What is Right of First Refusal?

Being a landlord is appealing.

It provides a regular income and a way to build an investment portfolio.

However, there are some challenges to being a landlord.

For example, selling a property with tenants in it is not straightforward.

It can be complicated by many factors, including a right of first refusal.

Read on to find out what this is and how it works.

What is right of first refusal?

A right of first refusal (ROFR) is a written agreement between a landlord and a tenant.

It is usually a standalone agreement. It states that when the landlord lists a house for sale, they will give the tenant first refusal.

In other words, the tenant can buy the property before other buyers. They just need to match any offer the landlord receives.

Right of first refusals don’t only apply to tenants and landlords

Landlords can sign right of first refusal contracts with parties other than sitting tenants.

They can be signed by someone who does not own or live in the property in question.

For example, a property developer might negotiate a right of first refusal on adjacent land for future expansion.

What is a right of first offer?

A right of first offer (ROFO) is a different type of legal agreement.

Under this agreement, the holder has the right to make the first offer when a property is on the market.

The landlord will usually contact them and let them know. However, the landlord does not have to accept this offer. So, it is a slightly less strict agreement.

Can a right of first refusal be cancelled?

Your right of first refusal agreement should usually cover this. A clause can explain what might lead to its cancellation.

How quickly do tenants have to decide whether to offer on a property?

A tenant or leaseholder usually has two months to make an offer on a property. The written contract will specify the period in each case.

What happens if landlords break the right of first refusal?

If you are a landlord, your tenant will likely take legal action against you. You will then be liable to criminal prosecution and a fine.

This only applies if you have signed a legally binding contract.

Typical criteria for right of first refusal

For right of first refusal agreements to be valid, tenants and landlords must meet certain criteria.

For the landlord’s property to qualify:

The building must contain at least two flats
Qualifying leaseholders must own more than half of the flats
No more than 50% of the building must be in non-residential use.

Tenant requirements include:

The leases granted must be for 21 years or more (long leases)
The leaseholder must not own three or more flats
They must not have a short-hold or assured tenancy.

Does right of first refusal exist without a written agreement?

In most cases, no. A right of first refusal is a written agreement.

Without the signatures of everyone involved, a verbal agreement rarely holds up in court.

Why take out a right of first refusal?

Someone might want a right of first refusal because they think the property will increase in value. Or they might like the option of living in it in the future.

They might not have the funds to buy it immediately. But they will still be interested later on.

Do I have to offer my council house to the council?

There are specific rules surrounding the sale of council houses in the UK.

For example, property purchased through the right to buy (RTB) scheme being sold within 10 years of being bought must be offered to the council first (or another social landlord).

Sellers of RTB homes sold within 5 years of being bought must repay some or all of the original RTB discount.