Tenants are often unsure if they have the Right of First Refusal when their landlord decides to sell, and a landlord may not understand its obligations to its tenants. Property litigation expert and member of Lodders’ Dispute Resolution team, Vicky Khandker, explains where and when the Right of First Refusal applies.
If a landlord is proposing to sell its interest in a property, it may have to first offer it to the tenants before putting it on the market. This is called the Right of First Refusal (RFR). The circumstances surrounding whether or not RFR applies to a particular case can be unclear, and both tenants and landlords can often be confused about whether or not RFR applies to their situation.
Where RFR exists, the landlord must, by law, first offer it to the tenants before offering it on the open market. The landlord must serve formal notices on the tenants telling them what it is intending and must provide time for the tenants to consider the offer; it cannot sell to another party during that time.
For RFR to apply, the property, the landlord and the tenants have to meet certain requirements.
There are three requirements that the property must fulfil to be subject to RFR:
- The building must contain at least two flats held by qualifying tenants;
- No more than 50% of the internal floor area of the building is to be in non-residential use; and
- More than 50% of the flats in the premises must be held by qualifying tenants.
For example, a semi-detached house that has been converted into flats could be subject to RFR.
Flats that are above a shop could, however, be excluded, depending on the space in the building that is allocated to commercial use.
A building will be excluded from RFR if more than 50% is not in residential use. It could also be excluded if it contained empty spaces making up more than half the building, such as space that a landlord intends to use for non-residential purposes, such as storage.
Additionally, if the property to be sold contains more than one building, then you need to consider whether the RFR applies to any of those buildings individually or collectively. More than one notice may need to be served.
Right of First Refusal applies when the immediate landlord of the tenants decides to sell.
The immediate landlord is the person to whom the rent or ground rent is paid and who will be entitled to vacant possession of the flat when the lease expires.
This may not necessarily be the same party as the party who holds the freehold of the property.
For example: Mr Bloggs holds the freehold of a block of flats. He grants a head lease of the whole building to Mrs Doe. Mrs Doe then grants leases for each of the separate flats. In this case, Mrs Doe is the immediate landlord and would have to provide Right of First Refusal if she intended to sell her head lease. Mr Bloggs, as the freeholder, is not the immediate landlord and would be free to dispose of the freehold without offering it to the flat tenants first.
The RFR does not apply to the following landlords:
- Most housing authorities (local Councils, New Towns and Development Corporations);
- Registered social landlords and fully mutual housing associations which are not registered;
- Charitable housing trusts; and
- Resident landlords who live in the building where:
- The building is not a purpose-built block of flats, ie, it must be a property which has been converted into flats since its original construction; and
- The landlord genuinely lives in the building as its only or principal residence and has done so for more than 12 months.
For RFR to apply to a building, at least 50% of the tenants must be qualifying tenants. The term ‘qualifying tenant’ includes leaseholders and some fixed term or periodic tenancies, but does not include assured or assured shorthold tenancies unless those are not let directly by the landlord.
Someone who is a tenant of more than three flats in the building will not be a qualifying tenant of any of those flats.
Failure to give RFR
If a landlord fails to offer the Right to First Refusal when all qualifying criteria are met, it can be fined up to £5,000. Perhaps of more concern to a purchaser buying the property is that the tenants can also serve a notice on the new owner demanding details of the transaction and then take action to force the new owner to sell to them at the same price.
It is important to know your rights as a landlord or a tenant. At Lodders, our Property Dispute Resolution team has a proven track record of advising clients on issues relating to disposals of tenanted properties, whether as landlord or tenant. For help or advice on resolving a property-related dispute, please contact Vicky Khandker.