PROPERTY CLINIC: I am a leasehold flat owner who is interested in buying the freehold, but have just received a Section 5 notice – what does it mean and what are my options?
- A section 5 notice is the landlord’s offer to sell the freehold
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Obtaining the freehold can be extremely valuable to leaseholders
- Leaseholders who buy the freehold can give themselves 999 year leases
- The lease extensions can include the removal of toxic ground rent clauses
I am a flat owner looking to buy the freehold – what is the section 5 notice I’ve been issued with and how does it work? VP
Have you been served a section 5 notice? A section 5 notice is the landlord’s offer to sell the freehold
Myra Butterworth, MailOnline’s Property expert replies: A section 5 notice is the landlord’s offer to sell the freehold.
The right to buy the freehold can be extremely valuable for leaseholders.
Leaseholders who buy the freehold can give themselves 999 year leases – removing clauses such as uncapped ground rent increases and high permission charges for things like keeping pets.
Liam Spender, of law firm Velitor Law, replies: The Section 5 is a Right of First Refusal that requires the freeholder to offer the freehold to leaseholders at the same price he could potentially offer to a third party.
Qualifying tenants – who are typically leaseholders but the term includes others – have the right of first refusal to buy their freehold.
That is if they live in the right type of building and if the freeholder wants to sell the freehold. The right is set out in the Landlord and Tenant Act 1987.
The law also covers other types of transactions. It is a criminal offence for a freeholder to sell the freehold to a third party without first offering to sell it to the leaseholders at the same price. A sale in breach of the 1987 Act may also see the purchaser forced to sell the freehold to the leaseholders.
The right is extremely valuable. Leaseholders who buy the freehold can give themselves 999 year leases at no ground rent and without high permission fees for things like keeping pets.
They can also take over the management of the property. That means no longer having to rely on a third party landlord and having much greater control over their buildings. Unfortunately, the law is often legitimately avoided in relation to new build flats.
Two examples are developers agreeing forward sales while the building is still under construction, or developers including more than 50 per cent non-residential floor space in the building.
Leaseholders who buy the freehold can give themselves 999 year leases at no ground rent and without high permission fees for things like keeping pets
A section 5 notice is the landlord’s offer to sell the freehold. The landlord must serve the notice on 90 per cent of all leaseholders. If someone proves that the notice is not served on 90 per cent of all qualifying tenants, the landlord may still potentially be prosecuted.
The 1987 Act does not define what service means. The Interpretation Act 1978 says that a notice served by post is deemed served in the ordinary course of post. This is the second working day after posting a first class letter and the fourth working day after posting a second class letter.
Lease terms also often include notice clauses that say when a notice from the landlord is deemed served, typically two to three days after posting, which may assist where the landlord is the freeholder.
Once leaseholders are deemed served with the section 5 notice, they have to decide whether to accept the landlord’s offer. They have two months to decide.
While the price is mentioned in the Section 5 notice, that is the price at which the freeholder is looking to sell to a third party.
But the freeholder cannot sell the freehold to someone else until after the end of the two month period. More than 50 per cent of all leaseholders must accept the offer. If there are 10 leaseholders then at least six must agree.
The freeholder’s offer must be accepted within two months of service of the section 5 notice. Once more than 50 per cent of the total number of leaseholders agree there is no need to wait for further leaseholders to join.
The accepting leaseholders must accept by sending a section 6 notice containing all of the information set out in the 1987 Act.
The accepting leaseholders must also nominate a purchaser to buy the freehold. This can be done at the same time as sending the section 6 notice. It must also be done within two months of service of the section 5 notice.
Usually the nominated purchaser is a company in which all accepting leaseholders take a share. The accepting leaseholders provide money to the company to buy the freehold. All of the money must be in place by the time of exchange of contracts for the purchase.
Once the leaseholders have nominated a purchaser and sent their section 6 notice the freeholder cannot sell to anyone else, unless the nominated purchaser withdraws. The freeholder still has the right to decide not to proceed with the sale of the freehold at any point up to exchange of contracts.
The process can take months and disputes in this area can be lengthy and costly to resolve.
This area of law is highly complicated. Specialist advice is a must. It is advisable to have a specialist lawyer and chartered surveyor in place. This article is not a substitute for specific legal advice.
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