What is Right of First Refusal?

What is the Right of First Refusal?

The Right of First Refusal is the legal right for leaseholders of flats to be offered the freehold before it can be sold to anyone else. It was created by the Landlord and Tenant Act 1987 after years of leaseholders watching their buildings traded between investors without any say in the outcome.

In practice, it works through a piece of paper called a Section 5 Notice. If your freeholder decides to sell the building, they must serve a Section 5 Notice on the qualifying leaseholders setting out the price and terms. The leaseholders then have a window, normally at least two months, to accept those terms and buy the building themselves. Only if they refuse, or fail to act in time, can the freeholder sell to the third-party buyer.

This is a different right from Collective Enfranchisement, and the two are often confused. The Right of First Refusal is reactive: it kicks in when the freeholder chooses to sell. Collective Enfranchisement is proactive: leaseholders force the sale on their own timing.

A quick note for anyone arriving from a search: in US property and corporate law, "right of first refusal" is a common contract clause across many industries. In UK residential leasehold, it means something very specific, and that's what this page covers.

A Simple Example

Imagine you live in a ten-flat purpose-built block. Your freeholder, a small property investor, has agreed to sell the freehold to a larger investment company for £180,000.

Before that sale can complete, the freeholder must serve a Section 5 Notice on the qualifying leaseholders. The notice tells you the price (£180,000), the terms, and the deadline by which you can accept.

If more than half of the qualifying leaseholders accept the offer within the acceptance period, the sale to the third party is paused. The leaseholders nominate a purchaser, usually a company they set up together, and the freehold transfers to them on the same terms the investor would have got. If fewer than half accept, the freeholder is free to complete the original sale.

In other words, you get the first chance to buy the building at the price your freeholder was happy to take from someone else.

Why It Matters to You

Most leaseholders will go their whole life without seeing a Section 5 Notice. When one lands, though, the consequences are immediate and the clock is short.

If the building changes hands and you weren't given the chance to buy, three things tend to follow:

• A new freeholder, usually a professional investor, takes over and looks to recover their purchase price through ground rent, consent fees and service charge mark-ups
• The terms you have grown used to (informal permissions, light-touch management) often tighten without warning
• The price you might have paid yourselves, jointly, was usually within reach for each flat

The Right of First Refusal is the only point in the building's life when leaseholders can buy the freehold at a price set by the open market, on terms the freeholder has already agreed in principle. Miss that window and the alternative becomes Collective Enfranchisement, which is more powerful but slower, more demanding, and uses a different valuation formula.

When the Right is Triggered

The right only applies to "relevant disposals" of "qualifying premises". Both terms have specific legal definitions, and getting them wrong is where most informal advice falls down.

Qualifying premises must meet three tests:

• The building must contain two or more flats held by qualifying leaseholders
• At least 50% of the flats in the building must be held by qualifying leaseholders
• No more than 50% of the internal floor area may be non-residential (excluding common parts)

Relevant disposals include the sale of the freehold and the grant of a head lease, plus several less common transfers. The Act also lists "excluded disposals" that fall outside the right. The most common are gifts to family members, transfers between associated companies, disposals to a mortgagee, and transfers under a court order.

Exempt landlords are also excluded. The main categories are resident landlords (who live in the building and meet specific conditions) and most public-sector and registered social landlords.

If any one of those tests fails, the Right of First Refusal does not apply, and the freeholder can sell freely.

Who is a Qualifying Tenant?

To qualify, a leaseholder must hold a long lease of a flat in the building. The detail matters:

1. The lease must originally have been granted for more than 21 years
2. Holding three or more flats in the same building disqualifies a leaseholder. This is an anti-investor rule, designed to stop landlords running blocks through nominee leaseholders
3. Business tenancies and service tenancies are excluded

A short-lease assured shorthold tenant is not a qualifying leaseholder. Nor is an investor with four buy-to-let flats in the same block. Most ordinary long leaseholders of flats are.

The Section 5 Notice and What Happens Next

The Section 5 Notice is the trigger. It must:

• Be served on at least 90% of qualifying leaseholders (or all of them, where there are fewer than ten)
• Specify the property being sold and the principal terms, including the price
• Set an acceptance period of not less than two months from service

The "requisite majority" is more than 50% of the qualifying leaseholders. They must accept the offer within that window. Note that this is a majority of qualifying leaseholders, not a majority of flats and not two-thirds. A simple majority is enough.

Once the requisite majority accepts, a further period (also normally two months) is allowed for the leaseholders to nominate a purchaser. This is usually a company specifically incorporated by the participating leaseholders, often called a "nominee purchaser company". Contracts are exchanged and completion follows on the terms set out in the original notice.

Throughout, the freeholder is barred from selling to anyone else on better terms. If the freeholder wants to drop the price after the notice has been refused, the law requires them to serve a fresh Section 5 Notice at the new lower price first.

There is more than one form of the Section 5 Notice. Sections 5A, 5B, 5C, 5D and 5E each cover a different type of disposal (sale by auction, grant of a head lease, contractual sale, and so on). The principle is the same; the procedural detail varies, and the differences matter to your solicitor.

What if the Freeholder Doesn't Comply?

This is where the Right of First Refusal has real teeth, and where leaseholders most often underestimate the leverage they hold.

Since the Housing Act 1996 amended the 1987 Act, selling the freehold without first offering it to the leaseholders is a criminal offence. The freeholder can be fined up to level 5 on the standard scale, which in the magistrates' court is now an unlimited fine.

The civil remedies are even more useful in practice:

• Section 11 Notice: the leaseholders can require the new owner to disclose the terms on which they bought. This pulls the contract into the open.
• Section 12 Notice: the leaseholders can require the new owner to sell the freehold to them, at the same price they paid for it. The transaction is effectively unwound and rebuilt with the leaseholders in the buyer's seat.

Strict time limits apply. The Section 11 Notice must usually be served within two months of the leaseholders becoming aware of the disposal. The Section 12 Notice follows from there. Acting quickly matters.

In our experience, freeholders who skip the Right of First Refusal usually do so because they don't realise it applies, not because they're deliberately ignoring the law. That doesn't help them once the leaseholders catch on.

Right of First Refusal vs Collective Enfranchisement

The two routes are easy to confuse, but the differences are significant.

The headline difference is the price. Under the Right of First Refusal, the price is whatever the freeholder agreed with their buyer. That price is not anchored to any statutory formula and not subject to tribunal review. It may be a bargain. It may include "hope value" for redevelopment, or a premium an investor was willing to pay for portfolio reasons. The leaseholders have no automatic right to challenge it, only to accept or refuse.

Should You Accept a Section 5 Notice?

Three questions to work through before answering:

• Is the price fair? Get an independent RICS valuation modelled on a statutory Collective Enfranchisement basis. If the Section 5 price is materially below it, that's a strong signal to accept.
• Can you reach the requisite majority? More than 50% of qualifying leaseholders must agree, fund their share, and act inside two months. In a disengaged block, that's a stretch.
• Do you have the financing organised? The window is tight. A nominee purchaser company needs to be set up, contracts exchanged, completion funded. Banks and bridging lenders both move slower than the statute does.

Where the price reflects a fair market freehold value and the block is engaged, accepting can be the cheapest route to share-of-freehold ownership. Where the price reflects redevelopment hope value, or the block is fragmented, individual statutory lease extensions usually serve each leaseholder better.

We would never recommend accepting a Section 5 Notice without an independent valuation first. The freeholder set that price for someone else; it carries no statutory protection for you.

Recent and Pending Reform

The 1987 Act is widely regarded as procedurally clunky. It is older than the more sophisticated 1993 Act that governs Collective Enfranchisement, and the procedure has been criticised by the Law Commission.

So far, the Leasehold and Freehold Reform Act 2024 has not substantively reformed the Right of First Refusal. The direction of travel across leasehold reform is towards greater leaseholder rights, and the Law Commission has recommended modernising the 1987 regime, but a date is not yet on the table.

What this means in practice: act on the rights you have today, rather than waiting for a reform that may be years away.

In Summary

The Right of First Refusal is genuinely useful when it's triggered. It gives leaseholders a real shot at buying the building at the same price a third-party investor was willing to pay, with criminal-level penalties on the freeholder if they try to skip the process.

But it is reactive. If you want to own the freehold and your freeholder isn't planning to sell, Collective Enfranchisement is the route. If you're a single leaseholder who wants security on your own lease, a statutory lease extension is the simpler tool.

If a Section 5 Notice has just landed on your doormat, treat it as urgent and get an independent view of the price before doing anything else. Our free lease report is a useful starting point for understanding your own lease, and a short consultation call will tell you whether the notice price is a bargain or a trap.