Understanding Section 5 Right of First Refusal

Section 5 of the Landlord and Tenant Act 1987 grants qualifying tenants the Right of First Refusal when their landlord intends to sell their interest in a property. This right offers leaseholders the opportunity to purchase the property before it is offered to external third parties. In essence, it grants tenants the first opportunity to buy the freehold or extended leasehold interest.

To qualify for the Right of First Refusal, certain criteria must be met. These criteria include the following:

1. The property in question must fall within the scope of the Act. This typically involves residential properties containing at least two flats where (a) no more than 50% of the premises is in non-residential use and (b) more than 50% of the flats in the premises must be held by qualifying tenants.
2. The landlord must receive a “relevant offer” to purchase their interest in the property. A relevant offer is a written offer from a buyer, and it triggers the Right of First Refusal.
3. Qualifying tenants must be granted the opportunity to exercise their Right of First Refusal within a specified time frame, typically at least two months. They have the option to accept the offer, reject it, or nominate another purchaser.

The Importance of Section 5 Right of First Refusal

The Right of First Refusal is a fundamental safeguard designed to protect the rights and interests of residential leaseholders. Its significance lies in several key areas:

1. Empowering Leaseholders: The Right of First Refusal empowers tenants by allowing them the first opportunity to control their property’s destiny. It prevents landlords from making decisions that may not align with the tenants’ interests.
2. Preventing Unwanted Changes: By giving tenants the chance to purchase the property, this provision helps maintain the character and stability of the building. It can prevent undesirable changes or the introduction of new landlords with different management styles.
3. Promoting Stability: Stability is crucial in the residential sector. The Right of First Refusal helps create a sense of stability and security for leaseholders by allowing them to take control of their living environment.
4. Encouraging Fair Transactions: This provision encourages fair transactions between landlords and tenants. It ensures that tenants are not taken advantage of and that they have a say in the property’s future.

Prosecution for Failing to Comply

Compliance with Section 5 Right of First Refusal provisions is mandatory, and landlords who fail to adhere to the Act’s requirements can face prosecution. The consequences of non-compliance can be severe and may result in legal actions, fines, or even imprisonment.  The potential penalties for non-compliance include:

1. Civil Proceedings: If a landlord fails to offer their interest in the property to qualifying tenants as required by the Act, tenants can initiate civil proceedings against the landlord. The court can issue an order forcing the landlord to comply with the Act’s provisions.
2. Criminal Offense: In cases where a landlord deliberately fails to comply with the Act, it can be considered a criminal offense. Section 5(2) of the Landlord and Tenant Act 1987 establishes that a landlord who intentionally fails to follow the Right of First Refusal provisions may be subject to a fine.
3. Fines: Fines can be imposed on landlords who breach the Act’s provisions. The amount of the fine can vary, and the court will determine the appropriate penalty based on the specific circumstances of the case.
4. Imprisonment: In extreme cases of non-compliance, where a landlord’s actions are deemed especially egregious, imprisonment is a possible consequence. While imprisonment is relatively rare, it underscores the seriousness of the Right of First Refusal provisions in the Act.

It is essential for landlords to be aware of their obligations under the Landlord and Tenant Act 1987 and to take them seriously. Non-compliance can result in legal proceedings that are costly and damaging to their reputation.

In what appears to be the first prosecution of its kind, a local housing authority issued two summonses related to the sale of a block of flats at an auction, with the auction contract completed a month later.

The summonses were issued 6 months after the date of completion. However, what was overlooked was that the relevant disposal occurred on the date the auction contract was made (section 4A of the Act) and completion in accordance with the contract was not considered a relevant disposal under section 4(2)(i) of the Act. Consequently, the summonses were issued beyond the designated time limit. Upon this realization, the prosecution was withdrawn. The crucial lesson here is to verify the date of the summons application and confirm whether it exceeds 6 months from the relevant disposal date.

Concluding Thoughts

Regardless of the success or otherwise of the recent prosecution, the Right of First Refusal provisions in of the Landlord and Tenant Act 1987 are a vital component of the legal framework that protects the rights and interests of residential leaseholders. These provisions empower tenants to control the destiny of their living environment and prevent unwanted changes. Compliance with the Act’s requirements is mandatory, and landlords who fail to adhere to them can face prosecution, civil proceedings, fines, and even imprisonment. It is in the best interest of all parties involved to understand and uphold the Right of First Refusal provisions, ensuring a fair and secure living environment for residential leaseholders.

For more information please contact David Eder, Solicitor and Legal Director Commercial Real Estate, Secured Lending at david.eder@haroldbenjamin.com