How to sell the freehold of your property using a Section 5 Notice
Selling the freehold of your property is not as simple as selling your residential property due to the fact you have to consider the leaseholders living there. In most cases, they will have right of first refusal and you will likely need to serve a Section 5 Notice as per Section 5 of the Landlord and Tenant Act 1987 – Our London conveyancing lawyers explain this process here in our blog.
What is the freehold interest?
The freehold interest refers to ownership of both the property itself and the land it stands on. In contrast, those who own a leasehold interest in a property only own the lease to a property, which usually allows them to live or operate there as per the terms of the lease.
Who owns the freehold of a block of flats?
The freeholder will be the owner of the building, whether they’re an individual landlord or a property development company. The name of the freeholder will usually be provided in a tenants’ lease. If it is not, however, tenants can find out who their property’s freeholder is by getting in touch with the land registry.
How do you value freehold interest?
You can instruct a surveyor to appraise the freehold interest of your property.
Do I need to offer Right of First Refusal to my Lessees?
Yes, if they are eligible. Put simply, Right of First Refusal means you must first offer to sell the freehold to them if they qualify before you can offer it to anyone else. Failing to provide Right of First Refusal to eligible tenants is illegal, so you need to make sure you’ve checked to see if they qualify. Generally speaking, your lessees will be eligible if at least two-thirds of all lessees qualify, and if no more than 25% of the property is being used for commercial purposes. Qualifying lessees are those who had a minimum of 21 years on their lease when it was originally granted. Lessees who own three or more of the flats in the property do not qualify. If they are eligible, you will need to serve your leaseholders a Section 5A Notice. If your tenants decline your offer or fail to respond in time, you may then sell your freehold interest to anyone you wish – however, you cannot sell for a lower price than that which was offered to your leaseholders for 12 months after their refusal. You may also need to offer right of first refusal even if you only intend to sell part of your freehold, such as the airspace above your property. Find out more about selling, purchasing and extending properties into airspace in our blog post here.
Can Right of First Refusal be waived?
There are a few exemptions which mean you don’t have to offer right of first refusal to your leaseholders, including:
- When the property contains only one flat
- When the freeholder is not the immediate landlord who collects rent and will possess the property when the leases expire.
- The building is not a purpose-built block of flats, that is, it must be a property, a house for example, which has been converted into flats since its original construction and the landlord genuinely lives in the building as his only or principal residence and has done so for more than 12 months.
What should a Section 5A Notice Contain?
A Section 5A notice should contain:
- The freehold interest being sold
- The terms of the sale
- The non-negotiable price at which the property is to be sold
- A timeframe in which the leaseholders much respond (note that this must be at least two months from the date the Notice is served)
- A timeframe in which the leaseholders should nominate a purchaser to complete the transaction (note that this must also be a further two months)
How do I sell my freehold?
You will need to serve all eligible lessees a Section 5 Notice informing them of your intention to sell the flat and your acknowledgement of their right of first refusal. The Section 5 Notice should include the terms of the sale and a period of time in which the lessees can respond. The response time should be no shorter than two months from the date the Section 5 Notice was served to all lessees.
If the leaseholders accept
Once the Section 5 Notice has been served, each qualifying flat should write to you within the allotted timeframe if they would like to accept your offer. If 50% of the flats accept the offer, they will then have 2 months to nominate someone to handle the transaction. You can then send this nominee the contract of sale, who will then have 2 months to return the signed contract and pay the deposit. Following this, you should exchange contracts within 7 days. If you fail to exchange or send contracts within the time limits given, you will be considered to have withdrawn and cannot sell your freehold interest for another 12 months. On the other hand, if your leaseholders do not return or exchange the contracts in time, you will be then free to sell your freehold interest on the open market.
If the leaseholders do not accept
If your tenants do not accept the offer or fail to respond within the given period, you may then sell the freehold on the open market – however, you cannot offer the freehold to anyone at a lower price or on different terms than those which you offered to the leaseholders for at least 12 months after their refusal.
Can I sell my freehold at an auction?
Yes, although the process differs significantly. Instead of a Section 5A Notice, you must instead serve a Section 5B Notice 4 to 6 months before the date the auction will take place. This notice does not need to state a price or deposit, but should state:
- The freehold interest being sold
- That the freehold interest is to be sold at public auction
- The timeframe in which the tenants have to accept the opportunity to bid (note that this should be at least two months before the auction date)
- That qualifying tenants should nominate a purchaser within at least 28 days before the auction date.
- The date of the auction – while this isn’t legally required, it is wise to give the tenants as much notice as possible. If you choose not to include this in the section 5B notice, you should send another notice to the tenants listing the date, time and place of the auction at least 28 days in advance.
If your tenants refuse your offer, you can sell at auction within 12 months but only at a public auction. Selling at a private auction without serving a new Section 5B Notice is illegal.
Can you be forced to sell your freehold?
Qualifying leaseholders under the Leasehold Reform and Urban Development Act 1993 may be able to force you to sell your freehold interest to them at any time under a procedure called Collective Enfranchisement. In order to be eligible:
- Qualifying tenants must have had a minimum of 21 years on their original lease when it was granted
- At least two-thirds of the property’s tenants must qualify
- A majority of over 50% of the flats must agree to purchase (in properties with only two flats, both must agree)
Unfortunately, if these conditions are met, there isn’t much you can do to stop them. The price at which you can sell your freehold interest can be negotiated with your lessees, though you may find it useful to have a qualified surveyor appraise the value of the freehold. Be aware that if you refuse to negotiate with your lessees or intentionally set the price unreasonably high to deter them, they could apply for a first-tier tribunal at which the cost of the freehold will be decided for you.
How long does it take to sell my freehold interest?
Due to the variable parts of the process, it’s hard to give an accurate timescale. For example, if your leaseholders decide to purchase the freehold (and are efficient in ensuring the paperwork is completed) then the process can take as little as three months. However, few things in life are ever simple. Additionally, if delays occur on your end and you pass the relevant deadline, you may not be able to sell your property for 12 months.
How Starck Uberoi Solicitors can help
Our conveyancing solicitors have received Law Society Accreditation under the Conveyancing Quality Scheme (CQS) for their effective and fast conveyancing service. We can assist with a wide range of freehold conveyancing matters and are well known for conducting transactions efficiently and effectively. To book an appointment, please call 020 8840 6640 or email solicitor@starckuberoi.co.uk.
Our solicitors on Brentford High Street, are just a short walk away from Brentford railway station. Our Belgravia solicitors are located Just a 5 minute walk from Victoria tube station in Grosvenor Gardens. Our solicitors located in Ealing London are only a short walk from both Ealing Broadway and South Ealing and our solicitors in Richmond Surrey have the pleasure of overlooking the picturesque Richmond Green. Finally our solicitors in Canterbury Kent are located in the within the UNESCO World Heritage Site of Canterbury Cathedral.
Our partner, Raminder Uberoi, can also provide a Notary Public service at any of our London offices.
