The Right of First Refusal – how might this affect me?

The Right of First Refusal (RFR) affects landlords selling their freehold interest in a property. It also affects landlords acquiring a freehold interest in a building that contains flats and superior leaseholders selling their superior leasehold interest.

It gives qualifying tenants the opportunity to purchase the freehold of the property when their landlord decides to sell and before it goes on the open market.

It recognises that the sale of a tenant’s freehold directly affects their future and therefore gives them a greater degree of control.

This article explains how the RFR works and what it means for landlords and tenants.

What does the RFR say?

The RFR is outlined under Section 1 of the Landlord and Tenant Act 1987 (The Act).

It applies to premises that:

• consist of the whole or part of a building;
• contain two or more flats held by qualifying tenants; and the number of flats held by those tenants is more than 50% of the total number of flats contained in the building.

There are some exemptions, including for housing associations and social landlords.

It does not apply to landlords creating a new lease or landlords mortgaging or remortgaging their freehold interest.

RFR is activated when the landlord decides to sell. It should not be confused with the right of enfranchisement, which is where tenants can initiate the acquisition of the freehold.

If the RFR applies to the sale, the landlord needs to offer the freehold to the tenants before a sale takes place.

However, the landlord however sets the price for the freehold and is not obliged to negotiate with the tenants.

The landlord must also ensure they adhere to the notice and service requirements within The Act.

If the tenants do not take up the offer, then the landlord is free to sell the property to anyone.

However, it cannot be sold for anything less than the price at which it was offered to the tenants. For example, if the freehold was offered to the tenants for £10,000 it cannot be sold for anything less than this price. If the price for the freehold is reduced, it must first be offered to the tenants at this price before going on the open market again.

Ignore the RFR at your peril

Breaching the requirements of the RFR is a criminal offence.

Furthermore, if the provisions have not been followed, tenants have the right to serve notice on any new owner of the freehold interest. This forces them to sell the freehold to them at the price that was paid.

If you think RFR might apply to your situation and you would like advice, whether you’re a tenant, a landlord or a prospective landlord please get in touch for further advice and guidance.