A brief guide to the Right of First Refusal under the Landlord and Tenant Act 1987 (LTA 1987)

What is Right of First Refusal?

Landlords who want to sell the freehold of existing residential and mixed-use properties usually have to offer the leaseholders the first chance to buy it. This is known as the right of first refusal.

The right of first refusal applies to the disposal of any property containing 2 or more flats held by qualifying tenants, provided that more than 50% of the flats in the property are held by qualifying tenants. Where a property being sold contains a mixture of flats and non-residential accommodation, such as shops or offices, the qualifying tenants (but not the others such as business tenants) have the right of first refusal if no more than 50% of the internal floor area (not counting the common parts-staircases, landings etc) is in non-residential use. 

If the landlord fails to do so, they will be committing a criminal offence while the purchaser may also be required, on an application to the Court by the tenants, to transfer his interest to the tenants even if they have already transferred it to a third party.

Who are ‘Qualifying Tenants’?

A Qualifying Tenant is a tenant who is a long leaseholder who holds their lease directly with the person wishing to sell their interest. Shorthold tenants, assured tenants, business tenants, or an otherwise qualifying tenant who owns three or more flats in the same building will not be Qualifying Tenants.

What is the Process?

1. The landlord must serve an offer notice (a s.5 notice) on each tenant. The LTA 1987 provides that the landlord will have satisfied this obligation if at least 90% of the total number of tenants in the building have been served. The notice must set out the terms on which the landlord wishes to dispose.
2. The notice gives tenants the period (which must be at least 2 months) in which to accept the price and terms set out in the notice which are offered on a 'take it or leave it' basis. To accept the offer, at least 50% of the ‘qualifying tenants' must give an acceptance notice in response (a s.6 Notice).
3. If the tenants fail to serve a s.6 notice by the deadline set out in the s.5 notice, then the landlord is free to go ahead and dispose of the freehold interest to a third party at a price no less and on terms no less onerous as those set out in the s.5 offer notice. Any disposal must take place within 12 months from the expiry of the period set out in the s.5 notice.
4. If the tenants serve a s.6 notice, they must next nominate the entity which will purchase the property on their behalf. They must do so within a period of 2 months after the date of the acceptance notice.
5. Within 1 month after the date on which the tenants nominate the buying entity, the landlord must serve either a notice of withdrawal (if they no longer wish to proceed with the disposal) or send a form of contract to the tenants' solicitor.
6. The tenants' nominated entity must then within a further period of 2 months 'offer' to exchange contracts and provide the landlord with the deposit. The deposit is 10% of the agreed premium payable.
7. The landlord must then either exchange contracts within seven days or opt not to exchange. If the landlord refuses to exchange, then he will be unable to dispose of the property to a third party within a period of 12 months. Please note that this prohibition also applies where the landlord withdraw the s.5 notice at any point prior to the offer to exchange.
8. Assuming the contract is exchanged, the sale proceeds to completion in accordance with its provisions.

Are there any exceptions?

While the majority of disposals will be caught by the provision of the LTA 1987, but some are exempt, for example:

(a)  A grant of a single tenancy of a flat

(b)  A disposal to an associated company: this is where the interest is transferred as an asset to another company, which has been associated with the parent company for at least two years

(c)  disposals arising from collective enfranchisement

(d)  a sale by two or more persons of the same family to a different combination of the same family

(e)  sales to the Crown or to Government departments

(f)  A transfer of an estate or interest held on trust for any person where the disposal is made in connection with the appointment of a new trustee or in connection with the discharge of any trustee.

This is not an exhaustive list.

Are any Landlords exempt from the provisions of the LTA 1987?

Yes:

1. Resident landlords in non-purpose built blocks of flats (such as a house converted into flats) who occupy a flat in the premises as their only or principal residence and have done so for at least 12 months ending at the date of the disposal; and
2. Registered housing associations and local authorities.

The Right of First Refusal can be a difficult process with many traps for the unwary.