Where the landlord of a block of flats intends to dispose of their interest in the building, they must first, by law, offer it to the tenants. This involves the service of formal notices under the Landlord and Tenant Act 1987, which provides specific information to be included, such as the purchase price and what is included in the sale. The tenants must be given at least two months to respond, and the landlord cannot sell the property in that time. Breach of the statutory provisions is a criminal offence, so it is very important landlords are aware of their obligations.

The right of first refusal does not apply to all blocks of flats. To qualify, a block of flats must contain at least two flats.  No more than 50% of the block can be for non-residential use, and at least 50% of the flats must be owned by qualifying tenants.

A qualifying tenant is a leaseholder under either a long lease, fixed or periodic tenancy. The tenants of shorthold tenancies, business, or agricultural tenancies or those tied to employment do not qualify. The right of first refusal will also not apply where three or more properties are owned by the same person. The obligation also only applies to the immediate landlord of the tenants; this may be the freeholder, or it could be a superior leaseholder.

Once the landlord has decided to sell the property, he must serve notice on the tenants, but the form of notice is a little different depending on the method of sale used by the landlord.

In a private sale, the notice must include the price and any other terms of the sale. The tenants must have a period of at least two months to respond to the notice and, in order to force the sale to the tenants, at least 50% of the qualifying tenants must accept the offer.

If an insufficient number of tenants accept the offer, then the landlord is free to sell to whomever they please, providing that they don’t sell for a lower amount than stated in the notice. What sometimes happens is a landlord will offer a freehold to the tenants for £50,000, for example, but fails to find a buyer. The landlord may receive a lower offer of, say, £40,000, but the landlord cannot accept this without first offering the freehold to the tenants again, at the lower price. Therefore, practically, a landlord selling by private sale will market the property and get an offer first, before then serving notice on the tenants.

If the tenants accept the landlord’s offer, then they have a further two months to nominate the purchaser, which is usually either one of the individuals or, more commonly, a specially incorporated management company.

Where the property is sold by auction, the landlord cannot include the sale price as this will be set when the hammer goes down. Therefore, the tenants must accept the offer without knowing the purchase price. If the tenants do not wish to purchase for the price achieved at auction, then they don’t have to accept the contract, but they will be liable for the landlord’s reasonable legal costs of the right of first refusal procedure.

It is a criminal offence for a landlord to not follow the statutory procedure without reasonable excuse. Even though the relevant legislation has been in force since 1987, there is still very little case law about what is a reasonable excuse for failing to comply with the Act. The safest thing to do is to follow it carefully.

The penalty for a breach of the Act is a fine. The Legal Aid, Sentencing and Punishment of Offenders Act 2012 made this fine unlimited for offences committed after 13 March 2015.

Where a landlord is found guilty of breaching the right of first refusal by selling to a third party without first offering the freehold to the leaseholders, the sale to that third party will remain valid.

In summary, right of first refusal is not a means of forcing a landlord to sell its freehold interest; it is simply an opportunity for tenants to purchase that interest before it is sold on the open market. The landlord can withdraw from the sale at any point prior to the exchange of contracts, even if notices have been served and the offer accepted.

The right of first refusal does not provide an opportunity for tenants to negotiate the sale price or terms. The landlord sets the price, and it cannot be determined by a court or Tribunal. However, if the tenants do not accept the offer, the landlord cannot sell its interest to another party on different terms or at a lower price than that originally offered unless he again offers the right to the existing tenants on the new terms and/or at the lower figure.

If a landlord fails to comply with the statutory requirements, it is not only a criminal offence punishable by an unlimited fine, but the tenants can force a purchaser of the landlord’s interest to sell the interest to them for the same price.

If you are a landlord or a tenant in a block of flats and would like to discuss this matter further, please contact Nicolle Marchant on 01494 893 514 or by email.