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If you have received a Section 5 notice informing you have right of first refusal to buy the freehold of your block of flats you are probably wondering what to do. Most leaseholders or flat owners receiving such a notice do not react quickly enough and do not see it for the opportunity it may be. Before you hide the letter away hoping you can ignore it, realise that this could be a chance to secure, or even increase, the value of what is probably your most valuable asset - your leasehold flat.
We cannot avoid getting legal here and you will almost certainly at some point want to consult a specialist leasehold solicitor or surveyor: you can find them at the web site of the Association of Leasehold Enfranchisement Practitioners. First a little background.
Section 5 of the Landlord and Tenant Act 1987 (the Act) as amended by the 1996 Housing Act, compels the owner of the freehold of your block of flats to do certain things if they want he wants to sell that freehold to someone else. It gives you as a flat owner (referred to as a tenant or lessee) what is known as the Right of First Refusal to that freehold. In other words, the freeholder (known as the landlord) has to ask the flat owners (known as the tenants) first if they want to buy it before he can sell it to anyone else.
They must do this in a very particular way: get it wrong and the freeholder could be committing a criminal offence. Specifically, they have to tell you in the form of a notice - the Section 5 Offer Notice. It looks formal because it should adhere to a very specific format.
There are five forms of Section 5 notice ranging for A to E in the Act. The most common by far are the first two, so we will only deal with these here. It is important to understand that this article does not constitute advice and you should only act after consulting a suitably qualified enfranchisement solicitor. You can find a local one at the ALEP web site.
Not every single one of the people in your block of flats will necessarily have received a notice. (We discuss in a separate article what are qualifying tenants but not all flat owners will necessarily be qualifying tenants and not all blocks are necessarily qualifying blocks). If there are more than nine flats that qualify for the right of first refusal, 90% can be sent Offer Notices and the freeholder will be complying with the law in that respect. If there are only two flats, they only need to serve notice on one of them. You should check you all have the same date on your notices: the acceptance dates and deadlines are related to the last one received, assuming you are all in the same 'building', as defined by the Act.
Under a Section 5A notice, the landlord says they want to sell the freehold on the open market. They must tell you the price they will accept and the terms of the sale. This is not up for negotiation and must be a reasonable price. It will be a big number but will usually be less than the cost of buying the freehold using a statutory procedure known as a Section 13 notice. Most qualified property professionals will tell you that buying the freehold generally costs less than the extra value it adds.
The freeholder will not generally just make up a silly price: they are barred for a year from reducing the price and trying to sell it to anyone else after you are notified of your right of first refusal. Flat owners cannot turn to the government's Leasehold Valuation Tribunal to confirm what is a reasonable: it is a take-it-or-leave-it offer. If the price is inflated, noone else will buy it anyway.
However, flat owners may wish to push to the side the Right of First Refusal to pay for their own legal costs and force the agenda via a Section 13 notice if they think that they can negotiate a lower price. We will assume here that the professional surveyor's valuation suggests that the Section 5 price is reasonable.
It is not enough for just you to respond that you wish to buy the freehold and exercise your Right of First Refusal. You need to get together with your neighbours so that the group of you represents MORE than half of the number of flats in the block. We do not have the space here to define your block but this may not be as clear cut as you might think. However, if you live in a converted house, it is likely to be clearer and three out of 5 in a conversion would need to be party to the purchase, for example. You will want to maximise the number of participating flats so that you can spread the cost as best as you can.
The most important timescale for your responding to the notice is the two-month deadline after the date of the Offer Notice. You need to write formally to accept the offer by this time. In a larger block this can be a very short period of time to co-ordinate the efforts of many neighbours. Freeholders regularly service such notices close to Christmas and in the summer when many people are on holiday or pre-occupied with seasonal matters so are more difficult to round up.
The next looming deadline, assuming you do decide you want to take up the offer, is two months away. So eight weeks after you have formally accepted the offer, you now need to tell the freeholder who will actually buy it. In other words; will it be a person or do you set up a company or other entity? This is the nominee purchaser. Miss this deadline and the freeholder is free again to sell the asset as they wish on the open market.
Assuming you do nominate the purchaser on time, the seller has a month to send you the contract and the nominated person then has two months to sign it. A deposit of 10% will be paid to the seller at the same time.
So that is a Section 5A, now to Section 5B. This applies to sales of freeholds in auctions and the timescales are slightly different with more time to respond, though the process is broadly the same. Obviously the freeholder does not have a specific offer price but they do have to notify you of their intention to put it into an auction between four and six months before the date of the auction. You need to respond within two months and this point must be two months before the auction. You get half the time of a Section 5A notice to nominate a purchaser - one month. Then the flat owners must send one more notice 28 days prior to the auction confirming that the process should continue.
Then we come to the auction itself. Actually, flat owners do not have to attend. They can wait for the auction to finish and then they can step into the shoes of the winning bidder. They don't have to and they certainly should not bid if they want the best price. The auction house will make it clear to prospective bidders that flat owners have reserved their right to take the place of the winning bidder, and this can certainly suppress interest and so the 'hammer price'. The freeholder then has seven days after the action, if the freehold sells, to notify the nominated flat owner. The flat owner then has 28 days to step into the shoes of the winning bidder and take over that sales contract, if they wish.
If a majority of flat owners have not secured these 'step-in' rights, all is not lost. Any number of them could still be the successful bidder at auction, provided they can come up with the funds - usually 10% on the day and the remainder within 28 days.
You may not receive any form of Section 5 Notice from the freeholder but you may receive a Section 18 notice from a person or company that wants to buy your freehold. This is a way of ensuring that the prospective buyer does not get caught out in the event the freeholder does not go through due process. You have similar timescales to respond and to buy the freehold along with your neighbours. If less than half of the tenants respond blocking the sale, the new prospect buyer can go ahead with the purchase.
It is worth noting here that only the 'immediate' landlord is obliged to offer the right of first refusal. Sometimes there is an intermediate or headlease between the ultimate freeholder and the flat owner (the lessee). If such a situation exists then the ultimate landlord can sell as they wish, even without consulting the headlessee.
Not only should your existing or old freeholder follow a strict procedure, but the new freeholder must also do so. You should receive a Section 3A notice under the 1985 Landlord and Tenant Act informing you of your rights. That can often be a heads-up that the right of first refusal has been denied, at which point you may wish to consult a specialist residential leasehold solicitor.
This is a complex legal process and you will need a solicitor to advise you and a surveyor to determine the correct price for the freehold. You should find a qualified and experienced professional in this sector and the Association of Leasehold Enfranchisement Practitioners has a database of vetted members.
Andy Szebeni is part of the management team of the Association of Leasehold Enfranchisement Practitioners. ALEP has more than 100 members, each vetted before joining. They include solicitors, surveyors who value leases, intermediaries, managing agents and other professionals in England and Wales specialising in the field of leasehold enfranchisement. Havea look at the searchable list of vetted members at http://www.alep.org.uk/membership/.
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