Understanding The Right Of First Refusal (ROFR)

Part 1 of the Landlord and Tenant Act 1987 (the 'Act') grants certain residential tenants the right of first refusal when a landlord proposes to make certain disposals of or affecting the whole or part of its premises.

What is the right of first refusal (ROFR)?

Where the Act applies, a landlord is prohibited from making the disposal (or, where applicable, contracting to do so) unless the landlord has first served a formal "offer" notice upon the "qualifying tenants" of the flats, giving them a prior opportunity to take the disposal.

It is open to the "requisite majority" of the qualifying tenants to accept the landlord's offer of the right of first refusal. If the tenants do not accept the offer, the landlord can only proceed with the proposed disposal to a third party within a limited timeframe and on the same terms as those set out in the offer notices.

What are the formal notices under the Landlord and Tenant Act 1987?

1. (Contract for Sale) Section 5A notice: where a landlord proposes to enter into a contract to create or transfer an estate or interest in land.
2. (Sale at Auction) Section 5B: where the landlord proposes to dispose of an interest in the premises by a sale at a public auction in England or Wales.
3. (Granting an Option or Pre-emption rights) Section 5C: where the landlord proposes to dispose of an interest in the premises by granting an option or granting a right of pre-emption.
4. (Conveyance without contract) Section 5D: where the landlord proposes to dispose of an interest in the premises other than under a contract, option or right of pre-emption.
5. (Additional requirements where there is non-monetary consideration) Section 5E: no matter how the proposed disposal is to be effected, if it is to be made for consideration that does not consist wholly of money, the section 5 offer notice must comply with the requirements of sections 5A, 5B, 5C or 5D (as applicable) and the requirements of section 5E.

What are the qualifying criteria for a right of first refusal?

1. Does the proposed disposal relate to qualifying premises? (see Premises).
2. Do the premises contain sufficient qualifying tenants? (see Qualifying tenants).
3. Is the person making the disposal the "landlord" for the purposes of the Act?.
4. Is the disposal a "relevant disposal"?

If the answer to any of these questions is "no", then the transaction will fall outside the scope of the Act, and the landlord will not be obliged to offer the disposal.

Premises

Subject to one exception, the Act applies to premises if all of the following conditions are satisfied:

1. The premises consist of the whole or part of a building.
2. The premises contain two or more flats held by "qualifying tenants".
3. The number of flats held by "qualifying tenants" exceeds 50% of the total number of flats contained in the premises.

The exception relates to premises that are in mixed-use. The premises will not qualify if both of the following conditions are satisfied:

1. Part or parts of the premises is or are occupied, or intended to be occupied, for non-residential purposes.
2. The internal floor area of those non-residential part(s), taken together, exceeds 50% of the total internal floor area in the premises.

Qualifying tenants

The Act defines a "qualifying tenant" as every tenant of a flat under a tenancy, except for a narrow list of exceptions.

Tenants under the following types of tenancy are specifically excluded:

1. A protected shorthold tenancy, as defined in section 52 of the Housing Act 1980.
2. A tenancy to which Part II of the Landlord and Tenant Act 1954 applies, whether or not it has been contracted out of the security of tenure provisions.
3. A tenancy is "terminable on the cessation" of the tenant's employment or, in plain English "a tenancy that the landlord can end if the tenant's employment, which is the reason for the tenancy, ends".
4. An assured tenancy (including an assured shorthold tenancy) or an assured agricultural occupancy within Part 1 of the Housing Act 1988
5. A tenant whose landlord is a qualifying tenant of the flat.
6. A tenant who holds a tenancy of three or more flats in the building

Landlord

Subject to two exceptions, the Act will only apply to a disposal by either of the following:

1. the immediate landlord of the qualifying tenants of the flats of the premises; or
2. where any qualifying tenants are statutory tenants under the Rent Acts, the person who, apart from that tenancy, would be entitled to possession of the flat.

Therefore, in a structure where both a freeholder and a head leaseholder have interests superior to the qualifying tenants, only disposal by the head leaseholder is usually caught.

However, there are two exceptions. These relate to:

Superior landlords

This exception applies if the immediate landlord of the qualifying tenants is itself a tenant under a tenancy which is either:

1. a tenancy for a term of less than seven years, or;
2. a tenancy for more than seven years, with a landlord's break option exercisable during the first seven years.

In these circumstances, its landlord, the superior landlord, will also be regarded as a "landlord" for the purposes of the Act, and a disposal by either the immediate landlord or the superior landlord will be caught.

Mortgagees

Where a landlord has mortgaged its interest, its mortgagee will also be regarded as a "landlord" for the purposes of the Act if the mortgagee disposes of the landlord's interest in exercise of its powers of sale or leasing.

The premises will not qualify if the landlord's interest is held by either an exempt or a resident landlord. Exempt landlords are defined as local authorities and police authorities, development corporations and urban development corporations, registered housing associations, and various other public bodies.

A landlord will be a resident landlord where all the following conditions are satisfied:

1. The premises are not and do not form part of, a purpose-built block of flats.
2. The landlord occupies a flat in the premises as its only principal residence.
3. The landlord has continuously occupied that flat as its only or principal residence for at least the previous 12 months.

A company cannot be a resident landlord, as it cannot occupy a flat itself.

What is a relevant disposal?

A "relevant disposal" is defined as a disposal by the landlord of any estate or interest (whether legal or equitable) in any premises to which the Act applies, apart from a list of specified exemptions.

These are as follows:

1. The grant of a tenancy of a single flat (with or without any appurtenant premises)
2. Disposal of any interest of a beneficiary in settled land
3. A disposal of any incorporeal hereditament. Incorporeal hereditaments are intangible non-personal property rights, including easements and profits à prendre.
4. A disposal to a trustee in bankruptcy or to the liquidator of a company.
5. Disposal by way of security for a loan.
6. Various disposals made pursuant to a court order in specified matrimonial, civil partnership, family or inheritance proceedings.
7. Disposal in pursuance of a compulsory purchase order.
8. Disposal of any freehold or leasehold interest in pursuance of a collective enfranchisement claim
9. Disposal by way of gift to a member of the landlord's family or to a charity.
10. Disposal of functional land by one charity to another, which intends to use that land as functional land (that is, land occupied by the charity or by trustees for it and wholly or mainly for charitable purposes).
11. A disposal of land consisting of the transfer of an estate or interest held on trust for any person where the disposal is made in connection with the appointment of a new trustee or the discharge of any trustee.
12. A disposal consisting of a transfer by two or more members of a family to fewer of their number, or to a different combination of members of that family.
13. Disposal in pursuance of a contract, option or right of pre-emption binding on the landlord, except as provided in section 8D. However, the contract, option, or grant of a right of pre-emption will be a relevant disposal.
14. The surrender of a tenancy made pursuant to a covenant, condition or agreement contained in that tenancy.
15. Disposal to the Crown.
16. A disposal by a body corporate to a company that has been associated with that body for at least two years.
17. A disposal under the terms of a will or the law relating to intestacy.
18. The conferral of a code right under Schedule 3A to the Communications Act 2003.

Do landlords have to offer the right of first refusal?

A disposal will survive a breach of the Act's requirements, but both civil and criminal penalties may be imposed (see below: What are the penalties for breaching the Landlord and Tenant Act 1987?).

What are the implications on sale and disposal?

The only real implication is a possible delay to the usual completion timetable and increased compliance costs. On a standard sale by contract, the s5A offer notice must include all of the "principal terms". The landlord should be certain of the terms agreed upon before serving notice. This is usually by agreement of "Heads of Terms". Although full contracts could be agreed upon in principle, these should not be exchanged until after the lapse of the relevant acceptance period (in the case of a private contract sale – 2 months, providing the offer is not accepted).

Where there is a sale by auction, the tenants have an opportunity to bid, but by serving notice of acceptance here, they are effectively entitled to step into the successful bidder's shoes.

What are the penalties for breaching the Landlord and Tenant Act 1987?

If a landlord fails to comply with its obligations under the Act, it may be liable to criminal prosecution and civil action.

However, any disposal made in contravention of the Act will remain valid.

The Criminal offence. Under section 10A of the Act, a landlord will be guilty of a criminal offence if, without reasonable excuse, it makes a relevant disposal affecting premises to which the Act applies in either of the following situations:

1. Where the landlord failed to comply with the requirements of section 5 of the Act.
2. Where the disposal contravened any prohibition or restriction in sections 6 to 10 of the Act.

The Act has no guidance on what might constitute a reasonable excuse.

A person guilty of an offence under section 10A, will be liable on summary conviction to a fine not exceeding level 5 on the standard scale. There is no maximum limit to the fine which may be imposed in relation to a level 5 summary offence where that offence was committed after 12 March 2015.

Where the landlord is a body corporate, an officer of the body corporate may also be liable in their personal capacity. An officer means a director, manager, secretary or other officer and any person who purports to act as an officer. To be personally liable, the officer must have consented to, or connived in the office or have caused the offence through their neglect.

The Civil Liability

Section 19 of the Act allows "any person interested" to enforce the obligations contained in the Act against a defaulting party by following a two-stage process: (i) A notice should be served on the defaulting party requiring the default to be made good, (ii) if the default has not been made good, within 14 days of the date of service of the default notice, an application may be made to the court for an order requiring the default to be remedied.

Once a disposal has taken place in breach of the Act, the tenants will in practice no longer be able to enforce the landlord's duty to serve offer notices under section 5. Still, this provision may assist the tenants in enforcing compliance with obligations arising out of an information notice served under section 11 or a purchase notice under sections 12A, 12B or 12C.

What are tenants' rights against the purchaser?

Where a landlord has made a relevant disposal affecting premises which, at the date of disposal, fell within the Act and in doing so has contravened section 5, then the requisite majority of the qualifying tenants have various rights against both the purchaser and its successor(s) in title.

In summary, these rights enable the requisite majority of the qualifying tenants to:

1. Require the purchaser to provide information about the disposal (by serving an information notice).
2. Acquire the relevant interest from the purchaser on the same terms (by serving a purchase notice).
3. The qualifying tenants may also have rights against the purchaser's successor in title.

These rights may be lost by the passage of time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.