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

What is the tenant’s right of first refusal?

If the owner of your building is selling the freehold interest in the building, they are generally required to offer the freehold interest jointly to the owners of the flats within the building before they can sell it to a third party. This also applies if your landlord is selling their intermediate leasehold interest in the building.

Why should I accept the section 5 notice?

If you receive a section 5 notice you should first consider the details of the landlord’s interest being sold (which may be a freehold interest or intermediate leasehold interest), the price that the landlord will accept for their interest and the deadline for an acceptance notice to be served.

If the price represents a fair value for the landlord’s interest, then there are various benefits to owning a share in the landlord’s interest in your building. Once the landlord’s interest has been acquired by the participating flat owners, they will then normally collectively gain control over the management of the building (typically including arranging the buildings insurance, services charges and day to day management of the building).

In most circumstances, the freehold is sold and the flat owners can extend their individual leases to 999 years and reduce the ground rent to nil for no premium. If all flats participate, the new lease can often be tailored to suit the circumstances of your particular building and ensure that your individual flats are as marketable as possible which will help you realise the maximum value of your flat. If there are one or more flats that do not participate, then certain improvements can still be made to the participating flat owners individual leases and any defects in the leases can be remedied.

How do I know if the price offered in the notice represents a fair value for the freehold interest?

We always recommend that if you are considering accepting the section 5 notice, you instruct a specialist enfranchisement valuer to advise you on whether the offer price represents a fair value for the freehold interest.

We can recommend specialist enfranchisement valuers who have extensive experience and expertise in this area and can advise you if the offer price set out in the section 5 notice is fair.

What is the cost of accepting the section 5 notice?

The total cost of accepting the section 5 notice will be comprised of the following:-

  1. Your share of the price – this is the payment that will be made to the landlord as consideration for the transfer of the freehold interest as set out in the section 5 notice.  Your instructed valuer will also be able to advise how the price should be fairly divided between the participating flat owners.
  2. Your share of the participating flat owners’ costs – this will include the cost of your solicitor and your valuer (if any), plus any disbursements, for example, Land Registry fees, bank charges, stamp duty (if any), etc.
  3. Your share of the landlord’s costs (if any) – the landlord may set out as a term of the section 5 offer that the flat owners will be responsible for its costs in connection with the sale of the freehold. If the flat owners choose to accept the notice then they will have to pay the landlord’s costs.
  4. Lease extension costs – if you acquire the freehold interest, following the acquisition, you will not have to pay an additional premium for extending your lease, but you will have to pay your own legal costs for drafting and finalising the lease extension. In addition, if you have a mortgage over your individual flat, then the lender may charge a small fee for providing their consent to the lease extension.

How long will it take to complete the section 5 process?

This will depend on whether the landlord is intending to make a private disposal of their interest or whether they are intending to sell their interest at auction.

If the landlord is intending to make a private disposal of their interest 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 purchase of the freehold.

If the landlord is intending to sell their 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 purchase of the freehold depending on when the auction is held.

What are the requirements for accepting the section 5 notice?

In order to validly accept the notice, more than 50% of the flat owners in the building must collectively and formally accept the section 5 notice by serving a section 6 acceptance notice. We would recommend that the flat owners that wish to accept the notice, jointly instruct a solicitor to act on behalf of the participating flat owners.

Should we hold the freehold interest in a company name or in our individual names?

If you were to hold the freehold in the name of the company each participating flat would be entitled to membership in the freehold company, and each flat owner would be responsible as the members and directors for the administration of the company, for example, registering new members, submitting annual returns, etc. The freehold company will then be responsible for the freeholder’s obligations under the leases, which typically includes arranging the buildings insurance, maintenance and repair of the building and common parts and dealing with the service charges and the day to day management of the building.

It must also be noted that legal title in England and Wales can only be held by a maximum of four individuals, and therefore if there are more than four individual freeholders then it is highly recommended that a company is set up to hold the freehold interest, otherwise you will have to enter into a Deed of Trust with all the beneficial owners of the freehold if there are more than four to record and protect the unnamed freeholders beneficial ownership.

The benefit of holding the freehold interest in the name of the company is that if any of the flat owners sell their flat you and your co-freeholders would not be required to sign a Transfer Deed as the company would still hold the freehold interest, but you would just need to transfer your membership in the freehold company to your buyer. By comparison, if you hold the freehold interest in your individual names, all the individuals on the freehold title will have to sign a Transfer Deed to transfer the share of freehold to the buyer and be identified for Land Registry purposes. If there is a Deed of Trust in place, then a new Deed of Trust will have to be signed every time the freehold is transferred. This could result in delay to your sale if, for example, the co-freeholders were not resident in the building, abroad, unwell or simply being uncooperative.

In addition, holding the freehold interest under the name of a company would protect each flat owner as an individual against personal liability from any claims against the freehold company, for example, for breach of covenant.

The drawback of setting up a company to hold the freehold interest is the cost and time of carrying out the administration for the company, for example, filing annual returns, etc. However, with Companies House web-filing, filing requirements are simplified making it easier for you to do yourself or if you do appoint a managing agent, they will deal with this for you and recoup the cost through the service charge.

If you would like to instruct a managing agent to deal with the management of the building on behalf of the freeholder then you can instruct a managing agent either in the name of the company or in your individual names.

What is the procedure once the flat owners have accepted the section 5 notice?

The procedure is slightly different depending on whether the landlord is intending to make a private disposal of the freehold interest or whether they are intending to sell the freehold interest at auction.

Private Disposal of the Freehold/Landlord’s 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.

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/s 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 has membership in.

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 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).

Following completion, we will deal with all the post-completion formalities including paying any stamp duty (if applicable) and registered the transfer of the freehold at HM Land Registry.

After the purchase is completed, we will then deal with your individual 999 year lease extensions.

Auction Disposal of the Freehold/Landlord’s Interest (Section 5B Notice)

When the landlord serves a Section 5B notice on the flat owners, they will not provide an offer price that they will 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.

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/s 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 has membership 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 5B 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 sign and return within 28 days of receipt with the deposit (which is 10% of the successful bid price). The landlord then has a further 28 days to offer a formal exchange of contracts which is when the participating flat owners are contractually obliged to proceed with the purchase. 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).

Following completion, we will deal with all the post-completion formalities including paying any stamp duty (if applicable) and registered the transfer at HM Land Registry.

After the purchase is completed, we will then deal with your individual lease extensions.

How can LEASE Law help me?

LEASE Law are specialist solicitors who can act on your behalf in respect of the legal requirements for transferring the freehold/intermediate leasehold interest to the flat owners through the Section 5 procedure.

The work that we will carry out for the participating flat owners includes preparing a participation agreement, preparing and serving the acceptance notice and nomination notice on the freeholder, negotiating the terms of the contract and the Transfer Deed, exchanging contracts, completing the transaction and registering the Transfer Deed at HM Land Registry.

We can also recommend specialist enfranchisement valuers who have extensive experience and expertise in this area to advise you whether the price set out in the section 5 notice or determined at auction represents a fair value for the freehold/intermediate leasehold interest.

If you receive a section 5 offer notice from your landlord, we are more than happy to have a discussion with you to outline your possible options. As you only have two months to formally accept a section 5 offer we recommend that you contact us as soon as possible after receiving the notice. 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.