The Right of First Refusal – How do you know if the price is a fair one?

The Right of First Refusal – How do you know if the price is a fair one?

We have seen a huge increase in the number of Right of First Refusals being issued and the big question asked by leaseholders is this: Is the price we’re being offered a good one?

As the number of Right of First Refusals (RFR) increases, so does the number that have a price tag far - far - higher than they should be.  Leaseholders, at the mercy of freeholders for years, are (unsurprisingly) often so keen to be rid of their freeholder once and for all that they run into the freeholder’s trap, paying more for their freehold than it is worth.
So how do you work out if the price offered is a good one or not?

What is an RFR and what does it look like?

If you own a leasehold flat and a freeholder decides to sell the freehold of your block, they are obliged - by law - to first offer it to the leaseholders. A failure to do so is a criminal offence. Although there are various options for disposal available to freeholders, the most common methods by far are via a Section 5a or Section 5b.

What are the differences between a Section 5a or Section 5b?

A S5a will contain a ‘take it or leave it’ figure. A S5b will inform you that your freeholder will be selling your freehold at a property auction.
Watch out for future articles that explain these two methods in more detail.

For now, let’s focus on the S5a fixed price offer. Historically, it was considered that if a freeholder issued a S5a Notice it meant they had a buyer lined up, usually another professional ground rent investor. If that were true, then there would be a considerable discount in the price being offered as, if there were no discount, a professional ground rent investor would not consider buying it.

The current threat of leasehold legislation changes, specifically relating to altering the way ground rents are valued, has got freeholders jumpy. Unprecedented numbers have decided to sell their freeholds before the Government makes any change to the valuation methods in such transactions. However, it has also seen freeholders alter the price they sell for and, consequently, many of the freeholds we have seen offered in this way are for a much higher price than they are actually worth!

The freeholders are trying it on!

What steps do you need to take?

Firstly, you need to get a qualified valuer to calculate how much it would cost each flat in the building to extend their lease today, taking into account their current lease length and ground rent.
You must then obtain a valuation for any other aspects of the building such as common parts, garages or revenue generating aspects of the building (telephone masts etc.). Adding this together will give you the retail value of the building.
You can now compare this price with the figure which has been offered to you and calculate the discount, if, indeed, there is one.

This first step is also essential in order to calculate the exact amount each leaseholder who wishes to participate will pay for their share of the freehold. Don’t fall into the freeholder’s trap – please ensure you are properly advised.

Knowledge is power. We've developed a number of videos to explain the Section 5 process, please visit s5solutions.co.uk to view.

The Leasehold Solutions Group has been helping leaseholders successfully buy their freeholds through the Right of First Refusal for 17 years.

Our vast experience will prevent you getting ripped off and our experts can guide you through the likely pitfalls and benefits of group action.

If you receive an S5 of any kind, do not delay – time is not on your side (we guarantee that any offer your freeholder makes has been carefully timed and considered…).