Are we about to see an increase in freehold portfolio sales? If so this is even more reason for leaseholders to be aware of their Right of First Refusal and how to respond to a Section 5 notice, should they wish to purchase their freehold.
What is a Right of First Refusal?
Within the Landlord & Tenant Act 1987 it states that it is a criminal offence for a landlord to sell their interest in a building containing flats without offering it t the leaseholders of the building first. This is known as the Right of First Refusal.
There are some exceptions contained in the legislation, but on the whole, if the building complies with the following criteria and the disposal is a ‘relevant disposal’ for the purposes of the Act, a Right of First Refusal is likely to be required:
- The premises consist of the whole or part of a building
- The premises contain 2 or more flats held by qualifying tenants (i.e. lease granted for more than 21 years)
- The number of flats held by qualifying tenants is more than 50% of the total number of flats in the premises
Could we see more freeholds up for sale?
In the current climate there are several reasons why we may be about to see a rise in the number of freehold sales, such as:
- Building Safety Act 2022 (BSA): The introduction of the BSA has brought with it an increase and complexity in duties for responsible people (which may include freeholders) of certain buildings. Some Freeholders, particularly those with older buildings or with particularly challenging building styles, may become more likely to sell due to the investment and work involved in bringing their buildings up to the required standards.
- Reform around ground rent & lease extension fees: With changes to new buildings and extended leases following the Ground Rent Act and continued discussion around wider reform there may be a reduction in certainty on returns. Much of the proposed change remains vague in time scale but may create a review of estates and portfolios which may enter the market.
- Increased insurance costs: We’re all seeing price rises one way or another at the moment, and freeholders are no different. With numerous costs increasing, such as insurance, freeholders may be reviewing their portfolios. Although on the majority of occasions the freeholder is able to pass the cost on to the leaseholder, with a number of costs going up, it could further test the leaseholder-freeholder relationship.
What to look out for
If a Freeholder/ landlord decides that they wish to sell their interest they must inform the leaseholders at the property by serving a section 5 notice. The notice providing the leaseholders with the opportunity to buy their freehold before it’s purchased by someone else or if being sold at auction to step into the shoes of the successful bidder at auction. Owning your freehold, can prove beneficial for a number of reasons:
- Owning a share of the freehold tends to increase the value of the property.
- Gain maximum control over the management of the building.
- Allows the lease to be extended for 999 years at no cost, other than legal fees.
- Allows the terms of the lease to be amended, which can remove ground rent and correct any defects.
When a Section 5 notice is received, it’s crucial to act quickly, as the leaseholders only have 2 months to respond. Additionally, to purchase the freehold the majority of the leaseholders (51% of them) have to agree to progress with the purchase. In larger blocks this can obviously take time to organise. If the freeholder doesn’t receive an acceptance from the leaseholders within 2 months, they’re then able to progress with a ale of the freehold to a third party on the same terms. If leaseholders want to buy the freehold then they need to be supported by experts who know the timescale and can advise on the best tactics to ensure success.
