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Right of first refusal – essential information for landlords and tenants

Summary

Residential tenants have a right of first refusal to buy the landlord’s reversion to their building, and effectively become their own landlord, where a landlord proposes to sell its interest.  These rights are provided by legislation set out in The Landlord and Tenant Act 1987 (the Act).  The Act prohibits a landlord from making a disposal unless the landlord has served an offer notice (a section 5 notice), on the qualifying tenants of the premises.  The landlord will commit a criminal offence if a disposal is made without the notices having been served.

Service of notice

The notice must be served on a fixed proportion of the “qualifying tenants” and must set out the terms on which the landlord proposes to dispose of the premises.  It must also state the period in which the tenants must accept or refuse the landlord’s offer, being a minimum period of two months from the date of service.

What happens next – acceptance of the offer

If the qualifying tenants choose to accept, the requisite majority must serve a notice of acceptance and must nominate a purchaser to buy the premises on their behalf, on the terms set out in the landlord’s offer notice.  If they fail to do so they will lose their rights in relation to the proposed disposal.  The landlord must not dispose of the property during that period, other than to a person nominated by the requisite majority of qualifying tenants.

What happens next – rejection / failure to accept the offer

If the requisite majority of qualifying tenants reject the offer, or if they fail to serve the acceptance notice and to make their nomination within the acceptance period, the landlord will be free to dispose of the relevant interest to a third party.  Any such disposal must take place during the following 12 month period, on the terms specified in the notice.

Withdrawal of the notice

Even if the tenants serve an acceptance notice and nominate a purchaser the landlord may decide not to proceed with the disposal, and must serve a withdrawal notice to this effect.  There may be a costs penalty for a landlord for withdrawing, dependant on the timing of the withdrawal notice.  If the landlord withdraws, the property cannot then be disposed of for a period of 12 months from the date of the service of the notice of withdrawal.  It is worth noting that the landlord would not be prevented from disposing of any other interest in the premises during that period however, subject to serving notice again in respect of the alternative disposal.

What happens if the landlord does not comply?

If a landlord fails to comply with its obligations they may be liable to a civil offence, and also to a criminal prosecution if, without reasonable excuse, a relevant disposal is made without having complied with the Act; or in contravention of any prohibition or restriction within the Act.  Where the landlord is a corporate body, an officer of the body corporate may also be liable in their personal capacity, if the officer consented to or connived at the offence, or caused the offence through neglect.

Tenants’ rights against the purchaser

If the provisions of the Act are not adhered to, any disposal in contravention of the Act will still remain valid and the purchaser will acquire good title, however the tenants will have a number of rights against the purchaser (and their successors in title).  These rights include a right to obtain information about the disposal; and the purchaser can ultimately be compelled to transfer the property to the nominated purchaser of the qualifying tenants.  Any such transfer must be made on the same terms and for the same consideration paid by the purchaser.

Conclusion

As can be seen above, the implications of not adhering to the Act can be widespread.  Please contact our Property team for further information here.

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