The right of first refusal under section 5 of the Landlord and Tenant Act 1987 (LTA 1987) is a legal mechanism designed to protect leaseholders of flats in England and Wales. It ensures that when a landlord intends to sell their interest in a building containing flats, the tenants are given the first opportunity to purchase that interest before it is offered to a third party. This right is framed in negative terms, meaning that a landlord is prohibited from making a “relevant disposal” of their interest without first offering it to the tenants and complying with the statutory requirements set out in the Act.
Not all disposals are caught by the Act, meaning that the landlord can dispose of their interest without triggering the requirement to comply. A transfer by way of gift to a family member for example is an “exempt disposal”. It is therefore important for a landlord to know whether their intended transaction is one which requires compliance with the Act prior to deciding whether or not to proceed.
Equally, not all freeholds are caught by the Act. The right of first refusal applies only to certain premises and tenants. The premises must consist of the whole or part of a building containing at least two flats, with more than 50% of the flats held by qualifying tenants. Additionally, the building must be used entirely for residential purposes or, in the case of mixed-use buildings, at least 50% of the internal floor area must be used for residential purposes. Qualifying tenants are typically leaseholders of flats, but there are specific criteria under the Act to determine eligibility.
To sell the freehold, the landlord must serve a notice under section 5 of the LTA 1987, commonly referred to as a “section 5 notice.” This notice must be served on the qualifying tenants of the flats in the building as soon as the landlord proposes to make a relevant disposal. The notice must include the principal terms of the proposed disposal, enabling the tenants to decide whether to accept the offer. The Section 5 Notice must comply with strict deadlines once served for the notice to be valid. Where the sale is to be at auction, those requirements are more stringent. The notice procedure must be completed prior to an exchange of contracts and for auctions, before the date of the auction. It is therefore important to proceed as soon as possible when looking to sell.
If the tenants decline to purchase the freehold or fail to respond, the landlord may proceed to sell the interest to a third party, but not on more favourable terms than those offered to the tenants. The sale must also take place within 12 months of the expiry of the notice. If the term changes, or if the 12 month period expires, the process must be repeated.
Failure by the landlord to comply with the requirements of the LTA 1987, such as not serving a section 5 notice or not adhering to the statutory procedures, constitutes a criminal offence. In such cases, tenants may have additional rights, including the ability to compel the purchaser to sell the interest to them or to take the benefit of the contract. Those rights are themselves subject to strict time limits and qualification criteria for the leaseholders.
The right of first refusal does not however end with the entering into of a contract for the sale of the freehold by the landlord. There are also notice requirements for the buyer, which if not complied with, mean that the time for compliance by the leaseholder does not start ticking. It is therefore important to understand your obligations as the purchaser of a freehold title and the steps that you must take following such purchase to protect your title.
In summary, the right of first refusal under section 5 of the LTA 1987 is a statutory safeguard for tenants, ensuring they have the opportunity to purchase their landlord’s interest in their building before it is sold to others. This process is governed by strict procedural requirements to protect tenants’ rights and ensure fairness in the disposal process. If you require any advice as to the right of first refusal, please contact Lorraine Lancaster of this firm’s Real Estate Litigation Department.
