Right of First Refusal

If all conditions are satisfied, the landlord must serve an offer notice referred to as a section 5 notice. Breach of this obligation by the landlord, or his agent, is a criminal offence punishable by a level 5 fine on conviction (£5000). 

The legislation requires the landlord to serve the notice on the qualifying tenants and provides that the landlord has complied with its contractual obligation if the notice is served on at least 90% of the qualifying tenants.

Our Real Estate Litigation Team can assist you with different types of notices depending on the type of disposal.

Any new landlord of a property containing at least one dwelling must inform tenants of his name and address as a requirement of the Landlord and Tenant Act 1985. Failure to serve notice is subject to criminal prosecution and is liable on conviction to a level 4 fine on the standard scale, currently £2,500.

Where the building is subject to the right of first refusal, the new landlord must also serve a notice under section 3A of the Landlord and Tenant Act 1985. This notice must be served irrespective of whether a section 5 notice was served.

The purpose of the section 3A notice is to alert the tenants to the possibility of a breach of the contractual right of first refusal.

When a tenant finds out that they have a new landlord and thinks that the transfer may not have occurred following the right of first refusal, the requisite majority (i.e., more than 50%) of the qualifying tenants may serve a section 11A notice on the new landlord. A section 11A notice allows the tenants to seek certain information. It must be served within four months of the section 3A notice being received or on the date the tenants received any other information indicating that disposal had taken place.

Once the section 11A notice has been served on the landlord, they must respond to the interested parties within one month.

Suppose the qualifying tenants can show a breach of the statutory requirements. In that case, they can require the landlord to give effect to the contract for disposal as though it had been entered into with the nominated person rather than the purchaser, or they can compel the new landlord to sell its newly acquired interest to them, on the same terms it has acquired it.

Our Real Estate Litigation Team can assist with serving the relevant notices required to ensure the acquisition of the nominated person can take place.

There are now only very limited opportunities for the avoidance of the act, which is due to the amendments brought in by the Housing Act 1996

As the act is complicated, our Real Estate Litigation Team can assist with advising you whether your circumstances will trigger the act or not.

The sale or transfer by the landlord of his interest is termed a disposal. The majority of disposals will trigger the right of first refusal. This typically includes the sale or transfer by the landlord of his freehold interest, but it could also include granting a new head lease or a new interest in the building. 

There are certain circumstances where the Right of First Refusal does not apply to freeholders. These include: 

• When more than 50% of the building is used for non-residential (commercial) purposes.
• If a tenancy has been granted in connection with employment.
• The tenancy is assured or falls under assured agricultural occupancy.
• You are a tenant of three or more flats within the building.
• You are a sub-tenant.
• The freeholder is a local authority.
• The freeholder is a registered social landlord.
• The freeholder is selling the property to certain family members.

While most sales of a freehold trigger the Right of First Refusal, some transactions do not, including:

• The grant of single tenancies for individual flats.
• The granting of a mortgage or loan secured against the freehold or head lease.
• Disposals to a receiver or trustee in bankruptcy (the initial transfer to the receiver, liquidator, or trustee is exempt, but any later disposal will require notice to be served to tenants).
• Disposals to an associated company, where the freehold or head lease is transferred to a company linked to the parent company for at least two years.
• Disposals arising from collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993.
• Disposals made under compulsory purchase orders.
• Sales between charities.
• Sales related to matrimonial or family proceedings.
• Transfers between family members, or between fewer family members within the same group.
• Sales to the Crown or Government departments. 

A head lease introduces an additional layer of ownership between the freeholder and leaseholders, structured as follows: 

• Freehold
• Head lease
• Individual leases

Head leases are more prevalent in certain areas, such as London and Bournemouth. 

Impact on the Right of First Refusal 

The Right of First Refusal applies only to the head lessee, not to the individual leaseholders under the head lease. 

In this case, there is no legal requirement for the freeholder or the head lessee to offer the freehold to the leaseholders below. However, if the head lessee decides to sell their head lease, they must offer it to the leaseholders first. If the freeholder wishes to sell while a head lease is in place, there is generally no obligation to serve a Section 5 Notice. 

Client Intro: Our Client purchased the freehold land of 3 flats. The freehold also included an additional fourth flat. Unfortunately, no section 5 notices were served on the qualifying tenants, and the client was not advised they were required.

Case overview: Following the purchase of the property, the qualifying tenants served upon our client notices regarding the transaction and then compelled our clients to transfer the property back to them. We advised our client concerning the additional notices and how best he could protect his position. Ultimately, the client transferred the property back to the qualifying tenants.

Client Intro: Our client purchased the freehold title subject to commercial premises and residential flats. As the freehold comprised of more than 50% residential flats, the transaction triggered the requirements of the Landlord and Tenant Act 1987. 

Case Overview: Section 5 notices were served by the seller due to the requirements of the Landlord and Tenant Act 1987. We advised our client on the validity of the section 5 notices to enable our client to proceed with the transaction. Our client was not satisfied that the section 5 notices were valid or had been served on all qualifying tenants. Therefore, we advised our client to serve section 18 notices to provide him with more comfort to proceed. 

After completing the transaction, we further advised our client that he was required to serve as a new landlord on the other notices.

Client Intro: Our client is a developer who built a residential estate comprising 69 apartments and three freehold houses. Our client is selling the freehold.

Case Overview: Section 5 notices were required due to the nature of the transaction. We advised our client on the section 5 notices, what information was required and how to serve the notice to ensure they were valid.