Collective Enfranchisement: Doing A Deal Outside The 1993 Act, Right of First Refusal Consequences
When purchasing your freehold there are two ways in which this can be done; the formal route of serving a Section 13 Notice or an informal approach to the freeholder to ‘do a deal’.
The formal route of serving a Section 13 Notice is governed by the Leasehold Reform, Housing and Urban Development Act 1993 and offers more protection in that once the Notice is served, so long as you meet the qualifying criteria, your landlord has to sell the freehold interest to you. By dealing with the freeholder outside of the 1993 Act there is nothing to stop your landlord at the last minute refusing to sell the freehold interest to you or trying to ask for an unreasonable purchase price.
However, there may well on occasion be an advantage to doing a deal outside the 1993 Act. Firstly, your legal fees will be cheaper as there should not be as much work involved so long as terms can be agreed relatively quickly. Secondly, if you have a reasonable landlord who is willing to offer you a fair deal it is likely to save you both time. If you are unsure of your landlord’s nature it might be worthwhile approaching them informally first and if they seem unwilling then serve them with a Section 13 Notice.
There are certain things to watch out for before accepting an informal deal where 100% of the flat owners in the building are not participating in the deal. Under the Landlord and Tenant Act 1987 (as amended by the Housing Act 1996) a landlord who is wishing to dispose of their freehold interest must offer it to the leaseholders in the first instance with more than 50% of the qualifying flat owners being entitled to take up the offer. This would be done by way of a Section 5A Notice. So if a landlord is approached informally by someone wanting to buy their freehold they must make sure the other flat owners are not able to force resale of the freehold interest to them after completion by virtue of breaching the 1987 Act. A landlord that does not serve a Section 5A Notice on their leaseholders before disposing of the freehold interest informally will have committed a criminal offence.
The Right of First Refusal legislation does not apply for freeholds where the landlord is a local authority and to most housing associations.
The new owner of the freehold will have to inform the leaseholders in the building of their assumed ownership in compliance with Section 3A of the Landlord and Tenant Act 1985 outlining the leaseholder’s rights to information regarding the sale. If the leaseholders believe it has been disposed of in contravention of the Right of First Refusal they would respond to the new landlord with a Section 11A Notice requesting full information of the sale terms. The leaseholders can force the new freeholder to sell it to them under the same terms as what they purchased it for. A minority of the leaseholders in the building will not be able to take issue with the transfer.
Leaseholders that do wish take issue with any informal disposal of the freehold interest availing of the Right of First Refusal legislation would have to meet the qualifying criteria of collective enfranchisement.
The Right of First Refusal governance does not typically apply to 1993 Act collective enfranchisement transactions.
If you are a leaseholder who believes their freehold may have been sold illegally and wish to commence a Right of First Refusal claim please contact the Leasehold Services Team at Anthony Gold Solicitors who would be happy to assist. Or perhaps you are a landlord wanting to dispose of your freehold interest to one or more of the leaseholders or an unrelated third party, please contact us for expert advice.