Right of First Refusal
Outline of the right of pre-emption given to qualifying tenants when their immediate landlord is disposing of his interest.
Legislation: Landlord and Tenant Act 1987
What is it? Where a freeholder is disposing of an interest in the freehold they are required to offer leaseholders the right to buy that interest first before selling it to a third party.
Disposal of an interest
- This can include the sale of the freehold of the whole, or part of, the building or common parts
Exempt disposals: The majority of disposals will trigger Right of First Refusal (RFR), but some are exempt, such as:
- The grant of a single tenancy –the landlord is free to grant tenancies/leases of individual flats.
- Disposal to an associated company, for example where the freehold is transferred to another company which has been associated with the transferring company for at least two years.
- A sale by two or more persons of the same family to a different combination of the same family.
- Please see our main Right of First Refusal advice guide for the full list.
To be subject to RFR the building must:
- Contain at least two flats
- More than 50% of the flats in the building must be owned by “qualifying tenants”
- No more than 50% of the building to be in non–residential use, e.g. shops or offices
Qualifying tenant includes leaseholders and some fixed term or periodic tenancies, but not assured or assured shorthold tenancies. Someone who is a tenant of three or more flats in the building will not be a qualifying tenant of any of those flats.
RFR applies to the immediate landlord of the tenants. That is the individual to whom they pay their ground rent and who is entitled to possession when the tenant’s lease finishes.
RFR does not apply to some landlords. These include most housing authorities such as councils, housing associations, charitable housing trusts and also to certain resident landlords.
An exempt resident landlord is one who lives in the building and where two conditions apply
- The building is not a purpose built block, for example a converted house, which has been converted into flats since its original construction and
- the landlord genuinely lives in the building as his only or principal residence and has done so for more than 12 months.
There are different procedures for different methods of disposal, for example a basic sale in the open market with or without a contract, disposal by auction, grant of option, right of pre-emption or where no money is changing hands. For the purposes of this fact sheet, we will assume it is a sale of the freehold in the open market further to a contract.
Prior to exchange of contracts, the landlord must serve an offer notice on the qualifying tenants offering the freehold interest at a specified price. The notice gives the qualifying tenants two months to accept the offer.
Acceptance and nominee purchaser
To accept the offer, more than half the qualifying tenants of flats in the building must accept the offer jointly in writing to the landlord within two months. Within a further two months the qualifying tenants must nominate a purchaser. For example, a company that they have set up to hold the freehold.
Within a further one month the landlord must send a contract to the nominee purchaser, who then has a further two months to sign and pay the deposit. Contracts are then exchanged within seven days and completion takes place on the date specified in the contract.
Non-acceptance of the offer of RFR
If the qualifying tenants do not accept the offer of RFR within the two months period the landlord is free to sell the freehold to a third party, but at not less than the figure offered in the offer notice for the next 12 months.
Failure to give RFR
If a landlord sells an interest in the freehold which should have been subject to RFR, more than 50% of the qualifying tenants have the right to serve an “information notice” on the new freeholder requesting details of the terms of the sale. The new freeholder is required to provide this within one month.
Once they have information on the terms of the sale more than 50% of the qualifying tenants can serve notice on the new freeholder requiring him to sell them the freehold on the same terms as he purchased.
Please note this fact sheet is a summary of this complex area of law.
Please see our full advice guide for more details; you may also need to seek further advice.