Episode three: First refusal rights
In the previous articles, I examined the right of the flat owners acting collectively to compel the landlord to sell them the freehold in the property and the right of individual flat owners to compel the landlord to extend their lease. In this article, I look at the position when the landlord decides he has had enough and tries to sell the property over the heads of the flat owners.
First refusal rights
This is the right for the flat owners to step in and buy the landlord’s interest if the landlord wants to sell. It resembles the right to buy the freehold but there are many differences, particularly with regard to “qualifying tenant”.
If the flat owners have first refusal rights and the landlord wants to sell, he must give formal notice to each qualifying tenant saying what price he wants. If the flat owners wish to buy, they need to form a company and use it in much the same way as with the right to buy process. There is no procedure for independent fixing of the price but the parties can agree a different amount if they wish. If the flat owners do not wish to buy, the landlord has a year in which to sell elsewhere but only on the same terms as were offered to the flat owners and not at a lower price.
There are strict time limits at all stages of the process.
The landlord can be criminally liable if these provisions are not followed.
There are special provisions where the landlord wishes to sell by auction. Basically, the landlord has to give several months’ prior notice and the flat owners can buy the property at the hammer price if they act quickly after the auction.
It can be very difficult in some cases to decide if the landlord has to comply with all this. There have been several court cases where the statutory rules have been criticised and the lack of clarity may well have led to some decisions that were a surprise to the parties. All the following must apply:-
- Does the nature of the property make the obligations apply? This will be the case if:
- the premises the landlord wants to sell are the whole or part of a building
- The premises contain 2 or more flats leased to “qualifying tenants” (see below but the definition is much wider than under the rights to buy and extend leases)
- the number of flats in the premises leased to qualifying tenants exceeds 50% of the total number of flats in the premises
- If part of the premises is not residential (eg a shop or an office) the internal floor area of the residential parts (whether or not leased to qualifying tenants) must be 50% or more of the whole of the premises – for this purpose, communal areas are left out of account
- Is the landlord exempt from the obligations? Generally speaking, if the landlord is the direct landlord of the qualifying tenants, it will have to comply but there are exceptions where the direct landlord only holds a lease of less than 7 years. However, there are certain landlords who are exempt, namely:-
- Various public authorities
- Registered housing associations
- Resident landlords – these are persons who have occupied a flat in the premises for at least the previous 12 months as their principal residence and the premises are not a purpose built block of flats
- The Crown
- Are there enough “qualifying tenants”? Remember that there must be at least 2 flats held by qualifying tenants and over half by number of the flats in the premises must be held by qualifying tenants. In this case, every tenant of a flat is a qualifying tenant except:-
- A protected shorthold tenant
- A tenant who occupies for the purpose of a business (even though it’s a flat)
- A tenant who holds the tenancy as a term of his/her employment (e.g. caretaker, bar/hotel staff)
- An assured shorthold tenant – this type of tenancy is almost universal nowadays for short term or periodic tenancies
- The tenant of 3 or more flats in the building that are not within the above 4 exceptions
- A subtenant whose landlord is a qualifying tenant
- Is the disposal exempt? Most disposals are not exempt and this includes the obvious examples of sale or lease as well as some less obvious ones such as the landlord surrendering the lease under which it holds the premises. Any contract to dispose, including an option or right of first refusal, is also treated as a disposal but there are special provisions to enable the landlord to enter into options and pre-emptions. The exempt disposals are as follows:-
- The grant of a lease or tenancy of a single flat
- The disposal of the interest of a beneficiary under a trust of settled land (don’t ask!)
- The grant of a right of way or drainage or similar legal right (“easement”) over the premises
- The creation of a mortgage or charge
- The disposal of the property to a liquidator of a company or the trustee in bankruptcy of an individual upon insolvency
- Various disposals under court order in matrimonial, family or inheritance cases
- Disposal under compulsory purchase orders
- Disposal to the flat owners under the right to buy covered in episode one
- Disposal by gift to a member of the landlord’s family or to a charity
- Disposal by one charity to another of “functional land”
- Disposal between trustees on retirement or appointment
- Disposal by two or more family members to fewer of their number
- Disposal in some cases under a contract, option or right of first refusal binding on the landlord – the landlord will have had to go through a similar notice procedure before entering into the contract, option, etc.
- Surrender of a lease under an obligation in the lease
- Disposal to the Crown
- Disposal between associated companies in the same group of companies
- Disposal under a will or intestacy
There is no provision for the price to be fixed independently if the flat owners do not agree with the sum stated by the landlord. If the landlord later sells at a lower price he commits a criminal offence and the flat owners have the right to compel the buyer to sell the property at the same price and on the same terms as the buyer obtained.
The flat owners do not have to pay the landlord’s professional fees unless they say they want to buy and later withdraw.
Once again, there is an elaborate scheme of notices and counter notices that have to be given within a strict timetable and failure to comply with the timetable may well mean that the party is deemed to have withdrawn and lost its rights.
If the landlord just goes ahead and disposes without notifying the tenants, that in itself is a criminal offence (max penalty £5,000). A purchaser would be ill advised to buy without checking that everything had been done properly, but if it proceeds all the same, it must give notice to the flat owners that the sale has taken place and include a statement that the flat owners may be entitled to buy the property. Failure to do so is a criminal offence (£2,500 fine). Purchasers can ask the flat owners before they buy whether the landlord has correctly offered to sell them the property and whether they want to buy it.