Tenants and the right of first refusal

Where a landowner intends to sell his premises, his tenant may have a right of first refusal under the Landlord and Tenants Act 1987 before it is offered to a third party.

In what circumstances does a tenant have a first right of refusal?

In order for the tenant to qualify for first right of refusal, the building must satisfy the following criteria:

• It must have at least two flats
• More than 50% of the flats in the building must be owned by “qualifying tenants”
• There cannot be more than 50% of the building for non-residential use

Assured and assured shorthold tenancies does not qualify for this right, nor do non-residential tenancies. Leaseholders qualify as do some fixed or periodic tenancies. A tenant of three or more flats will not qualify for any of the flats.

It also depends on the landlord as to whether the first right of refusal applies. The landlord must be the person that pays the ground rent and can take possession of the building when the tenancy ends. They cannot be a council, housing association or charitable housing association landlord. A resident landlord that has lived in the building as his only/primary residence for at least 12 months will not qualify. If the building is not a purpose built block of flats (for example, it is a converted house) then this also does not qualify. 

What happens if the landlord does not give the tenant first right of refusal?

If the landlord sells the property to a third party without giving the qualifying tenants a first right of refusal, then these tenants can serve an “information notice” on the new owner requesting details of the sale and this has to be providing within a month. The new owner can then be required to sell the freehold to the tenants on the same basis that he purchased it.

What is the procedure for the first right of refusal?

The landlord has various options for disposing of the property:

• Sale by contract on the open market
• Disposal by auction
• Grant of option or right of pre-emption
• Sale not pursuant to contract
• Sale for non-monetary consideration 

The most common are the first two options.

WHAT IS A SECTION 5 NOTICE?

For this option, the process is as follows:

• The owner has to notify the qualifying tenants by serving them with a section 5 notice, which offers them the opportunity to purchase the interest that the freeholder is disposing of 
• The tenants then have two months under the notice to decide whether they wish to accept the offer 
• At least 50% of the qualifying tenants of the flats in the building have to jointly accept in writing within the set period 
• Following this, they then have another two months to nominate a purchaser- this can be a company that they set up to hold the freehold
• The landlord then has another month to send the purchaser a contract 
• The purchaser then has two months following this to sign the contract and pay the relevant deposit
• The completion date is set in the contract
• The tenants can enter a participation agreement during the process that covers how the purchase price is going to be paid and how expenses will be shared between the tenants. It can also detail what will happen if one of the tenants decides to pull out. 

Where there is non-acceptance of the right of first refusal then the landlord is free to sell the property on the open market to a third party. It must not be sold within the first 12 months for an amount that is less than the amount stated in the section 5 offer notice.

Sale by auction

For sale by auction there is a different process:

• Notice is served without a price on at least 90% of the qualifying tenants between four to six months before the auction
• The tenants must respond within two months and if more than 50% accept the offer then they need to nominate a purchaser – again this can be a company that they set up to hold the freehold
• The freeholder must notify the purchaser at least 28 days before the auction of the relevant date
• In the conditions of sale, it must include reference to the fact that the freehold is being sold subject to the right of first refusal of the leaseholders. The leaseholders can attend the auction but they do not bid
• If the property sells, then a conditional contract is concluded with the successful big and a copy is sent to the nominated purchaser (or their lawyer) within seven days
• The contract has to be signed within 28 days and any conditions fulfilled (such as paying the deposit). This means that the contract is then effective with the nominated purchaser as opposed to the successful bidder
• The freeholder then has 28 days to also sign or withdraw