The Right of First Refusal: Part 2 - Auction Sale and Section 5B Notices

In the first instalment of this series we looked at what the right of first refusal is, when it applies and the process a landlord must follow when disposing of their interest in a building by way of a private sale.

But what happens if a landlord wishes to dispose of their interest at public auction? This instalment will focus on the process a landlord must follow in these circumstances and cover some frequently asked questions.

Section 5B Notices

As is the case with a private sale, if a landlord wishes to dispose of their interest in a building at public auction, they must first offer the qualifying leaseholders the right of first refusal. The notices served in this instance are Section 5B Notices.

The Section 5B Notices must be served on at least 90% of the Qualifying Tenants and must be served between four and six months before the date of the auction, in which the interest in the building is to be placed.

The Section 5B Notice will need to state:

• What is being disposed of (i.e. a freehold or leasehold interest)
• That the disposal is proposed to be made by public auction
• A statement that the notice constitutes an offer by the landlord, that can be accepted by the requisite majority of qualifying tenants of the constituent flats, for the contract, if any, entered into by the landlord at auction with the contracting purchaser (i.e. the successful bidder), to have effect as if it were a contract entered into between the landlord and the person(s) nominated by the qualifying tenants
• The date by which the leaseholders may accept the offer (being not less than two months from the date of service of the notice, but which must be at least two months before the date of the auction)
• The date by which the leaseholders must confirm who the nominated purchaser is (being a further period of 28 days, but which must be at least 28 days before the date of the auction).

The Purchase Price

Unlike a Section 5A Notice, a Section 5B Notice is not required to mention a price. There will also be no deposit to pay at this stage. This is because the price will not be known prior to the auction. Although a reserve price will likely be set by the auction house, there is no obligation for the landlord to disclose this information.

Serving an Acceptance Notice

In order to serve an acceptance notice, the requisite majority of Qualifying Tenants (more than 50%) must join together.

Once an acceptance notice has been served, the leaseholders must confirm to the landlord who the nominated purchaser is within the 28 day period as set out in the Section 5B Notice.

Unlike the private sale process which continues automatically, the nominated purchaser must send a notice to the landlord at least 28 days prior to the auction, confirming that the remaining stages of the process should apply, to ensure their acceptance notice is not deemed withdrawn.

The landlord’s interest will then be offered at the public auction. If there is a successful bid, the landlord must send a copy of the contract to the nominated purchaser within seven days of the auction. The leaseholders will then have a period of 28 days in which to accept the contract and step into the shoes of the successful bidder if they choose to do so. At this point, the leaseholders will also need to pay any required deposit.

Frequently Asked Questions

What happens if an acceptance notice is not served?

The landlord can still sell their interest at public auction within 12 months of the date of the Section 5B Notice. If there is a successful bid at the auction, the leaseholders will be notified of their new landlord once the purchase has completed.

When will the auction take place?

The Section 5B Notice may contain details of the auction (i.e. the date and time, place and the auctioneer). If this has not yet been decided but an acceptance notice has been served by the Qualifying Tenants, the landlord must serve another notice providing those details at least 28 days before the auction is due to take place.

Do leaseholders need to attend the auction or place bids?

There is no requirement for leaseholders to attend the auction but they are free to do so if they wish. If they do, it is advisable not to place any bids as this will increase the price they end up paying.

What happens if the landlord’s interest does not sell?

If there is no successful bid, the current landlord will remain the landlord until such time their interest in the building is sold.

If the landlord wishes to proceed with the sale after the unsuccessful auction, they would need to serve further Section 5 Notices and restart the process.

Look out for the final instalment in this series to follow soon:

Part 3: The Consequences of Failing to Comply with the Right of First Refusal