Category Archives: Right of first refusal – 1987 Act

Information specifically relating to the rights of the leaseholder of a leasehold house to purchase the freehold of the house.

I have been offered the freehold by the landlord serving me with an ‘offer notice’ – what does this mean?

There are two main types of offer notice relating to proposed sales of the freehold to a building under the 1987 Act.

Under the 1987 Act the landlord must (provided that the disposal is one to which the Act applies) offer the residents of the building the chance to purchase the freehold under the so-called ‘right of first refusal’ under that Act.

If the landlord does not do this he may well commit a criminal offence and there may be other avenues of redress – such as the chance to purchase the freehold on similar terms to the proposed transaction.

What does the fact that I have been served with an ‘Offer Notice’ mean?

Strangely enough, your landlord wants to sell the freehold to your building. It may be that there is a potential buyer lined up or that he is proposing to sell at auction or simply that because he wants to sell and because the legislation applies and a notice has been served to see whether the flat owners will ‘bite’ and purchase the freehold.

There are 2 main types of notice encountered in practice: – Section 5A and Section 5B. These are mentioned briefly below:

Section 5A

This is a ‘fixed price’ ‘take it or leave it’ offer. You cannot challenge the price in the notice. If you do want to purchase, but not at that the stated price consider the 1993 Act as an alternative.

The offer notice should state the key terms of the disposal and will stipulate a date – at least 2 months away – by which the qualifying tenants (basically long leaseholders but other tenancies also qualify for 1987 Act rights, so if in any doubt check) must serve an acceptance notice.

More than 50% (a majority) of the qualifying tenants are needed to serve the acceptance notice.

There are then other steps that must be taken (serving a nomination notice within a further 2 months and proceeding to exchange contracts within 2 months of receipt of the contract following nomination). You will need professional help to serve the relevant notices and proceed with the purchase.

You should also consider as a preliminary step getting some valuation advice to work out whether the proposed price is reasonable or not.

Section 5B

A section 5B notice tells you that the freehold is going to be sold at action. The notice will either state the date of the auction, or (provided that he complies with the relevant time limits) the landlord can serve a further notice closer to the auction date notifying you of the date and time of the auction.

Provided that the correct notices are served the flat owners will achieve a ‘right of first refusal’ against any successful bidder at the auction. They will then have 28 days to complete the contract in the same way that any eventual buyer would following an auction purchase.

Once again this is a collective right that must be exercised by a majority (more than 50%) of the qualifying tenants.

In the case of a 5B notice acceptance and nomination notices must also be served together with notice of election. Likewise you will need professional help to achieve success in purchasing the freehold under this route.

Once again valuation advice early on is recommended as is considering carefully the tactics as to whether to attend the auction or to attempt to make a bid before the sale takes place.

If I want to accept one of these notices, what should I do?

As mentioned above, these are collective rights open to a majority and so you will need more than 50% of the qualifying flat owners. The rules on what makes a qualifying building and identifying a qualifying tenant can be complex in certain cases and advice may be required.

Secondly, assuming that there are sufficient flat owners to proceed, they need to consider funding / valuation – i.e. is the process affordable and is the price that is proposed reasonable? In the case of an auction sale, a sense of the likely sale price will also be essential to work out not only whether the price is right but also whether there will sufficient participating flat owners with funds to complete in the relatively short time frame if the purchase proceeds.

Thirdly, if no acceptance notice is served and the freehold is not sold to someone else there is nothing to stop one or more of the flat owners buying the freehold provided that the relevant offer period has expired without acceptance, or if the process has been started but then abandoned by the majority.

 

Lease extension or freehold purchase – which is best ?

The differences between obtaining a lease extension or buying the freehold may seem a little bewildering at first, but the following basic guidelines below may help you choose which is right for you: –

A Lease Extension may be best for you if:

  • Your lease is short – or about to get more expensive to extend (e.g. about to become less than 80 years remaining);
  • You do not know your neighbours, do not get on with them, or would not want to be involved in running the freehold to your block with them;
  • There is a high degree of ‘apathy’ within the block and you feel that you might be the only one doing all the work;
  • There are a large number of flats (perhaps with non-resident owners) – and co-ordination and management of a freehold purchase claim might be difficult;
  • You are generally ‘satisfied’ with the management of your block and do not want to take over the service charge budget.

You will not end up owning the freehold and taking ‘control’, but you will solve the problem of protecting the captial value of your flat.

If you are nearing a relevant valuation point (e.g. the lease length becoming less than 80 years) you will be able to ‘peg’ the valuation date by serving notice before the relevant date is passed, something that may be missed if you are waiting for a ‘collective’ action to take place.

You will need to have owned your property for 2 years before you can exercise this right, or if you are buying you will need to consider getting the outgoing owner to serve the notice (provided they qualify) and ‘selling this on’ to you.

Freehold Purchase (or “collective enfranchisement”) may be best for you if:

  • You have concerns about future development of areas forming part of the block (e.g. the roof or other areas) – although it has to be remembered that the landlord can sometimes retain and develop common areas;
  • You want to take ownership and control of the day-to-day management of the site;
  • You have a well-organised group of residents (or a group of residents who are prepared to be organised);
  • You want to protect the long-term capital value of your asset (which you can do by extending the lease to 999 years after the freehold purchase completes);
  • There are other issues that can perhaps be addressed if the freehold is purchased (e.g. alteration of lease terms or correction of other defects in the title which may be possible with 100% participation);
  • It is a small block and there is an equal choice for those involved as to whether to pursue the purchase of the freehold (with 100% participation) or lease extensions.

The overall results can be very rewarding – taking ownership and control of your building is a satisfying process. You will (collectively) be able to consider changing the management, or possibly to exploit other opportunities (e.g. the sale of lease extensions or shares in the freehold to non-participating owners, or the right to develop areas in a way decided by the residents).

If one of your concerns is the development or sale of other areas forming part of the block then this needs to be considered carefully, as the freeholder has certain rights to retain common areas and to grant the freehold purchasing company equivalent rights over them. Issues may also arise where a lease of an area capable of development or other use has already been granted, as this may well not be acquired as part of the process.

Curiously, with freehold purchase you do not need to have owned your property for any particular length of time to take part or initiate a collective action and therefore if you are in a small block (or looking to buy a flat in one) this may be worth considering.

Whatever you decide to do, ultimately you may require specialist advice as to the pros and cons as outlined above, to help you come to a decision.