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Buying the Freehold and the Right of First Refusal

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Buying the Freehold and the Right of First Refusal

Leasehold Property Associate Anne Albritton discusses the role of the Right of First Refusal (ROFR) when a landlord sells their freehold.

Anne considers what he ROFR means for leaseholders and what options they have.

What is the Right of First Refusal?

The Landlord & Tenant Act 1987 states that it is a criminal offence for a landlord to sell their freehold title without first offering it to the leaseholders in the building.

This offer of the freehold title to the leaseholders is known as the Right of First Refusal.

How does the Right of First Refusal work?

A landlord would need to serve ‘Offer Notices’ setting out all of the proposed terms of the transaction.

There are certain transactions exempt from this requirement but generally, the premises will need to comply with the eligibility criteria as follows:-

  • The premises consist of the whole or part of a building;
  • The premises contain 2 or more flats held by qualifying tenants (i.e. leases granted for more than 21 years); and
  • The number of flats held by qualifying tenants is more than 50% of the total number of flats in the premises.

How long do leaseholders have to accept an offer on the freehold?

More than 50% of the qualifying tenants in the premises would need to accept the Offer within 2 months of the landlord’s Offer Notice (or such other period stated in the Offer Notice).

For example, in a building of 10 flats, at least 6 would need to participate.

In a building of only 2 flats, both flats would need to participate.

What is a Participation Agreement?

A Participation Agreement is a legally binding document between all of the leaseholders who are planning to purchase the freehold.

Where leaseholders have sufficient interest to accept the landlord’s offer, before an Acceptance Notice is served, we advise that the leaseholders enter into Participation Agreements with each other.

What is the purpose of a Participation Agreement?

The purpose of this is to set out the rights and obligations of the participants as a group and as individuals, and also those of the limited company, which is explained below.

A Participation Agreement would provide certainty of the steps and decisions to be taken in the freehold purchase, setting out the duties and obligations of the company and the participants, and making sure all participants provide funds in the agreed proportions.

What else does a Participation Agreement set out?

A Participation Agreement will also cover the situation in the event of one participant selling a flat part way through the procedure of buying the freehold.

The Participation Agreement would legally bind the participants to the venture and is therefore in everyone’s interest.

Accepting the freehold title offer: Next steps

Once the Acceptance Notice has been served, the statutory procedure provides for a Nomination Notice to be served on the landlord nominating the name of the party to whom the freehold is to be transferred.

The next usual stage is that the landlord provides a draft contract with a view to the contract terms being agreed, contracts being exchanged (and a deposit paid) and the matter then proceeding to completion.

In some circumstances, the transaction can proceed straight to completion without an exchange of contracts.

Should leaseholders form a management company?

We advise that a limited company, set up by the leaseholders, should be used to purchase the freehold on their behalf.

This provides the greatest security (in the event that one party is made bankrupt) and will also make future transactions 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.

What do the Articles of Association state?

The Articles of Association of that company will state that you can only be a member of the company if you also own a flat in the building.

The reason for this is to ensure that the freehold is always owned by people who own the flats in the building and so that a flat owner does not sell their flat but retain an interest in the freehold.

Our Guide for Directors will assist with the implications of managing such a limited company.

Valuation Advice

As a firm of lawyers, we are unable to advise as to the appropriate price for a freehold.

This area of valuation work is extremely specialist requiring a complex calculation which should be undertaken by a suitably qualified surveyor or valuer, so such work is outside our area of expertise.

Should you require valuation advice, we would be happy to arrange for a specialist valuer to advise you. Please contact us here if that is the case.

What is advance or withdrawal?

Please be aware that when the legislation was passing through Parliament, the statutory procedure was described as “advance or withdraw”.

As a result, unless each party advances to the next stage within the statutory timetable, there is a deemed withdrawal.

The landlord is therefore not committed to selling the freehold until contracts are exchanged, as in any normal transaction on the open market.

Freehold purchase: How to avoid accidental withdrawal

Therefore, at any time in the transaction before exchange of contracts, either party can fail to advance to the next step and, consequently, withdraw from the transaction.

This is of significance because the parties can incur professional fees and costs only to find that the matter is aborted before contracts are exchanged leaving the parties out of pocket.

Where an Acceptance Notice has been served but the matter is withdrawn thereafter by the landlord, the landlord would not be able to then sell the freehold to a third party.

If you have any questions regarding advance or withdrawal, please get in touch with a member of our team here.

What costs are associated with purchasing the freehold?

Quite often, a landlord will make it a term of the Offer Notice that the leaseholders will pay his professional fees and disbursements on completion.

We would be able to advise in relation to the likely costs to be involved in such a transaction.

What are a freeholder’s responsibilities?

Leaseholders acquiring the freehold of their building will step into the shoes of the outgoing landlord and will be subject to the covenants and provisions contained in the existing leases.

This will likely mean that the leaseholders’ limited company will become responsible for management and insurance of the building.

We would recommend that specialist managing agents are instructed to deal with the day to day management of the building to ensure that all legislation is complied with.

Lease extensions after purchasing the freehold

Once a group of leaseholders has purchased their freehold they would be able to extend their existing leases to 999 years and to reduce their ground rents to a peppercorn i.e. nil.

This would make the individual flats as attractive to potential buyers and as valuable as possible.

Lease extensions would be dealt with as a separate transaction and again, we would be able to provide you with an estimate of the likely costs to be incurred.

Specialist Leasehold Property Solicitors

Our specialist Leasehold Property Team are one of the largest in the region and happy to assist any buildings in this situation.

If you have any questions, please call 01202 499255 and a member of the team will be happy to chat about your situation and your specific requirements.

We offer all new clients a free initial chat with one of our bright, knowledgeable lawyers.