Me First! A Tenant's Right of First Refusal under the Landlord and Tenant Act 1987

Originally published August 2004

The Landlord and Tenant Act 1987 ("the Act") should always be at the forefront of property owners' minds when planning to build or sell developments containing residential elements. It is particularly relevant where a developer plans to grant long leases of residential units intending to sell on the freehold reversion to an institutional investor.

What is the Right of First Refusal?

Where the owner of the reversion ("the interest") of any property (not just purpose built residential blocks) containing two or more residential units held on almost any sort of residential tenancy except for an assured shorthold ("qualifying tenants") wishes to sell or grant a lease out of his interest in the property or any part of it, he is legally obliged to offer the interest to the qualifying tenants of the property ("the First Refusal Offer") and only if they do not take the offer up can he sell it to a third party. The information contained in the First Refusal Offer and all subsequent negotiations relating to the offer are strictly regulated by the Act.

If the First Refusal Offer is not accepted, the owner may then sell to any third party within the next 12 months provided the interest is sold at or above the offer price contained in the First Refusal Offer and otherwise on corresponding terms. If the owner wishes to sell the interest on terms that are less beneficial to him than the terms contained in the First Refusal Offer he must first re-offer the interest to the qualifying tenants on those less beneficial terms.

Note: On a building with a retail unit on the ground floor and flats above the Act requires a lease of the retail unit to be offered first to the qualifying tenant.

What must be contained in the First Refusal Offer?

This must be made in the form of a Notice to each qualifying tenant and must:-

state the property and interest to be sold;

give the principal terms of such sale, including the price; and

inform the qualifying tenants that the Notice constitutes an offer to sell under the Act.

What happens once the First Refusal Offer has been made?

Once the First Refusal Offer has been served on the qualifying tenants, the owner cannot sell his interest until the period given in the First Refusal Offer for the qualifying tenants to reply has lapsed. This must be a minimum of two months. During this offer period the qualifying tenants have three options:-

Accept the offer. This requires more than 50% of...