Leasehold Advice
Right of First Refusal: Section 5 Notices Explained
The Right of First Refusal is the right of the leaseholders in a block to be offered the freehold first, before the freeholder can sell it elsewhere. This guide covers how it works, what Section 5 notices say and what it means when you sell.
The Quick Take
The Right of First Refusal is the right of the leaseholders in a qualifying block of flats to be offered the freehold first, before the freeholder can sell it to anyone else. It is the law's way of giving leaseholders a fair shot at owning their building, at the moment the freeholder has already decided to sell.
The mechanism is a formal offer called a Section 5 notice, named after the section of the Landlord and Tenant Act 1987 that creates it. The freeholder has to put the proposed deal in writing, send it to the qualifying leaseholders and give them at least two months to respond. If more than half of them accept, the freeholder has to sell to a company nominated by the leaseholders, on those terms. If they do not accept, the freeholder is free to sell elsewhere, but only on terms no better for the buyer than the terms offered to the leaseholders.
This guide describes the law in England and Wales. The Right of First Refusal does not apply in Scotland or Northern Ireland, which have different leasehold and tenure systems.
What It Is and How It Works
The Right of First Refusal is reactive, not proactive: it only kicks in when the freeholder decides to sell. While the freeholder is happy to stay put, the right sits dormant. The moment the freeholder lines up a buyer for the freehold (or for certain other dealings with the building), the law steps in and says the leaseholders have to be offered the deal first.
The starting point: the freeholder wants to sell
A freeholder might want to sell for any number of reasons. The block has stopped being a useful investment, an estate is being broken up after a death, a buyer has approached out of the blue, or the freeholder simply wants the cash. Whatever the reason, the rule is the same: before the deal goes through, the qualifying leaseholders have to be offered the same terms.
The Section 5 notice
The offer takes the form of a Section 5 notice. It is a written document served on every qualifying leaseholder, setting out the building, the interest being sold, the proposed price and any other terms. It must also tell the leaseholders how long they have to accept (at least two months) and what they need to do to accept it. A notice that does not contain those things is not a valid Section 5 notice, and the freeholder cannot rely on it.
The collective response
The leaseholders are then in the same position as a buyer with a deadline. They can accept the offer, but only collectively: the law requires more than half of the qualifying leaseholders to agree in writing. Below that threshold, the right falls away and the freeholder can sell elsewhere. Above it, the leaseholders nominate a person, almost always a company set up between them, to take the freehold on the offered terms. From the freeholder's perspective, they then have a buyer. From the leaseholders' perspective, they have a route to share of freehold without going through a formal enfranchisement valuation and the legal costs that come with it. The trade-off is that the Section 5 price is set by the freeholder, not by statutory formula, so it can be higher or lower than an enfranchisement valuation would have produced.
Does Your Building Qualify
The qualifying tests sit in the Landlord and Tenant Act 1987. They look at the building, the leaseholders and the disposal itself.
The building
The building has to contain at least two flats held by qualifying tenants, and the residential part has to be the dominant use. Any non-residential element, such as shops or offices, must not be more than 50 percent of the internal floor area. A small block above a single shop is the classic example of a building that qualifies. A handful of buildings are outside the scheme altogether, including some resident-landlord conversions of four flats or fewer.
The leaseholders
Qualifying leaseholders must hold more than half the flats in the building. A qualifying leaseholder is broadly any long-lease leaseholder in the building. The legal test in the 1987 Act is defined by exclusion: anyone on a protected shorthold, a business tenancy, a service tenancy or an assured tenancy does not count. In practice almost all the long-lease owners are qualifying leaseholders. A leaseholder who holds three or more flats in the building is also excluded, because the protection is aimed at residents, not at investors who already own a slice of the block.
The disposal
The right covers most sales of the freehold, as well as some other dealings with the building such as the grant of a long lease over the common parts to an outside investor. A list of exempt disposals does not trigger the right, including gifts to close family members, transfers between trustees, transfers required by a court order, mortgage repossessions and certain charity disposals. If you are a leaseholder and a notice has arrived, you can assume the disposal triggers the right. If it does not, the freeholder's solicitor can explain why.
The Notice, the Deadline and the Response
When a Section 5 notice arrives, there is a sequence of steps and a tight clock. Knowing the shape of it helps the leaseholders make a decision without losing time arguing about the procedure.
What the notice has to say
A valid Section 5 notice has to identify the building, the interest being disposed of and the proposed terms, especially the price. It has to say who the offer is being made to and how acceptance works. It must set a date by which acceptance has to reach the freeholder, which cannot be less than two months from the date of the notice. The notice should also explain the further steps for nominating a purchaser after acceptance.
The two-month acceptance window
Two months sounds like a long time. In practice, with a block of strangers, it is short. The leaseholders have to read the notice, get advice if they need it, hold a meeting (or several) and reach a majority decision, all without the benefit of an existing residents' association in many cases. The simplest blocks to organise are the ones where the neighbours already know each other and someone is willing to take a lead. The hardest are the ones where the leases are mostly rented out and the leaseholders are absentee landlords scattered across the country.
Acceptance and nominating a purchaser
If more than half of the qualifying leaseholders accept in writing, the acceptance is binding on the freeholder. After acceptance, there is a further period (usually around two months) in which the leaseholders nominate a person to take the freehold. That person is almost always a private limited company set up between the participating leaseholders, with each leaseholder taking a share. The freehold is then transferred to that company on the terms set out in the original notice.
If the leaseholders do not accept
If the leaseholders do not respond, or fewer than half want to accept, the freeholder is free to sell on the open market for the next twelve months. The freedom comes with one strict limit: the open-market sale has to be on terms no more favourable to the buyer than the terms offered to the leaseholders. If the freeholder later wants to drop the price, or change the deal in a way that helps the buyer, the right of first refusal is triggered again and a fresh Section 5 notice has to be served before that sale can complete.
If the Freeholder Ignores the Law
Some freeholders comply with the Right of First Refusal. Some try to slip a sale through without it. The law allows for both possibilities and gives the leaseholders a route back when the rules have been broken.
It is a criminal offence
The Housing Act 1996 amended the 1987 Act so that disposing of a qualifying interest without first serving the required notice and complying with the procedure is a criminal offence. A landlord who breaks the rule can be prosecuted and fined. In practice prosecutions are rare; the more useful route, for the leaseholders, is the civil one.
The buyback right
If the freeholder has sold without serving a notice, the qualifying leaseholders can require the new owner to sell the freehold on to them at the same price the new owner paid. This is done with formal notices: first a notice asking for information about the disposal, then a purchase notice requiring the new owner to transfer the freehold to a nominated purchaser. The end result is the same as if the original Section 5 procedure had been followed, with the leaseholders ending up with share of freehold.
The time limit
The time to claim is short. The clock effectively starts when the leaseholders are formally notified of the new landlord, which is something a new freeholder is separately obliged to do, and the buyback notices have to be served within a tight window (broadly six months). Outside that window the right falls away and the new freeholder gets to keep the building. If a building has changed hands and no Section 5 notice was served, the practical priority is to take advice quickly.
The Right of First Refusal and Selling Your Flat
For someone selling a flat, the Right of First Refusal usually appears in one of three forms: a completed acceptance giving share of freehold, an active Section 5 process running in the background, or a notice that has just arrived and is yet to be acted on.
Share of freehold is a selling point
Where the leaseholders accepted a Section 5 notice and bought the freehold between them, the flat now comes with share of freehold. It is the same end result as a completed collective enfranchisement: a long lease, no outside freeholder and a share in the company that owns the building. Buyers and lenders tend to view this favourably, and it is genuinely a feature of the flat worth pointing out in the marketing.
Selling during an active process
If a Section 5 process is live (the notice has been served and acceptance is still being decided), a sale can still go through but the situation needs to be disclosed and explained to the buyer. The same applies to a live buyback claim against a new freeholder. Buyers tend to be cautious about uncertainty over who owns the freehold of the building, even though it does not affect the flat itself. Tell your conveyancer early so they can put the explanation in front of the buyer's side rather than letting it surface late.
If you cannot wait it out
The Right of First Refusal is a useful right, but it is collective and tied to the freeholder's timing. If you need to sell now and the building is mid-process, or if your problem is something a Right of First Refusal cannot fix (a short lease, a difficult freeholder who is not selling), a sale to a cash buyer is the route least affected by those things. A cash buyer can take a view on the flat as it stands, including any open Section 5 questions, where a typical residential buyer with a mortgage often cannot.
Relevant Legislation
Two pieces of law sit behind the Right of First Refusal, and a third has not yet touched it.
The Landlord and Tenant Act 1987, Part I is the source of the right. It defines the qualifying buildings, the qualifying leaseholders and the disposals that trigger the right. It sets out the Section 5 notice procedure, the two-month acceptance window, the majority needed and the steps for nominating a purchaser. It is the Act that gives the rules their shape.
The Housing Act 1996 amended the 1987 Act in several important ways. It made non-compliance with the procedure a criminal offence, tidied up the exempt disposals list and introduced the buyback procedure for cases where a freeholder has sold without serving a notice. Most of what makes the right enforceable in practice comes from the 1996 amendments rather than the original 1987 text.
The Leasehold and Freehold Reform Act 2024 is the wider reform Act, but its main provisions are about lease extensions, collective enfranchisement and service charges rather than Part I of the 1987 Act. As things stand, the Right of First Refusal is broadly unchanged by the 2024 Act. The picture may change in future as the legislative programme continues; the position today is that a leaseholder responding to a Section 5 notice works with the rules as they have stood since the 1996 amendments came into force.
Further Reading
Two related guides sit alongside this one: the proactive route to buying the freehold, and the management-only alternative.
Frequently Asked Questions
The Right of First Refusal is the statutory right of the leaseholders in a qualifying block of flats to be offered the freehold of their building first, before the freeholder can sell it on the open market. The freeholder has to set out the proposed terms in a formal notice, give the leaseholders time to think about it and only sell elsewhere if the offer is not accepted. The right comes from Part I of the Landlord and Tenant Act 1987 and applies to most ordinary leasehold blocks in England and Wales. It is not the same as collective enfranchisement, which is a sale the leaseholders can compel, at a price set by statutory valuation. The Right of First Refusal is a chance to buy on the terms the freeholder is already willing to take, when the freeholder has chosen to sell.
A Section 5 notice is the formal offer the freeholder has to serve on the qualifying leaseholders before disposing of the freehold of a building covered by the Right of First Refusal. The name comes from Section 5 of the Landlord and Tenant Act 1987. The notice sets out the building, the interest being sold, the price and any other proposed terms, and tells the leaseholders that if more than half of them want to accept, they can buy on those same terms. The notice must give at least two months for the leaseholders to respond.
Most ordinary leasehold blocks qualify, but there are a few tests. The building has to contain at least two flats held by qualifying tenants, and qualifying tenants must hold more than half the flats. Qualifying tenants are broadly the long-lease leaseholders in the building, defined in the 1987 Act by exclusion: anyone on a protected shorthold, business, service or assured tenancy does not count, so the test almost always catches all the long-lease owners. Any non-residential part, such as shops on the ground floor, must not be more than 50 percent of the internal floor area. A few buildings are excluded, including some resident-landlord conversions of four flats or fewer. The qualifying tests are similar to those for collective enfranchisement but a little less strict on the participation side.
Most sales of the freehold trigger the Right of First Refusal, as do some other dealings with the building, such as granting a long lease over the whole or the common parts to an outside investor. A list of exempt disposals does not trigger the right: gifts to close family, transfers between trustees, transfers in compliance with a court order, mortgage repossessions, certain charity disposals and a few others. If you are a leaseholder and a notice has arrived, the safest assumption is that the disposal triggers the right and is worth taking seriously; a solicitor can confirm it. If you are a leaseholder and the building has changed hands without a notice, that is when to check whether the disposal should have triggered one.
At least two months from the date of the notice. That is the minimum the law requires, and a longer period is sometimes specified. The two months is short for what the leaseholders have to do: read the notice, decide whether to accept the terms, get more than half of the qualifying leaseholders to agree, and put their acceptance in writing. After acceptance there is then a further period to nominate the purchaser, usually a company the leaseholders set up to take the freehold. The whole sequence is tight, so the right works best for blocks that are already organised and have a residents' association or a working group of neighbours.
The leaseholders nominate a person, almost always a company they set up between them, to take the freehold on the proposed terms. The freeholder is then bound to sell to that nominated purchaser at the price set out in the original Section 5 notice. The deal is then completed in much the same way as any other freehold purchase. The leaseholders end up owning the freehold through their company, which is the same position as a completed collective enfranchisement, often described as share of freehold.
The freeholder is then free to sell the freehold on the open market for the next twelve months, but only on terms no more favourable to the buyer than the terms offered to the leaseholders. If the freeholder later wants to change the price, or finds a buyer willing to pay less, the right of first refusal is triggered again and a fresh Section 5 notice has to be served before that lower-priced sale can proceed.
Yes. The Housing Act 1996 amended the 1987 Act and made it a criminal offence for a landlord to dispose of a qualifying interest without first serving the required notice and complying with the right of first refusal procedure. A landlord who breaks the law can be prosecuted and fined. In practice, prosecutions are rare; the more common remedy is the civil one, which is the leaseholders' right to require the new owner to sell the building on to them at the price the new owner paid.
The leaseholders can require the new owner to sell the freehold to them at the same price the new owner paid, by serving formal notices on the new owner. The first notice asks for information about the disposal; the second is a purchase notice requiring the new owner to transfer the freehold. The time limit is tight, broadly six months from the point at which the leaseholders become aware of the disposal. The clock effectively starts when the leaseholders are formally notified of the new landlord, which is something a freeholder is separately required to do. If your building has changed hands without a Section 5 notice, the practical priority is to take advice quickly, because the time limit is real.
Yes, but a buyer's solicitor will want to know about it. If a Section 5 notice has been served on the building and the leaseholders are still deciding, a buyer is stepping into a flat where the ownership of the building above is uncertain. The same is true if a buyback claim against a new freeholder is under way. None of these things stops a sale, but they need to be disclosed and explained. Where the building has already enfranchised through a Right of First Refusal acceptance and your flat now comes with share of freehold, that is a positive feature of the sale, not a complication.
The Right of First Refusal applies when the freeholder has chosen to sell: it gives the leaseholders the first chance to buy, on the terms the freeholder is already willing to accept. Collective enfranchisement, by contrast, is initiated by the leaseholders themselves, can be exercised whether the freeholder wants to sell or not, and the price is set by valuation rules rather than by what the freeholder has decided to ask. The Right of First Refusal can be quicker and cheaper when the moment is right, but it is reactive: it depends on the freeholder triggering it. Collective enfranchisement is proactive but slower and more expensive. Some blocks have ended up with share of freehold through a Section 5 acceptance, without ever needing to go through collective enfranchisement.