Section 5 of the Landlord and Tenant Act 1987
The legislation obliges the Landlord to offer Tenants of qualifying buildings, the right to acquire the freehold when the Landlord decides to sell.
1 Landlord Serves Notice
The Landlord must serve a Notice on the Tenants prior to the disposal allowing Tenants two months in which to accept the offer, although there is no obligation on either party to proceed at this stage.
2 Tenants Serve Counter Notice Accepting the Offer
If the Tenants agree to make an offer which is accepted by the Landlord the Tenants then have two months in which to nominate the purchaser (usually a company incorporated especially for that purpose owned by the participating Tenants) and then a further month in which to complete the purchase.
At least 51% of the Tenants must participate and accept the offer. This does not mean that those 51% need to provide all the funding as some can be provided by the other Tenants or from elsewhere.
3 Effect of Change of Freeholder
Once the purchase has taken place there is no change, in the terms of Tenant’s leases. The freehold will however, now be held by the company owned by the participating Tenants and they continue to pay ground rent to the Company as before (see 4 below).
4 Participating Tenants Right to Change Their Leases
The participating Tenants have the right to vary, extend or alter the Leases to suit themselves as well as the right to waive their ground rent providing the non-participating Tenants are not disadvantaged.
Participating Tenants can agree to extend the Leases of their own flats often to 999 years whilst those who do not participate continue to pay ground rent and pay for exercising a Lease extension.
The new company will be run by a Board of Directors who need not be all of the participating Tenants. The Directors are usually chosen by all the Tenants and are elected annually.
The advantages and disadvantages can be summarised as follows:-
Advantages
- Tenants can vary, extend or otherwise alter their Leases (with some exceptions) so that their Leases are saleable (should there be any defects) and in particular, are of a sufficient length to allow market sale.
- Tenants own an investment in a company which has an appreciating asset and therefore when selling a flat, it is often more attractive to a buyer to have an interest in the freehold and no ground rent
- For those flats that do may not already have a Residents Management Company or have acquired The Right To Manage.
a) Tenants may prefer a Landlord which has a financial interest and so can influence management style, as often there is dissatisfaction in the way that flats are managed by Landlords or their agents.
b) Tenants can arrange their own insurance of the block, often saving money and saving commission previously paid to the Landlord as well as saving money on management.
Disadvantages
- Where remaining unexpired Leases are greater than say 90 years, it could be argued that there is little to be achieved in acquiring an additional Lease term at that stage.
- The process is a complicated and expert advice and assistance may be required together with time devoted by those managing the process.
- For those flats that do may not already have a Residents Management Company or have acquired The Right To Manage.
a) Some Tenants find the managing the building difficult although they could appoint a managing agent to act of behalf of the Company. When Tenants leave it can sometimes be difficult to find another Tenant to act as a Director of the Company.
b) Tenants are able to exercise their Right To Manage qualifying buildings so buying the freehold is not necessary if the Tenants sole aim is to manage the property.
Please note that the above summary is provided in good faith but does not constitute legal advice. Tenants should always obtain professional advice from a specialist solicitor before taking any action in respect of Section 5 Notices.