Guidance for leaseholders and freeholders on freehold sales under the Landlord and Tenant Act 1987.  

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I have received a section 5 offer notice, what next?

If you’ve recently received a Section 5 notice from your freeholder, you may be wondering what it means and what steps you need to take next. This notice is a formal offer from your landlord, signalling their intention to sell their interest in your building, usually for a set price. It may also include a requirement to pay your freeholders legal costs

It also provides leaseholders in the building with the right of first refusal, a collective legal right to purchase the landlord’s interest before it is offered to an external buyer. The leaseholders must be offered the same terms i.e. price as the third party. 

In this guide, we’ll break down everything you need to know about Section 5 notices, qualifying tenants, and the steps to exercise your right of first refusal, ensuring you fully understand the process and potential benefits. 

What Does Receiving a Section 5 Notice Mean?  

When a landlord decides to sell their interest in a building, certain legal obligations come into play if the property meets specific criteria. These obligations are set out in the Landlord and Tenant Act 1987 and require landlords to give qualifying tenants the opportunity to purchase the interest being sold.  

A Section 5 notice is the legal document through which the landlord informs the tenants of their intention to sell and offers them the chance to collectively purchase the property as a group. This notice outlines:  

- The terms of the proposed sale (e.g., purchase price, deposit required and whether a contribution to landlords costs is required).  

- The interest being sold (e.g., the freehold or part of the building).  

- Deadlines for responding and the process for accepting the offer.  

The notice sets a deadline of at least two months for the qualifying tenants to decide whether to accept the offer collectively. If the offer is not accepted, the landlord is free to sell the property to another party under the same terms outlined in the notice, for a period of 12 months after the acceptance date.

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What Is the Right of First Refusal?  

This is a collective right granted to tenants in certain buildings, giving them the first opportunity to buy their landlord’s interest before it is sold to an external party such as a ground rent investor or property developer.

This right can only be exercised collectively by qualifying tenants—individual acceptance of the offer is not permitted and you will see that it is crucial to form a group of interested leaseholders as early as possible. To exercise the right, a group of over half of the flat owners must agree to proceed with the purchase. and be prepared to finance their share.  

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What Is the Landlord Offering?  

The Section 5 notice should clearly describe what the landlord intends to sell. This is more often than not the freehold title to the entire building and grounds, though it any be a sale of the any part of the freehold reversion i.e. a store room or basement.

Understanding exactly what is being offered is crucial for determining whether to proceed. If you’re unsure, seek legal advice to clarify the terms.  

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Am I a Qualifying Tenant?  

To exercise the right of first refusal, you must be a qualifying tenant. The basic criteria include:  

- The building must contain at least two flats held by qualifying tenants.  

- In buildings with more than two flats, over 50% of the flats must be held by qualifying tenants.  

A **qualifying tenant** is generally a leaseholder of a flat in the building, but there are exceptions. If you jointly own your flat with another person, you count as one qualifying tenant.  

If you’ve received a Section 5 notice, the landlord has identified you as a qualifying tenant, but it’s essential to confirm this status with legal advice.  

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Who Can Accept the Offer?  

The landlord’s offer is made to all qualifying tenants in the building as a group. To accept the offer:  

- A majority of the qualifying tenants must agree to proceed.  

- The offer cannot be accepted by a single tenant acting alone (unless the acceptance date passes, in which case the freeholder can then choose to sell to a single leaseholder if they wish).  

The requisite majority is calculated based on the number of qualifying tenants. For example:  

- In a building with two qualifying tenants, both must agree.  

- In a building with 10 flats at least 6 must agree.  

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What Are the Benefits of Accepting the Offer?  

The primary benefit of accepting a Section 5 offer is gaining control over the building’s management without having to follow the collective enfranchisement process, which is more costly and uncertain. As owners, the participating tenants can:  

- Run and manage the building collectively.  

- Decide on maintenance schedules, major works and contribution levels to service charge reserve funds

- Grant themselves 999-year lease extensions 

However, managing a building comes with responsibilities. These include complying with legal obligations, complying with the landlords lease covenants, maintaining the property to avoid health and safety risks, and handling disputes among tenants. You may need to appoint professional property managers to assist with these tasks.  

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How Much Will It Cost?  

The Section 5A notice will specify the proposed purchase price and any deposit required.  The notice may specify that the landlords costs are also payable, and should confirm the amount.

These terms are non-negotiable and offers under this process are very much 'take it or leave it'. Additional costs include:  

- Legal fees for the purchase process.  

- Valuation fees for an independent property assessment (optional but recommended, to ensure the group is not paying over the odds).  

Participants should enter into a participation agreement to document how costs will be divided among them and on what basis a participant can withdraw without penalty. Legal advice is essential in drafting this agreement and your solicitor will likely have a form of agreement that covers most scenarios, based on their experience of handling similar cases. 

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How Do Flat Owners Accept the Offer?  

To accept the offer, the flat owners must act collectively and meet the deadlines specified in the Section 5 notice:  

1. Form a requisite majority by identifying enough qualifying tenants willing to proceed.  

2. Instruct a solicitor to act on behalf of the group and serve a formal section 6 acceptance notice before the deadline. 

Once the acceptance notice is served, participants must nominate a purchaser (usually a company with specific article of association) to buy the landlord’s interest. 

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What Happens After the Acceptance Notice?  

After the acceptance notice, participants must:  

- Nominate a purchaser. This can be an individual, a group of tenants, or a company formed for the purpose. Setting up a company has benefits, such as simplifying future transfers of ownership.  

- Receive and sign the draft contract. The landlord provides the contract, and participants have two months to sign and pay the deposit.  

- Complete the purchase. Once the contract is signed, participants are legally bound to proceed, with the final payment due on the completion date.  

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What If a Qualifying Tenant Cannot Be Contacted?  

Reaching all qualifying tenants can be challenging, especially if some live overseas or do not occupy their flats. Methods to locate them include:  

- Checking contact details on the Land Registry.  

- Asking neighbours or managing agents to pass along your information.  

If you cannot contact enough qualifying tenants to form a requisite majority, the right of first refusal cannot be exercised.  There is unfortunately no legal right to request contact details of others, and a certain amount of leg work is required by a motivated group.

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What If the Participants Change Their Minds?  

Participants can withdraw from the purchase at any point before the contract is signed. However, this may incur legal fees, and remaining participants must renegotiate cost-sharing agreements. If the requisite majority is lost, the offer cannot proceed.  

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What If the Offer Is Not Accepted?  

If the qualifying tenants do not accept the offer, the landlord has 12 months to sell the interest to another buyer under the same terms. If no sale occurs within this period, a new Section 5A notice must be served before any future sale.  

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Next Steps  

If you’ve received a Section 5 notice and wish to proceed:  

1. Contact your neighbours to determine interest and form a requisite majority.  

2. Appoint a solicitor to represent the group and serve the acceptance notice.  

3. Act quickly to meet deadlines, complete ID checks for your solicitor, and avoid missing the opportunity.  

The right of first refusal is a powerful tool for tenants to take control of their building, but it requires coordination, legal advice, and careful planning. Working together with your neighbours and an experienced solicitor can help ensure a successful outcome. This process is usually cheaper and more straightforward than a collective enfranchisement claim, which typically involves a freeholder that is unwilling to sell.