Small businesses that deal in real estate must have a comprehensive knowledge of the law around the right of first refusal (ROFR).
Although this article deals with ROFR in the context of property, it can also apply in a commercial environment where one party provides a contractual right to another to have the opportunity to enter into a business arrangement before it is opened up to the market. This is commonly used in joint ventures, where one party enjoys the ROFR to buy the other out.
What does first Right of Refusal mean in real estate?
Under the Landlord and Tenant Act (LTA) 1987, qualifying tenants are provided with the opportunity to purchase the freehold of their building before all other interested parties. If the LTA applies, the landlord cannot sell the house until the following two conditions are met:
- Formal offer notices have been served on the "qualifying tenants" of the flats following section 5 of the LTA 1987
- The requirements make the disposal (sale) of sections 6 to 10 of the LTA 1987
How does Right of First Refusal work?
The Right of First Refusal is not automatic. Both the property and the leaseholders must meet strict qualification criteria set out under Section 5 of the Landlord and Tenant Act 1987 for ROFR to apply.
Property qualification criteria
- It must be at least two flats in the building
- More than 50% of the flats must be owned by qualifying leaseholders
- No more than 50% of the building must be in non-residential use
Leaseholder qualification criteria
- The leases granted must be for 21 years or more (long leases)
- The leaseholder must not own three or more flats
- They must not have a short-hold or assured tenancy
If you, as the landlord, use the property as your main residence and have been doing so for a year or more, you may be exempt from providing ROFR. If you need to offer ROFR, you must send a Section 5 Notice to all qualifying tenants.
This is a legal document; therefore, it must follow a prescribed form. Our commercial property solicitors can assist you with ensuring the form is completed correctly.
What is the Right of First Refusal process?
The five step process is as follows:
- You or your Solicitor will send a Section 5 Notice to all qualifying leaseholders. This is an offer by you to enter into a contract on the terms set out in the Notice.
- Leaseholders have two months from the date set out in the Notice to accept your offer.
- If you are still waiting for a response within two months, you can dispose of your property to any interested buyer.
However, you cannot sell the property for less than what was offered to the leaseholders under the Notice.
- If leaseholders do accept, they must confirm in writing. They will then have a further two months to nominate a purchaser. The qualifying leaseholders usually form this company to buy the freehold.
- The purchasing company (the nominee) must receive a sale and purchase contract within one month, and it then has two months to sign the contract and pay the required deposit.
How long does a Right of First Refusal last?
As stated above, the Section 5 Notice will confirm that leaseholders have two months from the date stated on the Notice to accept the landlord's offer, details of which will be set out in the Notice. You cannot sell the property to anyone else during this time.
What if a landlord does not provide Right of First Refusal to qualifying tenants?
Non-compliance with legislation is never a good idea. If you do not provide ROFR, you could face criminal and civil liability. In addition, the qualifying tenants could apply to undo the sale between you and the third party and purchase the freehold themselves on the same terms as the original sale.
Can a landlord serve a Right of First Refusal?
In theory, yes. However, in practice, there are many pitfalls in the ROFR process, many of which could result in you losing time and money.
Get legal assistance from LawBite
The Right of First Refusal is a complex area of law that can have significant implications for both property owners and prospective buyers. If you’re deciding to sell your commercial property or are selling the freehold, it’s essential to seek expert legal advice to ensure that you understand your rights and obligations under the LTA 1987.
Our team of commercial property lawyers is here to provide you with the guidance and support you need. To learn more about how we can assist you, book a free 15 minute consultation with one of our expert lawyers or call us on 020 3808 8314.