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Auctions and Rights of First Refusal

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5th February 2018

This week’s Ask the Expert in the Times Property Bricks & Mortar section is about auctions and Part 1 of the Landlord and Tenant Act 1987. The reader says that the landlords of his block of flats wants to sell the freehold at auction. The landlord says that if the lessees want to buy, they will have to pay the ‘hammer price’ at the auction. Is this correct?

Landlord and Tenant Act 1987

The Act gives leaseholders of most blocks of flats the right to acquire the freehold of their block if the landlord wants to dispose of it before offering it on the open market. Unlike the right to enfranchise, this is not a means of forcing a landlord to sell its freehold interest in the property who doesn’t want to sell. But it does apply once the landlord has decided to sell in any event.

The right only applies when the following three requirements are met.

1. The premises must contain at least two flats;
2. No more than 50% of the premises to be in non-residential use; and
3. More than 50% of the flats in the premises must be held by ‘qualifying tenants’.

The right is not available to tenants of local authorities, housing associations, nor, in some cases, where the landlord lives in the building. In most cases the landlord is required to give each of the leaseholders an offer notice under section 5 of the Act, setting out the proposed disposal price, and giving time for a qualifying majority of leaseholders to nominate a person to purchase the freehold at that price. If the landlord disposes of the freehold without giving notice, the leaseholders often have the legal right to force a later owner to sell to them at the original sale price – even many years later. If a landlord fails to comply with any of these statutory requirements he commits a criminal offence.

Sales by auction

For sales by auction, the rights apply in a modified form. The requirements of the notice and the timetable can be quite prescriptive, so qualifying tenants and landlords alike should be mindful of the requirements in s.5B. Firstly, the offer notice must be given at least four months before the date of the auction and must offer the right to buy for at least two months after the auction: see s.5B(7). It must contain the principal terms of the proposed disposal, the property and the interest. However, there will be no price or deposit mentioned (nor is the landlord required to divulge a reserve price). It must note that the disposal is to be by public auction; that the notice is an offer by the landlord for the contract (if any) entered into by the landlord at the auction with the purchaser, to have effect as if the nominated person had entered into it. In addition, it should specify an initial period for acceptance of at least two months. This initial period must end at least two months before the date of the auction; and it must contain a further period of 28 days for the nomination of a purchaser (note, not two months, as in s.5A notice). This period must end at least 28 days before the date of the auction.

The notice does not need to contain the date and details of the auction. However, if this is not included, at least 28 days before the auction the landlord must serve a further notice on the requisite majority (not all the qualifying tenants), stating the date, time and place of the auction. If the qualifying tenants wish to accept the offer, the requisite majority must do so within the initial period set in the landlord’s notice (unless a longer period is agreed). They must then notify the landlord of their nominated person within the 28-day further period. The nominated person must send a notice to the landlord at least 28 days before the date of the auction, electing that the remaining stages of the procedure should apply. Importantly in these circumstances, this notice must be sent to formally advise the landlord that they wish it to do so; failure to serve this notice will result in the tenants’ previous acceptance being deemed withdrawn.

The interest is then offered at the auction. The tenants are free to attend or not – there is no requirement that they do. If they do attend, they are not required to make a bid and would be unwise to do so as this will have the effect of driving up the price they will eventually have to pay. If a successful bid is accepted at the auction the landlord must send a copy of the contract to the nominated person within seven days of the auction. The nominated person then has a period of 28 days in which to accept the contract and pay any deposit required. This has the effect of the nominated person and not the successful bidder entering into the contract.

In practice, auction sale prices for properties which are subject to s.5B notices may be depressed because other bidders know they may be wasting their time. But there is no right to buy the freehold at anything less than the hammer price.

What happens if the landlord withdraws from the auction, the property doesn’t sell or the qualifying tenants are deemed to have withdrawn?

If the landlord withdraws the property from the auction, or it does not sell, then the interest cannot be sold, by auction or otherwise, without starting the whole procedure afresh. This applies equally to any sale by private treaty after the auction has ended – something that frequently happens with unsold lots in auctions.

The nominated person must accept the contract and pay the deposit. If they do not do so, they are deemed to have withdrawn. If the qualifying tenants do not accept the offer made by the landlord or notify him of the nominated person, or if the nominated person withdraws from the acquisition or is deemed to have withdrawn because of a failure to adhere to the time limits, then the landlord is free to sell at auction within the next 12 months, with no further reference to the tenants, but subject to conditions. However, he may not sell privately (other than a sale at a public auction) without a new notice under s.5A, or he commits a criminal offence. If either party withdraws, or is deemed to have withdrawn, they will be liable for costs.

Short answer

The leaseholders therefore have the right to buy the freehold if it sells at auction, but they still have to pay the hammer price to do so. The qualifying tenants should be mindful of the need to adhere to the timetable to avoid their claim being treated as withdrawn.

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