How Right of First Refusal Works

The Right of First Refusal (RFR) is triggered when a landlord wishes to sell their interest in a building subject to RFR legislation under the Landlord and Tenant Act 1987 (the “1987 Act”).

This legal provision requires the freeholder to offer it to the leaseholders before they can consider other buyers. Usually, this will be the entire freehold, but there are some exclusions including single tenancy grants, disposals to associated companies or sales within the same family. There are certain eligibility requirements which must be met for RFR:

• Two flats: the building must have at least two flats.‍
• More than half: more than half of the flats must be owned by “qualifying tenants”.‍
• Non-residential: no more than 50% of the building should consist of non-residential units.

Qualifying Tenants

To qualify for RFR, a tenant must be either a leaseholder or have a fixed/periodic tenancy. It does not extend to Assured Shorthold Tenancies, Assured Tenancies or non-residential tenancies. A tenant who owns all three flats in compliance with the building criteria would not qualify for RFR.

The Landlord

RFR applies directly against the landlord, whom leaseholders pay ground rent to and from whom they can reclaim possession at lease expiry. However, if it is a housing authority or resident landlord that meets certain conditions then RFR may not apply.

For resident landlords who want to escape its grasp then their building can not be purpose-built and they will have needed to live in it as their only or main home for at least 12 months.

Sections of Disposal

Various notice forms apply depending on how disposal is made, each governed by different parts of the 1987 Act. This article focuses on sale by contract (Section 5A) and sale by public auction (Section 5B) as the most common forms.

Sale by Contract (5A)

1. ‍Offer: the freeholder serves notice on qualifying tenants offering them a chance to buy the interest. They must be given at least 2 weeks to accept or reject at a price stated in the notice.‍
2. Acceptance: over 50% of qualifying tenants must accept within 2 months and then have two further months to establish a company to hold the freehold and serve it on the landlord via a nominated purchaser.‍
3. Exchange: the nominated person has 2 months from service of the contract to sign and pay a deposit of up to 10% of the purchase price as stated in the notice. Exchange must take place within 7 days of that time.

If they do not accept then there is no obstacle in the freeholder selling it on the open market, subject to not offering it at a lower price than originally put forward.

Sale by Public Auction (5B)

1. ‍Notice of Offer: the landlord serves notice of offer without specifying a price on at least 90% of qualifying tenants between 4 and 6 months before auction day.‍
2. Response: they then have 2 months to respond and over 50% acceptance is required, followed by nomination of a purchaser.‍
3. Auction: a conditional contract is agreed between landlord and winning bid.‍
4. Contract: within 7 days after auction day, it is sent out for signature by a nominated person who has 28 days to sign and return with conditions fulfilled.‍
5. Exchange: within another 28 days, landlord signs or withdraws.

Consequences of Failure to Give RFR

In the event that your landlord fails to offer a RFR, qualifying tenants can request contract terms from the new freeholder through an "information notice." The tenants have 1 month to get the required information and may require the new freeholder to sell the freehold under similar purchase terms. Failing to give notice under Section 5 comprises a criminal offense, subject to a fine of up to £5,000 on conviction.