Selling Your Freehold: the Right of First Refusal
Before selling a freehold containing flats you must in most cases offer it to the leaseholders first. Getting the Section 5 notice wrong is a criminal offence.
In short
What is the right of first refusal?
The right of first refusal under the Landlord and Tenant Act 1987 requires a freeholder to offer the freehold to qualifying leaseholders before disposing of it on the open market. The offer is made by serving a Section 5 notice.
When does it apply?
It applies where the building contains two or more flats held by qualifying tenants and no more than 50 per cent of the internal floor area is in non-residential use. Certain disposals, including transfers between group companies and gifts to family members, are exempt.
What happens if a freeholder does not comply?
Failure to serve a Section 5 notice is a criminal offence punishable by fine. The leaseholders may also require the new owner to sell the freehold to them on the same terms as the original disposal.
How long do leaseholders have to respond?
The Section 5 notice must give the qualifying tenants at least two months to accept the offer. If they accept, a further period applies for nominating a purchaser.
Section 5A and Section 5B: two different routes
The Landlord and Tenant Act 1987 prescribes a different procedure depending on how you intend to dispose. Which applies determines what the offer notice must say, how long the process takes and how your costs are dealt with.
Section 5A — disposal by contract
The route where you are selling privately, whether or not you have already found a buyer. Your section 5 offer notice sets out the terms on which you propose to dispose, including the price. The qualifying tenants have a period in which to accept those terms, and if they do, you are committed to selling to them at that price. If they do not, you are free to dispose to a third party — but not on terms materially better for the buyer than those you offered the tenants, and generally within twelve months.
Section 5B — disposal at auction
The route where you intend to sell by auction. The offer notice is served before the auction takes place and tells the tenants of your intention rather than proposing a price. If they accept, they acquire the right to step into the contract entered into at auction, on the same terms and at the price achieved. In practice this means the market sets the price and the tenants decide afterwards whether to take it.
Which suits you
Section 5A gives certainty of price but requires you to fix it before testing the market. Section 5B lets the market establish the price, but takes longer and leaves the outcome uncertain until the auction has run. The choice is a commercial one and worth taking advice on before you commit.
Common situations
Freeholders come to us at different points in a disposal. These are the ones that arise most often.
I have found a private buyer but need to offer it to the leaseholders first
This is the classic section 5A position. You must serve the offer notice before contracting with your buyer, setting out the price and terms agreed. If the tenants accept, they buy on those terms; if they do not, you may proceed with your buyer. Serving the notice after exchange does not cure the breach, and your buyer’s solicitor will usually require evidence that it has been dealt with properly.
I have no buyer but want to offer it to the leaseholders, and need it valued first
Very common, and the sensible order of things. Under section 5A the price is fixed by your notice, so a figure set too low commits you to selling below value and one set too high wastes months before you can market. A valuation before the notice is served is the single most useful step you can take.
I have inherited a freehold interest and want to sell it at auction
Section 5B applies. The offer notice is served before the auction, and the tenants may elect to take the contract at the price achieved. Inherited reversions frequently come with incomplete title information and unknown ground rent provisions, so the position is worth establishing before the lot is entered.
I want to sell part of the freehold to a leaseholder or a third party
Whether the right of first refusal is triggered depends on what is being disposed of. A disposal of part, the grant of certain interests, or a transaction affecting only some of the building may or may not be caught, and the analysis is fact-specific. It is worth resolving before you agree terms rather than after.
I want to buy a ground rent investment, through an agent or at auction
On the purchase side the question is whether the seller has complied. Where they have not, the qualifying tenants can require you to sell the freehold to them on the same terms you paid — so the compliance position is a matter of due diligence, not paperwork. We advise buyers as well as sellers on ground rent portfolios and single reversions.
Process and timescales
| Stage | What happens | Statutory timing | Typical elapsed |
|---|---|---|---|
| Establish whether the right applies | Building qualification, the number of qualifying tenants, non-residential floor area and whether the transaction is an exempt disposal. | Before marketing | — |
| Valuation | Particularly important on a section 5A disposal, where the price in the notice binds you. | Before the notice | 1–3 weeks |
| Serve the section 5 offer notice | On the qualifying tenants. Under 5A it states the price and terms; under 5B it gives notice of the intended auction. | 5B: served in advance of the auction | — |
| Acceptance period | The tenants have a period stated in the notice, not less than two months, in which to accept the offer. | Not less than two months | Months 1–2 |
| Nomination of a purchaser | If they accept, a further period runs for them to nominate the person who will acquire the interest. | Further period following acceptance | Months 2–4 |
| Completion, or freedom to sell | If the tenants proceed, the disposal completes to the nominee. If they do not accept or fail to nominate in time, you may dispose to a third party, generally within twelve months and not on terms materially better than those offered. | Generally within twelve months | Months 3–12 |
When a valuation is necessary
Always on a section 5A disposal, because the price you state in the notice is the price you are held to. Usually worthwhile on a section 5B disposal to set a reserve and to judge whether the auction route is likely to produce a better result than a private sale. And on any inherited or long-held reversion, where ground rent provisions, development potential and title matters may not be fully understood.
Costs on a disposal
The right of first refusal has no statutory costs regime equivalent to that on a lease extension or collective claim. Your costs are dealt with commercially, as part of the transaction.
Section 5A — within the offer
Because the notice sets out the terms on which you propose to dispose, your costs can be built into the price or made an express term of the offer. A tenant who accepts accepts the terms as a whole. This is the cleanest way to deal with the point, and the reason terms should be settled before the notice is served rather than after.
Section 5B — within the auction contract
Where the disposal is by auction, the costs position is governed by the contract entered into at auction, and by the conditions of sale on which the lot is offered. The tenants who elect to take the contract take it as it stands, so what the contract provides for is what applies.
Where no notice is served
If the right of first refusal has been overlooked, the position is quite different and considerably worse. Non-compliance is a criminal offence, and the qualifying tenants may require the new owner to sell to them on the same terms. Costs then become the least of the difficulties.
Where it goes wrong
Failing to serve at all
The most serious error, and a criminal offence. It also leaves the buyer exposed, because the leaseholders can require them to sell on the same terms.
Serving on the wrong parties
The notice must go to the qualifying tenants. Errors in identifying them can invalidate the process entirely.
A price that cannot be justified
Set it too high and you waste months before you can market. Set it too low and you have committed to a figure below what the freehold is worth.
Missing an exemption
Some disposals do not trigger the right at all. Serving unnecessarily costs months of delay for nothing.
What we do
Advise whether the right applies
Before you market. This alone frequently saves months.
Value the freehold
A RICS Registered Valuer establishes a defensible price — the figure you are committing to if the tenants accept.
Prepare and serve the notices
Drafted by Arcadia Law, served correctly on the qualifying tenants.
Handle the response
Whether the tenants take up the right or the period expires and you proceed to the open market.
Where we act
myfreehold is based in London and acts for freeholders across all 32 London boroughs and the City of London, and regularly for clients with property interests throughout England and Wales.
Portfolio disposals frequently involve buildings in several locations at once. We can handle the notices across a portfolio rather than building by building.
A complete disposal service
We act for freeholders disposing of reversionary interests, from a single building to a portfolio of ground rents, and we can take the whole transaction rather than a part of it.
Valuation
Blakes values the reversion so you know what the interest is worth before you commit to a figure. On a section 5A disposal that valuation determines the price in your offer notice, and once served you are held to it. On a section 5B disposal it informs the reserve and tells you whether auction is likely to beat a private sale.
Statutory compliance
Arcadia Law establishes whether the right of first refusal applies, identifies the qualifying tenants, and prepares and serves the section 5 notices correctly and in the right order. Compliance is the part that most often goes wrong, and the part with criminal consequences.
Legal packs and title
We prepare the legal pack, deal with title, leases, ground rent schedules and replies to enquiries. On inherited or long-held reversions this frequently involves reconstructing a title picture that has not been looked at for years.
Auction partners
We work with established and reputable auctioneers who deal regularly in ground rents and reversionary interests. We can introduce you, prepare the lot properly and make sure the section 5B notices have been served before the catalogue closes.
Through to completion
Whether the tenants take up the right or the interest sells to a third party, Arcadia handles the conveyancing to completion. One instruction covers the valuation, the statutory compliance and the sale.
The purpose of taking it as one instruction is a clean disposal. A buyer’s solicitor will ask whether the right of first refusal has been complied with, and a transaction that cannot answer that question convincingly is one that stalls, is renegotiated, or falls away.
Common questions from freeholders
Do I have to offer the freehold to my leaseholders?
In most cases yes, where the building contains two or more flats held by qualifying tenants and the non-residential parts do not exceed the prescribed proportion. Certain disposals are exempt. The analysis should be done before you market, not after you have agreed terms.
What happens if I sell without serving a notice?
Non-compliance is a criminal offence punishable by fine. The qualifying tenants may also serve notices on the new owner requiring them to sell the freehold on the same terms as the original disposal, which unwinds the transaction commercially.
What is the difference between Section 5A and Section 5B?
Section 5A applies to a disposal by contract, where your notice states the price and terms. Section 5B applies to a disposal at auction, where the notice precedes the auction and the tenants may take the contract at the price achieved.
Can I sell at auction without offering it to the leaseholders?
No. The right of first refusal applies to auction disposals through the section 5B procedure, which requires the notice to be served in advance of the auction. Entering a lot without having done so creates a serious problem for both you and the buyer.
What price should I put in the offer notice?
A properly valued one. Too low and you are bound to sell below value; too high and the tenants decline, but you have lost months and cannot then market at a materially lower price to a third party. This is the single most common and most expensive mistake.
What if the leaseholders do not respond?
If the acceptance period expires without acceptance, or they accept but fail to nominate a purchaser in time, you are free to dispose to a third party — generally within twelve months and not on terms materially more favourable to the buyer than those offered to the tenants.
Are there disposals that do not trigger the right?
Yes. A number of transactions are exempt, including certain transfers between associated companies, gifts to family members, disposals under a will or intestacy, and some transfers by way of security. Whether a particular transaction falls within an exemption is fact-specific.
Can I recover my costs from the leaseholders?
There is no statutory entitlement as there is on a lease extension. Under section 5A costs can be reflected in the price or in the terms of the offer; under section 5B they are governed by the auction contract and conditions of sale.
I am buying a ground rent investment. What should I check?
Whether the seller has complied with the right of first refusal, and whether any earlier disposal in the title failed to. An unremedied breach travels with the property and can result in the tenants requiring you to sell to them on the terms you paid.
Does leasehold reform affect the right of first refusal?
The Leasehold and Freehold Reform Act 2024 is directed principally at enfranchisement valuation rather than the 1987 Act, and the right of first refusal is not among the provisions awaiting commencement. See our page on leasehold reform for the current position.
Planning a disposal?
Speak to us before you market. We will confirm whether the right of first refusal applies, what the freehold is worth, and what the notice needs to say.
Make an enquiry
Tell us about the building and what you intend to do, and we will advise on the process and the figure.
Valuation
Blakes Surveyors Ltd
Company no. 9184264
RICS regulated firm no. 752265
Legal
Arcadia Law Ltd
Company no. 10043933
SRA no. 629605
myfreehold is a joint enterprise between Blakes Surveyors Ltd, regulated by the Royal Institution of Chartered Surveyors, and Arcadia Law Ltd, authorised and regulated by the Solicitors Regulation Authority (SRA no. 629605). Both companies are registered in England and Wales.
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