Right of first refusal – how to react to an offer notice?
Right of First Refusal
Outline of the right of pre-emption given to qualifying tenants when their immediate landlord is disposing of his interest.
By Tornike Purcell, Associate at Eversheds Sutherland LLP, and Nicholas Kissen, Senior Adviser at LEASE
We begin this article with an example question:
I own a flat in a block where there are 49 other flats also under long leases. Recently, the landlord has offered to sell us the freehold of the block for £20,000. Each of us received a formal notice (the offer notice) offering us the freehold and giving 10 weeks to respond if we are interested in taking it up. How do I participate?
Usually when a landlord is proposing to sell the freehold of a building containing flats, they must first offer it to the leaseholders, collectively, before selling – or exchanging contracts on a sale – to someone else. This procedure is known as the Right of First Refusal. The law governing the Right of First Refusal is complex so for leaseholders in receipt of an offer the taking of early and expert legal advice is essential.
Organising after the offer notice is received
- Getting in touch with other leaseholders may be tricky – especially if they are living elsewhere or indeed abroad – and steps to do so should be taken as soon as the offer is received;
- Think about how to obtain contact details of other leaseholders – the managing agent, the Land Registry, a letter-drop at each flat, for instance.
- If there are more than four flats, it is recommended to set up a company which will act as the purchasing vehicle (ie ‘Nominated Person’, see below).
- It is common to enter into a participation agreement to set out how the purchase price will be split between those taking part, what happens if one of them decides to pull out of the process and how purchase expenses – such as legal and any valuation costs – can be shared amongst them.
The timeline for progressing the Right of First Refusal is below
- Within 10 weeks of the landlord’s offer: More than 50 per cent of the leaseholders (i.e. at least 26 leaseholders in this particular block) must combine to accept the landlord’s offer (the landlord must give a minimum of two months) deadline given in the offer notice;
- Within two months after accepting the offer: The leaseholders then have to notify the landlord of the identity of the person who will acquire the freehold. With a block of this size this may well be a company in which each of the participating leaseholders is a member. Under the law of the Right of First Refusal this company will be known as the “Nominated person”;
- Within one month of receiving the notice identifying the Nominated Person: The landlord must provide the Nominated Person with a Contract for the sale of the freehold;
- Within two months from the date of receipt of the contract: The Nominated Person has to pay the deposit for the freehold and exchange contracts;
- The completion date is agreed on exchange of contracts.
Acquiring the freehold under the Right of First Refusal will generally mean taking responsibility for the building. Inevitably, leaseholders will assume what for some may be unfamiliar responsibilities.
They will take charge of decision-making in relation to such matters as building insurance, enforcing lease covenants, management, providing services and the overall running of the building.
If not entirely managing the block by themselves, engaging relevant professionals for such tasks should be considered and appointed at the appropriate time; for instance, managing agents, solicitors, insurance brokers.
Points to note
- Read the Offer Notice carefully
- Be aware of the deadlines in the Offer Notice and diarise
- The deadlines for doing anything are likely to be short and this time can pass very quickly
- If interested in accepting the offer, ensure enough people feel the same way as you by contacting them early and sounding them out
- Advice guides