The Right of First Refusal (ROFR) is something we get a lot of questions about, due to its complex and often confusing nature.
In her latest article Leasehold Property Executive Hannah Faith outlines what the Right of First Refusal is, in simple terms, and outlines your rights as flat owner.
What is the Right of First Refusal?
As the owner of your building, your freeholder may sell their title when they wish. However, in most circumstances the freehold owner of a building containing flats cannot sell without first offering it for sale to the existing flat owners.
Should a freeholder sell their freehold title without first offering it to the flat owners in the building it will amount to a criminal offence under the Landlord & Tenant Act 1987.
This obligation for the freeholder to first offer the freehold title to the flat owners is known as the Right of First Refusal.
It is important to note that the freehold of the building is sold as a whole as it cannot be split up; you can’t buy just your flat’s freehold on its own.
How does the Right of First Refusal work?
When a freeholder comes to sell the freehold, they must serve on the flat owners a notice of first refusal, known as a Section 5 Notice, setting out the terms of the offer, in particular the price.
Am I entitled to the Right of First Refusal?
It is not enough to simply be one of the flat owners within a building to qualify for the Right of First Refusal.
To qualify the following criteria must be satisfied:
- The building overall must consist of the whole or part of a building;
- The building must contain 2 or more flats owned by ‘qualifying tenants’ with leases granted for more than 21 years; and
- The number of flats held by these qualifying tenants must add up to more than 50% of the total number of flats in the building.
If you qualify, then as a flat owner you and your neighbours must first be offered the opportunity to purchase the freehold before anyone else.
How long do leaseholders have to accept an offer to buy the freehold?
If the flat owners wish to take advantage of the offer, more than 50% of the qualifying tenants in the building will need to accept the offer within 2 months.
If your building contains only 2 flats then both will have to exercise their right of first refusal.
How do I accept a Section 5 notice?
Once more than 50% of the flat owners have decided to take up the offer to buy the freehold, they must collectively accept the offer to buy.
At this stage it is wise for the participating flat owners to enter an agreement between themselves, known as a Participation Agreement.
This is a legal, binding agreement between the flat owners that will set out the rights and obligations of the participants as a group.
In particular, it will clarify the steps and decisions to be taken in the freehold purchase, set out the duties and obligations of the participants, and ensure all participants provide funds in the agreed proportions.
How does the freehold purchase work?
Once the flat owners have agreed to collectively purchase the freehold, they will nominate a party who the freehold will be transferred to.
Our advice is that a limited company is set up and used as the vehicle to purchase the freehold on their behalf. The participating flat owners then become shareholders of that company.
This provides the greatest security for the flat owners and will make future transactions much easier, as the freehold will remain registered in the name of the company instead of having to be transferred every time one of the flats is sold.
With a company set up, the freehold can then be managed through the company with individual flat owners being shareholders and Directors of that company.
Final steps
Once the flat owners have completed these necessary steps the freeholder will provide a draft contract containing the terms of the sale.
Contracts will then be exchanged, a deposit paid, and the matter will proceed to completion.
You will then collectively be the proud owners of your freehold.
What happens when you buy the freehold?
Once you as flat owners become the owners of the freehold you will be able to exercise control over the building and will be free to manage it as you see fit.
This may include managing the building yourselves or employing the services of a managing agent selected by you to run the day to day tasks required, such as maintenance, repairs, gardening and insurance etc.
What is the benefit of owning the freehold?
Many flat owners welcome the freedom ownership of the freehold brings.
Amongst other advantages, you will be able to decide how to manage the building as well as extend the existing leases of the participating flats without the costs and restrictions associated with lease extensions when dealing with a third-party freeholder.
What are the risks with the Right of First Refusal?
Owning your own freehold is not without its risks.
Although you may have a Right of First Refusal a freeholder cannot be compelled to sell the freehold under this process.
This can be done, but under a separate process called Collective Enfranchisement. This is covered in separate article here.
The Right of First Refusal applies only if your freeholder chooses to sell.
Can the landlord withdraw from the sale of freehold?
With the Right of First Refusal either party may withdraw before the exchange of contracts by which time you may have incurred professional fees and costs leaving you out of pocket.
If a freeholder decides to withdraw before contracts are exchanged, they are not able to subsequently sell to someone else without starting the whole process again by serving fresh Right of First Refusal Notices; thereby giving the flat owners a fresh chance, despite the initial sale falling through.
How much does it cost to buy the freehold?
The main costs will of course be the purchase price of the freehold.
You will have the legal costs to consider, possibly a valuation fee and the cost of setting up a limited company to own the freehold.
In addition, it is likely that your freeholder will make it a term of the original offer that the flat owners will pay their professional fees and other costs incurred in the sale.
Specialist solicitors for freehold purchase
If you have any questions following this article, please don't hesitate to get in touch with our bright Leasehold Property team.
The team have experience in all aspects of leasehold property including freehold purchase, both through ROFR and Collective Enfranchisement. We would be happy to assist you with this.
Call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.
Comments