Serving Section 5 Notices.

Firstly, what exactly is a Section 5 Notice?

Qualifying tenants (leaseholders) are entitled to a Section 5 Notice as their Right of First Refusal offer to purchase the freehold of a building. It is relevant when freeholders desire to dispose of their freehold interest through private sale. The term ‘private sale’ can mean selling to a freehold buyer specialist or a private individual through a legal contract.

Whenever prepared and served, all Section 5 Notices must be issued in accordance with the Landlord and Tenant Act 1987. Failing to comply can result in a criminal conviction and a fine, as strict rules must be followed. It is recommended that if you are in any way uncertain of the process that professional advice should be taken.

The law prohibits the sale of the freehold under different terms within a 12 month period following the serving of a Section 5 Notice to a tenant / leaseholder. Should the leaseholder not accept the Right of First Refusal offer the freehold cannot then be sold at a lesser price to a different third party. The offer cannot be contested and it is non-negotiable.

Secondly, what is contained in a Section 5 Notice?

As a guide, you will find the following in a Section 5 Notice:

• The contact details of the freeholder.
• The address of the freehold sale.
• The acceptance date that the offer must be actioned.
• Details of any deposit should one need to be paid.
• The offered purchase price of the freehold.

It is critically important that any Section 5 Notice should be served in the exact format as dictated by law in order to protect the freeholder and the leaseholder. Written confirmation that the notice represents an offer made by the landlord to enter into a contract must also be included.

Qualifying for Right of First Refusal.

The requirement for a Section 5 Notice to be served is only when the property for sale  plus the leaseholder / tenant qualifies for the Right of First Refusal.

In order for the freehold property to qualify there are a number of requirements that should be met:

1. The property must contain two flats as a minimum.
2. Qualifying tenants must own more than 50% of the flats in the property.
3. The building must have a maximum of 50% that is in non-residential use.

In order for the leaseholder to qualify under Section 5 there are other requirements that should be met:

1. The lease term must be a 21 year minimum.
2. The leaseholder must not have a ‘short-hold’ or ‘assured’ tenancy.
3. The leaseholder must not own three or more of the flats.

The Section 5 Notice should only be served if all of these requirements have been met.

There is a legal rule stating that Section 5 Notices must be served on at least 90% of the qualifying leaseholders. This exists in case some leaseholders cannot be traced.

Is there an expiry date for a Section 5 Notice?

There is a two month time frame from the date on the Section 5 Notice for a leaseholder to accept the Right of First Refusal offer. In order for acceptance to take place, more than 50% of leaseholders must serve a notice of acceptance on the freeholder.

Should notice be served beyond the two month time frame the freeholder is entitled to sell the freehold on the open market. This sale must be on the same terms as stated in the Section 5 Notice.