The Landlord and Tenant Act 1987 (LTA 1987) Part I creates a statutory right of first refusal for long leaseholders of qualifying residential buildings. Before a freeholder can make a relevant disposal — which includes not only a straightforward sale of the freehold but also grants of superior leases exceeding 21 years and certain other disposals — the freeholder must first offer the qualifying tenants the opportunity to purchase on the same terms. The offer must be in writing, state the principal terms of the proposed disposal, and give qualifying tenants at least 12 weeks to respond and nominate a purchaser.
The right of first refusal is one of the most widely breached provisions in landlord and tenant law, largely because many solicitors advising on freehold sales in England do not check whether it applies. If it does apply and is breached, the consequences are serious: criminal prosecution of the former landlord, and a statutory right for the qualifying tenants to serve a 'purchase notice' on the new purchaser demanding that they sell to the tenants at the same price within the next 6 months.
Qualifying buildings — when does the right of first refusal apply?
The right of first refusal applies only to buildings that meet all four conditions under LTA 1987 s.1:
- Condition 1 — the building contains two or more flats: The right applies where the premises consist of the whole or part of a building and include at least two flats. 'Premises' includes the common parts (stairwells, hallways, gardens) but must primarily consist of the building itself. A single flat does not trigger the right of first refusal; a purpose-built block of 6 flats does
- Condition 2 — more than 50% of the flats are held by qualifying tenants: More than half of all the flats in the building must be held by qualifying tenants (see below). If the freeholder occupies more than half the building, or if a majority of the flats are held on short assured shorthold tenancies (which are excluded from 'qualifying tenant' status), the right does not apply. The 50% threshold is calculated by number of flats, not by value
- Condition 3 — no resident landlord: The right does not apply where the freeholder (or a predecessor in title who owned before 29 August 1996) has lived in the building as their only or principal home at any time in the past 12 months. A freeholder who occupies one of the flats as their home is a 'resident landlord' and is exempt. The resident landlord exemption applies only to individuals — a company freeholder can never be a resident landlord
- Condition 4 — the landlord is not an exempt landlord: Certain public authorities and registered providers of social housing (housing associations) are exempt landlords under s.58 LTA 1987. Private freeholders and their companies are not exempt. Most privately owned freeholds trigger the right of first refusal where conditions 1-3 are met
Qualifying tenants — who can exercise the right of first refusal?
Not all occupiers of flats in a qualifying building are qualifying tenants under LTA 1987:
- Long leaseholders (21+ year leases): A tenant holding a lease originally granted for more than 21 years is a qualifying tenant, regardless of how much of that lease remains. A flat owner with a 99-year lease with 30 years remaining is a qualifying tenant. A business tenant holding under a lease granted for business purposes (even if over 21 years) is excluded
- Assured shorthold tenancy (AST) holders are NOT qualifying tenants: Tenants holding under an AST or any periodic tenancy do not have the right of first refusal. The right is specifically for long leaseholders with a proprietary interest in their flat — not for short-term occupiers
- No more than two qualifying tenancies per person: If one person holds long leases on more than two flats in the same building, they count as a qualifying tenant only in respect of those two flats. This prevents single investors from controlling a majority of qualifying tenants
- At least two-thirds must participate in the acceptance: Once an offer notice is served, at least two-thirds of the qualifying tenants must join in the acceptance (LTA 1987 s.6). If fewer than two-thirds accept, the offer lapses and the freeholder may proceed with the sale
Relevant disposals — what triggers the obligation?
The obligation to serve an offer notice arises before any 'relevant disposal' of a 'relevant landlord's' interest:
- Sale or transfer of the freehold: The most common relevant disposal — a straightforward sale of the freehold to a third party. The freeholder must serve the offer notice before exchanging contracts, not before completion
- Grant of a superior lease exceeding 21 years: If the freeholder grants a headlease of the building for more than 21 years, this is a relevant disposal and triggers the obligation. A headlease is often used as a commercial arrangement — the headlease holder becomes the intermediate landlord of all the flats
- Gift or transfer at undervalue: Transferring the freehold to a family member or company at less than market value is a relevant disposal. The right of first refusal applies equally to below-market disposals
- Exempt transactions: Certain disposals are NOT relevant disposals: sales by mortgagees exercising their power of sale (LTA 1987 s.4(2)(a)); disposals under compulsory purchase orders; court-ordered disposals (including in matrimonial proceedings); disposals within associated companies (s.4(2)(d)) — group restructuring where both companies are 90%+ under common ownership. A freeholder transferring to their own wholly owned company is exempt from the first refusal obligation
- Timing — offer notice must be served before the disposal: The offer notice must be served before the relevant disposal is made (before exchange of contracts in a sale). A freeholder who exchanges contracts without serving the offer notice has already committed the criminal offence — serving the notice after exchange does not cure the breach
The offer notice procedure — serving, accepting, and completing
Where the right of first refusal applies, the freeholder must serve an offer notice in accordance with LTA 1987 s.5-10:
- Content of the offer notice (s.5 LTA 1987): The notice must be in writing and must specify: (1) the principal terms of the proposed disposal — the property being disposed of, the consideration (price), and any conditions attached; (2) the period for acceptance (at least 12 weeks from service); (3) the names of all qualifying tenants on whom the notice is being served. Failure to include the required information invalidates the notice
- Service of the offer notice: The offer notice must be served on each qualifying tenant individually. Service is by registered post to the tenant's flat or their last known address. Where the identity or address of a qualifying tenant is not reasonably ascertainable, the freeholder can serve by advertisement under s.5B
- Acceptance — at least two-thirds of qualifying tenants must respond within the period: Within the acceptance period (minimum 12 weeks), at least two-thirds of the qualifying tenants must serve an acceptance notice on the freeholder. The acceptance notice must nominate a purchaser — this will typically be a company formed by the participating leaseholders or a trustee on their behalf. The nominated purchaser can be anyone (a company, a professional trustee, an individual leaseholder)
- Post-acceptance process: After acceptance, the freeholder and the nominated purchaser negotiate the contract on the terms stated in the offer notice. If terms cannot be agreed within 2 months of acceptance, either party can apply to the FTT to determine the terms (s.8B LTA 1987). The nominated purchaser must exchange within 3 months of acceptance or the freeholder is free to sell to a third party on the same or better terms within 12 months
Criminal offence and the purchase notice remedy
Non-compliance with the right of first refusal obligation is a criminal offence and carries significant civil consequences:
- Criminal offence (LTA 1987 s.10A): A landlord who makes a relevant disposal of a qualifying building to a third party without first serving a valid offer notice commits a criminal offence. The offence is triable either way — on summary conviction (magistrates) or on indictment. There is no maximum fine limit — the court can impose an unlimited fine. The offence can also be committed by a company and its officers. HMRC does not investigate but local councils can prosecute
- The purchase notice remedy (LTA 1987 s.11-17): Within 6 months of the relevant disposal coming to the qualifying tenants' attention, the qualifying tenants can serve a purchase notice on the new purchaser (not the original landlord) requiring them to sell the interest to a nominated purchaser at the price originally paid. This means the new purchaser is required to sell the property they bought in good faith — they are bound as the successor even though they may have been unaware of the breach. Purchasers and their solicitors should always verify whether the right of first refusal applies before proceeding with a freehold acquisition
- Practical due diligence for purchasers: Any solicitor acting on a freehold purchase of a residential building should check whether the right of first refusal applies and obtain a statutory declaration from the vendor confirming that: the building is not a qualifying building; or the appropriate offer notices have been served and the acceptance period has lapsed. Failure to carry out this due diligence exposes the purchaser to a compulsory resale to the leaseholders
Frequently asked questions
What is the landlord's right of first refusal under the Landlord and Tenant Act 1987?+
Under LTA 1987 Part I, a freeholder who wishes to sell a qualifying residential building (2+ flats, 50%+ held by qualifying long leaseholders, no resident landlord) must first offer the qualifying leaseholders the right to purchase on the same terms. The offer notice must give at least 12 weeks for acceptance. Selling without this notice is a criminal offence with an unlimited fine.
Is selling a freehold without serving an offer notice a criminal offence?+
Yes. Under LTA 1987 s.10A, making a relevant disposal of a qualifying residential building without first serving a valid offer notice on the qualifying tenants is a criminal offence, triable either way, with an unlimited fine. The offence is committed at the point of disposal — serving the notice after exchange of contracts does not cure it.
What is the purchase notice remedy for leaseholders?+
Under LTA 1987 s.11-17, if a landlord sells a qualifying building without serving a right of first refusal notice, the qualifying tenants have 6 months (from discovering the breach) to serve a purchase notice on the new purchaser requiring them to sell the interest to the leaseholders at the price originally paid.
Does the right of first refusal apply to transfers within the same company group?+
No. Disposals between associated companies (where both are 90%+ under common ownership) are exempt from the right of first refusal under LTA 1987 s.4(2)(d). Similarly, disposals by mortgagees exercising their power of sale and court-ordered disposals are exempt.