Rights of First Refusal – What is it and Why is it an Issue?

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Karen Taylor - Senior Associate

5 minutes reading time

Part 1 of the Landlord and Tenant Act 1987, as amended by the Housing Act 1996, introduced the concept of the residential tenants' rights of first refusal.

Rights of first refusal is where a landlord is proposing to sell his interest in a building containing flats, the right may exist, and by law, the landlord must first offer it to the qualifying tenants before offering it on the open market.

For the right of first refusal to exist, the premises, the landlord and the tenants must meet certain requirements.

The Premises are defined as the "whole or part of a building" containing at least two flats, but no more than 50% of the premises are to be in non-residential use.  

The property litigation legislation is silent on what is intended as a building, but it is generally understood to mean a separate building, or in some cases, a part of a building which may be divided vertically from another part.

In the absence of a legal definition, you should apply the ordinary meaning of the word as being 'an inclosure of brick or stone covered by a roof'.  

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Rights of first refusal what is it and why is it an issue v2

Denetower Ltd v Toop [1991] 1 EGLR 84

In the case of Denetower Ltd v Toop [1991] 1 EGLR 84, the Court of Appeal ruled that the building included appurtenances. These are rights, benefits or privileges which allow owners to fully use and enjoy their property, such as airspace.

More than 50% of the flats must be held by qualifying tenants. This includes a sub-tenancy and an agreement for a tenancy or sub-tenancy. Tenancies can include long leases, short, fixed term tenancy, periodic tenancy and Rent Act tenancy.

However, exemptions include shorthold, assured, business, agricultural or employment-dependant tenants. 

Leaseholders of three or more flats do not qualify concerning any of their apartments.

The Act only applies to qualifying tenants' immediate landlord and does not apply to most housing authorities, registered social landlords, charitable housing trusts and resident landlords who live in the building where the building is not a purpose-built block of flats, and the landlord genuinely lives in the building as his only and principal residence and has done for more than 12 months.

Sales or transfers of a landlord's interest or part are "relevant disposals". The majority of disposals will trigger the right, but there are some exemptions, including the grant of a single tenant of an individual flat, the grant of a mortgage and disposal to an associated company, to name a few.

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Denetower Ltd v Toop 1991 1 EGLR 84

The Offer Notice

The legislation states that if the proposed transaction involves the disposal of an estate or grant an interest and all conditions are satisfied, the landlord must serve a notice on each qualifying tenant known as the 'offer notice'.

Breach of this obligation by the landlord or his agent is a criminal offence, punishable by a level 5 fine on conviction (£5000). The local authority has the power to prosecute for this offence, but they are not obliged to.

The notice's form depends on the disposal type, so deciding which disposal options to take is important. However, the most common are sales by contract, referred to as section 5A notices.

The landlord will be considered to have complied if notice is served upon at least 90% of the qualifying tenants or all but one if there are less than ten qualifying tenants.

To identify and validly serve the notices on the qualifying leaseholders, it is necessary to review each tenant's lease and title documents. It may be pertinent to serve multiple notices in relation to the same flat.

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The Offer Notice

What happens after the 5A notice has been served?

After the notice has been served, setting on the proposed disposal, the landlord must not dispose of his interest for two months. The date is usually set out in the notice.

If the qualifying tenants wish to accept the offer, the requisite majority must write to accept. That majority is more than 50% of the qualifying tenants (counting one vote per flat).

Those tenants must serve a notice accepting the landlord's offer within the period set out in the landlord's notice (unless he later agrees to a longer period).

The purchaser has two months to sign and return the agreement and pay any deposit. The landlord has seven days to exchange.

Suppose the qualifying tenants do not serve the acceptance notice or serve it outside the offer period.

In that case, the landlord can dispose of the interest on the open market, but not on different terms or at a price lower than that proposed to the tenants in the Offer Notice.

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What happens after the 5A notice has been served

Where might the right arise?

It has been seen that the first quarter of 2023 is proving financially challenging for many individuals, and the temporary restrictions that were in place during COVID have now gone.

As a result, some predict that there will be an increase in formal insolvency procedures. Therefore, insolvency practitioners must be mindful of the right of first refusal.

There is an exemption where there is a disposal to a receiver or trustee in bankruptcy: the transfer of the estate to the receiver, liquidator or trustee in the first instance is an exempt disposal, as well as a transfer to the mortgagee in exercising a power of sale or leasing.

However, any subsequent disposal by the receiver, liquidator or trustee will not be exempt, and the tenants will need to receive notice of their rights.

The right of first refusal does not prevent corporate restructuring or family arrangements, and there are exemptions that could assist.

However, any complex restructuring must be carefully thought out, with each step assessed to determine whether the right will trigger.

It may be in complex disposals more than one section 5 notice is required. If this is the case, it needs to be planned to minimise delays caused by the statutory procedure.

For residential and mixed-use landlords trying to acquire property in a rapidly moving market, the Act can be problematic.

It is, therefore, important that the right of first refusal is considered initially to manage expectations regarding the outcome and timings.

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Where might the right arise

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If you are a commercial or residential landlord that has questions regarding the right of first refusal, contact our Property Litigation solicitors for expert legal advice:


Karen Taylor's profile picture

Karen Taylor

Senior Associate

Karen has 16 years of experience acting as a Property Litigation solicitor. Karen has specialist expertise in lease renewals, breaks and forfeiture actions, claims for rent and service charge arrears and disputes arising from alienation and dilapidations issues.

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