If you own a leasehold property and your landlord is thinking of selling the freehold, you may have the right of first refusal to purchase it.
There are a number of advantages for leaseholders when they also own the freehold in their building, so purchasing the freehold is something you should seriously consider doing.
Advantages in owning the freehold
Possibly the biggest advantage for leaseholders in owning the freehold is the opportunity to grant themselves longer leases. When the remaining term on a lease falls below around 80 years its value starts to decrease. Most mortgage lenders will not lend on a leasehold property where less than 70 years remain of the term, which will make it less saleable and reduce property price.
Although most leaseholders have the right to extend the term of their lease, this is a time-consuming process and can be expensive, involving legal fees for both the leaseholder and the freeholder, survey fees and a payment to the landlord to purchase the extended term.
If you own the freehold, you can grant yourselves leases for 999 years and generally only pay your own legal costs, which will be considerably lower than those incurred in any negotiation with a landlord, a Land Registry fee to register the new lease and the purchase price for the freehold interest.
If you and the other leaseholders own the freehold, you can set your own level of service charge and decide how much you want to put aside into a sinking fund for future large items of repair.
You can choose your own workmen to carry out repairs and maintenance and arrange your own insurance. You can decide not to charge ground rent and when you come to sell, owning a share of the freehold will make your property more attractive to buyers.
The right to buy the freehold
To qualify for a right of first refusal to buy the freehold there must be a minimum of two flats in the building, with at least half of them owned by ‘qualifying tenants’. At least half of the building must be used for residential purposes.
A qualifying tenant is someone with a fixed or periodic tenancy, i.e. not a shorthold tenancy or business tenancy. They cannot own three or more flats in the building.
The right of first refusal
Under the Landlord and Tenant Act 1987 (the Act), where a landlord wishes to dispose of their freehold interest and the leaseholders have a right of first refusal, an offer notice under section 5 of the Act needs to be served by the landlord on a minimum of 90% of the tenants. Where there are less than ten tenants, notice must be served on at least nine of them.
The notice will detail the landlord’s terms, to include the price and a deadline for acceptance of the offer.
If the tenants wish to go ahead, they should instruct an expert property solicitor to check the freehold interest that is being sold to ensure that it is legally sound. The solicitor will respond to the landlord within the time limit and deal with issues such as checking the contract, transferring the deposit and purchase monies and registering the ownership of the freehold interest into the new names of the tenants, generally by way of a management company.
This article is not a definitive statement of the law. It is designed as a free update on the law at the time of publishing. It is not a substitute for legal advice on specific facts and circumstances. BakerLaw LLP and/or the writer accepts no liability or responsibility for reliance on this article and recommends that you seek independent legal advice on your specific circumstances prior to taking any steps.