Posted by Nick Martyn, Partner
“The Right of First Refusal – an offer you can’t refuse?”
The Right of First Refusal – what is it?
The right of first refusal came about as a result of the coming into force of the Landlord and Tenant Act 1987 (“the 87 Act”). In essence, the right provides an opportunity for residential flat owners to collectively acquire their landlord’s interest in circumstances where the landlord wants to sell. In that situation, the landlord cannot dispose of its interest unless the landlord:
1. First serves notices (usually called ‘Section 5 Notices’) on the relevant flat owners offering that interest to them; and
2. the disposal complies with the relevant provisions of the 87 Act.
It’s one of a number of leaseholder rights aimed at providing opportunities for flat owners to enhance the value of their asset and where there is a collective acquisition, to take control and ownership of the building in which their flat is situated.
We are seeing an increasing number of instructions in this area where developers of new-build developments are looking to dispose of their property following completion of the development and in other situations, where landlords are looking to sell their assets for a variety of reasons. And whilst there are other options available to flat owners, exercising the right of first refusal can represent a relatively quick and cost-effective method of securing the landlord’s interest and taking control of the building and its management.
When does it apply?
To which premises?
Subject to certain exceptions, the 87 Act applies to premises if three conditions are satisfied:
1. The premises consist of the whole or part of a ‘building’;
2. The premises contain two or more flats held by ‘qualifying tenants’; and
3. The number of flats held by qualifying tenants must exceed 50% of the total number of flats contained in the premises.
The exceptions arise where the premises is mixed use and provide that the 87 Act will not apply where:
1. A part or parts of the premises is or are or intended to be occupied otherwise than for residential purposes; and
2. The internal floor area of that part of those parts (taken together) exceeds 50% of the internal floor area of the premises (taken as a whole). In calculating the relevant area, the internal floor area of common parts is disregarded.
To which landlords?
The 87 Act doesn’t apply to resident landlords or to a number of ‘exempt’ landlords which, generally speaking, are public authority bodies.
If the landlord holds a lease of 7 years or more of the premises, it will apply to that landlord and not the freehold owner.
To which flat owners?
The rights contained in the 87 Act apply to ‘qualifying tenants’. This term includes both flat owners with long term and short terms lease (for example, Rent Act tenants). However, certain tenancies are excluded (for example, Assured and Assured Shorthold Tenancies). Flat owners of at least three flats in the same building are also excluded.
To which disposals?
A disposal caught by the 87 Act is called a ‘relevant disposal’ and includes the disposal by the landlord of any estate or interest in such premises, including the disposal of the common parts of the premises. This includes the sale of the freehold of premises but also the grant of a lease over those premises. The proposed sale could be to a third party on the open market or a sale by auction. Depending on the type of the sale, a different procedure under the 87 Act may apply.
Most disposals are ‘relevant disposals’ but there are some exceptions. For example, the grant of a flat lease, the grant of a mortgage or a disposal to an ‘associated company’ which has been linked to the landlord for at least two years.
So what should you do if you receive a Section 5 Notice from your landlord?
• Act quickly. You will usually only have two months to formally respond to the notice, so it is important that you engage quickly with the other flat owners and look to secure appropriate representation and assistance.
• Form a core group of flat owners who can seek to drum up support for the acquisition from other flat owners.
• Secure valuation advice from an appropriate surveyor. The surveyor will advise on whether the price proposed in the Section 5 Notice is reasonable and if it represents good value for money.
• Obtain help from a specialist law firm. A solicitors’ practice with relevant experience will be able to advise you on the acquisition process and what you will need to do to successfully pursue the acquisition. The lawyers should also advise you on the other acquisition options available and discuss with you whether an acquisition under the 87 Act is the most appropriate for your particular situation.
• Setting up Nominee Company. It will usually be necessary to set up a ‘nominee’ company which will be the vehicle through which the landlord’s interest is acquired. The law firm you instruct can help you with this. The participating flat owners will become shareholders of that company and you will need to decide which owners should become directors.
There are a number of advantages of acquiring the landlord’s interest through the procedure set out in the 87 Act:
• It’s a relatively quick process. Because of the time limits set out in the 87 Act and the way in which the procedure works in practice, it tends to be a quicker route to acquiring the landlord’s interest when compared to the other options available. One of the principal reasons is because the offer made by the landlord is a ‘take it or leave it’ offer. There is no negotiation over the price or the terms. The procedure therefore avoids what can often a lengthy process of negotiating the acquisition terms and in the absence of an agreement, a determination of those terms by a Tribunal. Of course, the ‘take it or leave it’ nature of the offer can be a disadvantage, if the price proposed by the landlord is too high or the terms proposed are unreasonable. Your solicitors (in conjunction with advice from your surveyor) can help you with making a decision about whether to proceed or if another acquisition procedure might be preferable.
• Legal costs are usually lower. Whilst there are exceptions, the legal costs involved in engaging in the procedure under the 87 Act are usually lower than the costs involved in acquisitions under the other available procedures.
So, is the right of first refusal an offer you can’t refuse? Possibly. Whilst there are certain issues with the 87 Act provisions and it is not always the most appropriate procedure, it is certainly something which flat owners should consider carefully; the chances are, it may represent a great way to secure the landlord’s interest and ultimately, to enhance the value of your flat.
If you have any enquiries, please contact Nick Martyn on:
020 7583 2222 Email us