Brett Williams: Exceptions To The Rule Of Right Of First Refusal
Brett Williams, BSc (Hons), MRICS, FIRPM is a Partner at CPBigwood. He is in charge of their Residential Service Charge Department, managing approximately 15,000 flats in some 400 developments in over 100 towns/30 counties throughout the UK. He is also a past Chairman of ARMA, where he held the role for three years.
Here Brett explains the exceptions to the rule for freehold sales (right of first refusal).
The first circumstance in which the freehold can be sold without the need for service of a section 5 notice on the leaseholders is obviously where there are no leaseholders!
In actuality, the loophole exists where less than half of the leases have been granted, i.e. less than half of the flats have been sold. The reason that this avoids the legislation is that there is a requirement for a majority of the leaseholders of the building to accept the right of first refusal. If less than half of the leases have been granted then a majority cannot exist to accept that right.
It is often the case that a developer will agree a sale and exchange contracts for the transfer of the freehold to an investor in the early stages of undertaking the development. It is usually a condition of the contract that completion takes place on notice served by the developer at a fixed period after the sale of the last flat. This is not illegal as it allows the developer to proceed with the sale without the cost and delay of serving section 5 notices. Whilst the leaseholders get a new freeholder without the chance of purchasing the freehold, they can of course exercise their collective enfranchisement rights under the Leasehold Reform (Housing and Urban Development) Act 1993 as they can in any circumstance, subject to meeting the qualifying criteria.
The second circumstance relates to a company sale. Take a developer who owns the freehold in a Limited Company and having completed the development and sold all plots, he then sells all of the shares in the freehold company to another party. This also avoids the legislation in that there is no change of ownership, but the freehold has effectively changed hands with the company having new owners.
Thirdly, as many of you know, there are some quite complicated legal structures attached to land. The most common situation for residential flats is that there is a freeholder who has granted leases to all of the leaseholders in the development. Probably the next most common is where there is a residents management company incorporated in the lease which transfers the responsibility for the management from the freeholder to the leaseholders as members of the company. If the company owns a head-lease of the entire development and the leaseholders have under-leases, I have been involved in cases where the solicitors have advised that the leaseholders do not have the right of first refusal and the freehold can be sold without the need for service of section 5 notices.
The matter of a freehold sale is therefore not straightforward and if either the freeholder or leaseholders are uncertain of their rights, then competent legal advice should be sought.
For further information on this and other matters relating to residential property, please contact Brett Williams on:
0121 233 0500
0121 233 0014