualification criteria so legal and valuation advice is essential. Please refer to our guide on Collective Enfranchisement.
How can Hart Brown Solicitors help me?
Our award winning Leasehold Enfranchisement team have the specialist knowledge, expertise and experience to advise you in respect of any matters pertaining to the Right to First Refusal whether you are a landlord or a leaseholder or prospective buyer of a reversionary interest. They can assist you in determining whether you and your building qualify, guide you through the procedure and likely costs involved in more detail and of course act for you in connection with the service of any notices. They can also assist with claims to acquire the freehold where a Landlord has failed to comply with the RFR procedure.