Tenant’s Right of First Refusal (Section 5 Notices)

It is important to note that the section 5 procedure is only triggered by the landlord’s choice to sell the freehold interest. The section 5 procedure is not forced by the flat owners.

Do I have to serve section 5 notices before I sell the freehold to my building?

Generally, the section 5 procedure applies if the following conditions are fulfilled:-

  1. The building is the whole or part of a building that can be vertically divided from the remainder of the building; and
  2. There are two or more flats in the building; and
  3. At least 50% of the building must be residential (excluding common parts); and
  4. More than 50% of the flats in the premises must be held by qualifying tenants (tenants who own their flats on long leases which are leases that were originally granted for 21 years or more).

There are a number of specific exempt transactions and specific exempt landlords which we would investigate for you as part of our instruction before arranging to serve section 5 notices.

What is the cost to me of sale of the freehold through the section 5 procedure?

We would recommend that as a term of the section 5 offer notice the flat owners are responsible for your costs in relation to the sale of the freehold. If they accept the section 5 offer, then the flat owners will be responsible for your costs in connection with the sale of the freehold which will include your legal costs in connection with transferring the freehold and your valuation costs in connection with assessing the premium that you should offer to the flat owners for the freehold interest (if you do not intend to sell the interest at auction).

How long will the section 5 procedure take?

This will depend on whether you intend to make a private disposal of the freehold interest or intend to sell the freehold interest at auction.

If you intend to make a private disposal of the freehold and the flat owners choose to accept the section 5 notice, generally we would estimate that it would take 4-8 months to complete the sale of the freehold.

If you intend to sell the freehold interest at auction and the flat owners choose to accept the section 5 notice, generally we would estimate that it would take 6-8 months to complete the sale of the freehold depending on when the auction is held.

What is the section 5 procedure for transferring the freehold if the flat owners validly accept the offer?

The procedure is slightly different depending on whether you intend to make a private disposal of the freehold interest or whether you intend to sell the freehold interest at auction.

Private Disposal of the Freehold Interest (Section 5A Notice)

When the landlord serves a Section 5A notice on the flat owners offering a price that they will accept for the freehold, they must give the flat owners a deadline of at least two months to formally respond with an acceptance notice.

For the flat owners to accept a ‘requisite majority’ of flat owners is required. To form ‘requisite majority’ more than 50% of the flat owners must act together and serve a joint acceptance notice.

Following acceptance, the flat owners then have a further two months in which they must serve a ‘Nomination Notice’. The Nomination Notice will nominate a purchaser to hold the freehold, which essentially means that the flat owners will tell the landlord in which name they wish to hold the freehold. This may be in individual names of the participating flat owners, or a company name that each individual participating flat owner holds membership.

The landlord then has one month to send a contract to the participating flat owners which the participating flat owners must sign and return within two months of receipt with the deposit (which is usually 10% of the purchase price). The landlord then has seven days to offer a formal exchange of contracts which is when the participating flat owners are contractually obliged to proceed with the purchase of the freehold and the completion date is agreed and entered into the contract.

After exchange of contracts, the Transfer Deed will be signed by both parties and the matter will proceed to completion on the agreed completion date (which is when the balance of the purchase price and costs are paid to the landlord’s solicitor).

Auction Disposal of the Freehold Interest (Section 5B Notice)

When the landlord serves a Section 5B notice on the flat owners, they will not provide an offer price for the flat owners to accept but will give the flat owners notice of their intention to sell the freehold interest at auction. The notice must be served between four and six months before the auction and the freeholder must give the flat owners a deadline of at least two months to formally respond with a notice theoretically accepting the right of first refusal.

Please note for the flat owners to accept a ‘requisite majority’ of flat owners is required. To form a ‘requisite majority’ more than 50% of the flat owners must act together and serve a joint acceptance notice.

The flat owners then have a further 28 days in which they must serve a ‘Nomination Notice’. The Nomination Notice will nominate a purchaser to hold the freehold interest, which essentially means that the flat owners will tell the landlord in which name they wish to hold the freehold. This may be in individual names of the participating flat owners if it is a very small building, or a company name that each individual participating flat owner has a share in.

At least 28 days before the auction the landlord must notify the purchaser of the date and place of the auction.

On the day that the auction is held, if the freehold interest does not sell, then the procedure falls away, and if the landlord wishes to try and sell again, they must start the section 5 procedure from the beginning. However, if the freehold interest does sell, by accepting the section 5 notice the participating flat owners have reserved their right to step into the shoes of the successful bidder and proceed to purchase the freehold interest for the same price as the successful bid.

The landlord then has 7 days to send a contract to the participating flat owners which the participating flat owners must accept within 28 days of receipt and fulfil the terms i.e. pay the deposit (which is usually 10% of the successful bid price). The completion date will be as set out in the auction contract.

After exchange of contracts, the Transfer Deed will be signed by both parties and the matter will proceed to completion on the agreed completion date (which is when the balance of the purchase price and costs are paid to the landlord’s solicitor).

How can LEASE Law help me?

LEASE Law are specialist solicitors who can act on your behalf in respect of the legal requirements for selling your freehold interest, including the section 5 procedure.

The work that we will carry out for you includes preparing and serving the section 5 notice, receiving and investigating the acceptance notice and nomination notice, drafting and negotiating the terms of the contract and the Transfer Deed, exchanging contracts and completing the transaction.

We can also recommend specialist enfranchisement valuers who have extensive experience and expertise in this area to advise you on the value of the freehold interest.

If you would like LEASE Law to assist you, please contact Jade Wilson (jade@leaselaw.co.uk or 0204 511 9100) or Joanna Botley (joanna@leaselaw.co.uk or 0204 511 9101) for a no obligation discussion.