Right of First Refusal

The legislation obliges a Landlord to offer Leaseholders of a qualifying building, the right to acquire the freehold when the Landlord decides they wish to sell their freehold interest.

The process is as follows;

1. Landlord Serves Notice

The Landlord must serve a Notice on the Leaseholders prior to the disposal allowing Leaseholders two months in which to accept the offer, although there is no obligation on either party to proceed at this stage.

2. Leaseholders Serve Counter Notice Accepting the Offer

If the Tenants agree to make an offer which is accepted by the Landlord, the Leaseholders then have 2 months in which to nominate the purchaser (usually a company incorporated especially for that purpose owned by the participating Tenants) and then a further month in which to complete the purchase.

At least 51% of the Leaseholders must participate and accept the offer. This does not mean that those 51% need to provide all the funding as some can be provided by the other Leaseholders or from elsewhere.

3. Effect of Change of Freeholder

Once the purchase has taken place there is no change, in the terms of Leaseholder’s leases. The freehold will however, now be held by the company owned by the participating Leaseholders and they continue to pay ground rent to the Company as before.

4. Participating Leaseholders Right to Change Their Leases

The participating Leaseholders have the right to vary, extend or alter the Leases to suit themselves as well as the right to waive their ground rent providing the non-participating Leaseholders are not disadvantaged.

Participating Leaseholders can agree to extend the Leases of their own flats often to 999 years whilst those who do not participate continue to pay ground rent and pay for exercising a Lease extension.

The new company will be run by a Board of Directors who need not be all of the participating Leaseholders. The Directors are usually chosen by all the Leaseholders and are elected annually.

The advantages and disadvantages can be summarised as follows;

Advantages

1..Leaseholders can vary, extend or otherwise alter their Leases (with some exceptions) so that their Leases are saleable (should there be any defects) and in particular, are of a sufficient length to allow market sale.

2. Leaseholders own an investment in a company which has an appreciating asset and therefore when selling a flat, it is often more attractive to a buyer to have an interest in the freehold and no ground rent

3. Leaseholders may prefer a Landlord which has a greater financial interest and so can influence management style, as often there is dissatisfaction in the way that flats are managed by Landlords or their agents.

4. Leaseholders can arrange their own insurance of the block, often saving money and saving commission previously paid to the Landlord as well as saving money on management.

Disadvantages

1..Where remaining unexpired Leases are greater than say 90 years, it could be argued that there is little to be achieved in acquiring an additional Lease term at that stage.

2. The process is a complicated and expert advice and assistance may be required together with time devoted by those managing the process.

3. Some Leaseholders find the managing the building difficult although they could appoint a managing agent to act of behalf of the Company. When Leaseholders leave it can sometimes be difficult to find another Leaseholder to act as a Director of the Company.

4. Leaseholders are also able to exercise their Right To Manage qualifying buildings so buying the freehold is not necessary if the Leaseholders’ sole aim is to manage the property.

Please note that the above summary is provided in good faith but does not constitute legal advice. Tenants should always obtain professional advice from a specialist solicitor before taking any action in respect of Section 5 Notices.