According to the Landlord & Tenant Act 1987, a landlord must first offer the freehold of a property to the leaseholders of the building before selling. This is known as the Right of First Refusal.
In such cases, the landlord may choose to sell the property at auction.
But, as leaseholders, how does this work? Will you know the price first? And what agreements will you need?
In this article, Leasehold Property Partner Niki Adkins outlines everything you need to know…
Buying the freehold at auction: First steps
Firstly, after being granted the Right of First Refusal, you and the neighbours who are interested in purchasing can confirm your interest in the property by serving an Acceptance Notice by the designated deadline.
Unfortunately, you won’t know what the sale price of the property is until the day of the auction. You don’t need to attend the auction in order to make a bid, as if you have served the necessary Acceptance Notice, you have the ability to step into the shoes of any successful purchaser at the auction.
Do all leaseholders have to agree to buy freehold?
More than 50% of the qualifying tenants in the property would need to accept the offer within 2 months of the landlord’s notice.
So, for example, in a building of 10 flats, 6 or more tenants would need to participate. And, in a building of only 2 flats, both flats would need to participate.
There are a couple more criteria that need to be met in order to qualify for the Right of First Refusal. You can read those here.
What is a participation agreement when buying the freehold?
However, before an Acceptance Notice is served, we would advise that you and your fellow interested leaseholders enter into a legally binding Participation Agreement.
This agreement would formally set out each person’s rights and obligations both individually and in the group. Entering into a Participation Agreement will make the steps you need to take and decisions you need to make much clearer and ensure that each person’s contribution to the purchase is recorded.
It will also sets out what would happen if one participant was to sell their flat part way through the procedure of buying the freehold.
What happens after the auction?
After the auction, the freeholder must provide a copy of the contract entered into by the buyer (if any) within seven days.
You and your neighbours will then have 28 days to decide whether to proceed for the auction price, and to complete the purchase within those 28 days, or withdraw all-together.
Is it better to buy freehold property through a limited company?
Buying the freehold through a limited company provides the greatest security in the event that one party is made bankrupt.
In addition, doing so will make future transactions far easier as the freehold can remain registered in the name of the company instead of having to be transferred every time one of the flats is sold.
At Frettens, our Corporate & Commercial team can assist you in setting up a limited company; ensuring that all the legal documentation is drafted correctly and that the most important considerations are taken into account.
Through the Articles of Association, we would dictate that company members must own a flat in the building; so that flat owners do not sell their flat but retain an interest in the freehold.
You can click here to read our dedicated Guide for Directors, which will assist with the implications of managing a limited company.
Advance or withdraw
You should note that when the legislation was passing through Parliament in the 1980s, the statutory procedure was described as “advance or withdraw”.
As a result, unless you and/or your landlord advance to the next stage within the statutory timetable, your right to purchase will be withdrawn. The landlord is therefore not committed to selling the freehold until contracts are exchanged at the auction.
How much does it cost to buy the freehold?
This depends on your circumstances. You will have to pay your own professional and legal fees and, if included as a term within the Offer Notice, you will have to pay the landlord’s fees too.
In addition, you may wish to instruct a specialist valuer to calculate how much the freehold is worth – which will come at a price. At Frettens, we would be happy to put you in touch with a valuer to assist you with this.
We would also be able to provide you with tailored advice as to how much a freehold purchase is likely to cost you. You can call us on 01202 499255 for a free initial chat.
I’ve purchased the freehold…what now?
Now that you and your neighbours own the freehold, you’ll be afforded the same benefits as your previous landlord. For example, you’ll now control service charges and won’t have to pay ground rent!
Furthermore, you will be able to extend your lease to 999 years – making your flat an attractive prospect for potential buyers and enhance its value. Find out more about extending your lease as freeholder here.
As well as those benefits, you will now take on new responsibilities for the management and insurance of the property.
We would recommend that you instruct specialist managing agents to deal with the day to day management of the building to ensure that all legislation is complied with. Again, we can put you in touch with someone!
If you want to learn more about buying the freehold before proceeding, I’ve gone into a little more detail in another article that can be read here.
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.
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