Share of Freehold (Flat Purchase) Right of First Refusal

SpaceMan

Hi All,

I am a first-time buyer in the closing stages of purchasing a leasehold flat, with a share of the freehold, in a converted house of 3 flats.

I was days away from exchange of contract, only to be told by my solicitor today that the seller's solicitor first needs to serve a "Section 5 Notice" to the existing tenants, relating to the "1987 Landlord & Tenants Act - Right of First Refusal", apparently offering them "my" future share of the freehold, which I understood I was purchasing with the flat.

Current structure of the household:
Flat 1 - 50% Freeholder
Flat 2 - Leaseholder only
Flat 3 - 50% Freeholder (the flat I am purchasing) (top floor)

When originally advertised 3 months ago, the tenure was specified as Leasehold, with share of freehold, which turned out to be a 50% share, as above.

Given that this is a law from 1987, why did neither my solicitor, nor the seller's solicitor, nor the estate agent know that the 50% freehold as part of Flat 3 had to be offered to the tenants in Flat 1 & 2 before being allowed to be sold to me as part of the purchase of Flat 3?

To my mind, this property was mis-advertised and should have said "including a POSSIBLE share of the freehold, subject to a Section 5 Notice being served on current tenants"?! I see many flats sold with a share of the freehold - are they all subject to this law? Or is it only because Flat #2 currently doesn't own any of the freehold that they have to be offered a chance to buy into it?

Do I not have any rights to obtain a share of the freehold (even if only 33%) being a purchaser who would subsequently become a tenant after the sale goes through? This sounds very strange to me.


All the leases have 166 years remaining, so presumably there is little monetary value in the freehold itself, so any sale of such to existing tenants would just be a nil value transaction?


Am awaiting more information on the matter from my solicitor.

Very surprising to have received this bombshell so close to finalising things - am not a happy bunny!

Any help/advice much appreciated.
Thank you.

Tom99

[FONT=Verdana, sans-serif]I can't think that your interpenetration can be correct because that way anyone who had previously acquired a share of the freehold could be derived of it on sale and other leaseholders could ratchet up their own %age ownership beyond what their own flat was due. It would be against the spirit of the legislation.[/FONT]
[FONT=Verdana, sans-serif]I am sure others will provide a more precise answer but two questions:[/FONT]

• [FONT=Verdana, sans-serif]How is the freehold title owned, by the two owners as tenants in common or by a company with the two owners having a share of the company?[/FONT]
• [FONT=Verdana, sans-serif]Has flat 3 been the main residence of the vendor for the past 12 mths? Is do I believe that absolves them from having to serve a right of first refusal notice.[/FONT]

SpaceMan

Thank you, Tom.

This whole situation has sprung up suddenly from the seller's solicitor side, which is what my solicitor is going to query.

The freehold title is owned as tenants in common. There is no Ltd company, and no shares involved.

Flat 3 was the main residence of the vendor for several years, however, the flat has been empty from the time I went for a first viewing, so at this moment, I can't say exactly when the vendor moved out.

On that point, which backs up your thinking, I did read on the "Shelter Legal" website that the flat would be RFR exempt if:

"the flats are not a purpose built block and there is a resident freeholder who has been living there for at least the last 12 months"

I know that the other freeholder has been resident in Flat 1 for many years, if that is relevant.

Tom99

SpaceMan wrote: »

Thank you, Tom.

This whole situation has sprung up suddenly from the seller's solicitor side, which is what my solicitor is going to query.

The freehold title is owned as tenants in common. There is no Ltd company, and no shares involved.

Flat 3 was the main residence of the vendor for several years, however, the flat has been empty from the time I went for a first viewing, so at this moment, I can't say exactly when the vendor moved out.

On that point, which backs up your thinking, I did read on the "Shelter Legal" website that the flat would be RFR exempt if:

"the flats are not a purpose built block and there is a resident freeholder who has been living there for at least the last 12 months"

I know that the other freeholder has been resident in Flat 1 for many years, if that is relevant.

Your seller will not count as a resident landlord because he does not occupy the flat now.

https://www.legislation.gov.uk/ukpga/1987/31/section/58

SpaceMan

Thanks again, Tom.

My solicitor has responded saying that the RFR law is applicable in this instance due to the fact that the building contains at least one non-freeholder, and so the Notice must be served on all existing tenants due to that.

What I find strange about this situation is that the 50% freehold being sold could then be distributed amongst Flat 1 & 2 prior to my purchase of Flat 3 going ahead, and then I become a tenant after purchase and end up with 0% of the freehold.

I can understand why the law exists in the case where a (share of) freehold is being sold to an external 3rd party, but in the case where there is an incoming tenant as a result of the sale, then it looks like their rights are zero in this case.

Strictly speaking, I don't think this property should have been advertised with a "share of freehold".

I can see nothing to stop the sale of 50% of freehold being split between the current 2 tenants meaning that Flat 1 ends up with 75%, and Flat 2 gets 25%, leaving Flat 3 (me!) with 0%.

Given the long leases on all flats, the freehold probably has zero/small monetary value, so why wouldn't the existing tenants take as much as possible.

Tom99

SpaceMan wrote: »

My solicitor has responded saying that the RFR law is applicable in this instance due to the fact that the building contains at least one non-freeholder, and so the Notice must be served on all existing tenants due to that.

[FONT=Verdana, sans-serif]Surely that would mean notice to all three tenants then?[/FONT]
[FONT=Verdana, sans-serif]Ask your solicitor exactly where in legislation is the clause that means notice has to be served because one tenant does not own a share. Or conversely which clause in the legislation would exempt notice from being served because all three owned 33.3% each.[/FONT]

SpaceMan

The vendor is selling the freehold, who themselves has been a tenant until recently.

The relevant part of the legislation, so I understand, is that whenever a freehold is being sold, if there are any "qualifying tenants" then Notice must be served to ALL tenants in the building.

The law clearly states that a leaseholder is a qualifying tenant, i.e. Flat 2 in my case. So it is this which is triggering the requirement to serve Notice.

If there are no qualifying tenants, then the situation is exempt from the law.

Am I answering my own original question now?! Am learning more about this as the day progresses...

Thank you for your input.

Tom99

SpaceMan wrote: »

The vendor is selling the freehold, who themselves has been a tenant until recently.

The relevant part of the legislation, so I understand, is that whenever a freehold is being sold, if there are any "qualifying tenants" then Notice must be served to ALL tenants in the building.

The law clearly states that a leaseholder is a qualifying tenant, i.e. Flat 2 in my case. So it is this which is triggering the requirement to serve Notice.

If there are no qualifying tenants, then the situation is exempt from the law.

Am I answering my own original question now?! Am learning more about this as the day progresses...

Thank you for your input.

There need to be at least two qualifying tenants so if only flat 2 is a qualifying tenant notice would not be needed.

SpaceMan

There need to be at least two qualifying tenants so if only flat 2 is a qualifying tenant notice would not be needed

Where did you find this, please?


I have seen stated that if the 'qualifying tenants' wish to take up the offer, then more than 50% of them must write to accept the offer.

Is that what you are referring to? If so, then that is different to what you mention. I don't think that precludes there being only one qualifying tenant.

Tom99

SpaceMan wrote: »

Where did you find this, please?

I have seen stated that if the 'qualifying tenants' wish to take up the offer, then more than 50% of them must write to accept the offer.

Is that what you are referring to? If so, then that is different to what you mention. I don't think that precludes there being only one qualifying tenant.

Section 1 (2)(b):

https://www.legislation.gov.uk/ukpga/1987/31/section/1

SpaceMan

Thank you, Tom. I have sent to my solicitor.

I am assuming that the vendor's flat is excluded from this, as presumably they couldn't serve notice to themselves.
If so, the question comes down to is Flat 1 (as current co-freeholder) classed as a qualifying tenant. They are of course a leaseholder, but also own a share of the freehold already.