Right of First Refusal

Have you received a “Section 5 Notice”?

If so, it basically means that the Landlord is giving the Leaseholders an option to purchase the (often Freehold) property.

What is not commonly known is that, the Landlord only does this because he is legally prohibited from selling the property to a third party without offering it to the Leaseholders first.

If he does not offer it to them and sells it on the open market, he commits a criminal offence, and furthermore it is possible for the Leaseholders to compel the current owner to sell the property directly to them, for the original price that should have been offered to them, on those same terms.

But when you receive such a notice, it must be accepted within a period of two months after receipt, and it can only be accepted by the majority of qualifying Leaseholders joining collectively.

  • The Notice has to be sent to the Leaseholders setting out certain information about the sale, including the price at which the Freeholder wishes to sell, and other terms.
  • If a majority (over 50%) of the qualifying Leaseholders wish to acquire the Freehold on those terms, then that majority must serve a Counter Notice on the Freeholder to that effect within the time limits set out in the Notice. The Counter Notice must contain certain essential information. If the Counter Notice is not served or is served late, the Freeholder is free to sell the Freehold to anyone else within the following 12 months, provided that the terms are no less favourable than those set out in the Section 5 Notice.
  • If a Counter Notice is served by a sufficient majority of Leaseholders, they then have a further period within which they can, if they wish, form a Company to purchase the Freehold.
  • There are further timetables in the 1987 Act dealing with the drafting and preparation of documents leading through to completion. If the Leaseholders do not enter into a binding Contract to acquire the Freehold with a set time period from when the Contract for sale is issued, they will be taken to have withdrawn and the Freeholder is free to sell to someone else.
  • Leaseholders can propose a Counter-Offer to the terms set out in the Section 5 Notice, but if they do so and the Landlord does not accept them, they are taken to have withdrawn and again the Freeholder is free to sell to someone else.
  • Normally, the Leaseholders do not have to pay the Landlord’s costs, unless it is a specific term of the deal he offers the Leaseholders in the Section 5 Notice. However, there is an exception if the Leaseholders withdraw, or are taken to have withdrawn, after a set point in the process in which event they would be liable for the Landlord’s costs after that point.
  • There is a separate procedure to be followed where the Freeholder decides to put the Freehold up for public auction. Further details available on request.
  • If the Freeholder fails to comply with his obligations to offer the Leaseholders the right of first refusal, and sells to a third party, the Freeholder commits a criminal offence. In addition, the Leaseholders have the right to acquire the Freehold in these circumstances from the third party who bought it, on the same terms.

If you would like us to assist with this process please get in touch by calling Daniel Tang on 0208 290 7373 or email dtang@judge-priestley.co.uk