The wrong time to reform Right of First Refusal on blocks of flats
When the freeholds of blocks of flats are sold in England, their market value is revealed. Nowadays, the pricing information would even be marked on the public record at the Land Registry, but this was not the norm until the 1990s. From 1987, however, the price paid has had to be disclosed to the qualifying owners of the individual flats, and they have the right of first refusal of that price.
Even if they can't or won't exercise this right, it provides a price discovery mechanism for the owners of the flats. From 1993 they obtained the right to buy the freehold at a time of their own choosing, rather than reacting to the decision of their landlord to sell at a time of *his* choosing. (I say "his" but the only owners of blocks of flats that I know are actually all women or corporations.)
This alternative right, introduced in 1993, uses a statutory valuation scheme that approximates what the freehold of the block would be worth if the owner couldn't overcharge for the provision of building management services, a practice which had been restrained in 1985.
The history is roughly:
- 1985: building management can no longer be run at an unreasonable profit
- 1987: the owners of flats are granted the option to buy the freehold of their block at the market price, when it is discovered, for example, at auction or during a potential sale to an investor
- 1993: the owners of flats are granted the option to buy that freehold when the price has not just been agreed in the market, but instead according to a statutory scheme that treats the 1985 reform as working perfectly
Having the dual system keeps people honest:
- if you're overcharging for building management and getting away with it, then a discounted cashflow analysis will value your building at more than you'd get for it if the flat owners bought on the statutory valuation basis; it follows that a potential buyer on the open market would be left out of pocket if the flat owners subsequently exercised their rights under the 1993 Act
- conversely, some of the estimations that go into the statutory valuation scheme are not an exact science, so having the market rates for some buildings show up in Land Registry data, and thereby on Rightmove and elsewhere, provides a check on this process
Now in 2024, Parliament reformed the 1993 statutory valuation scheme to make it more prescriptive, and won its case when sued in the High Court by certain freeholders. This means that a political judgment can be substituted for the "inexact science" of valuation estimates, within the continuing framework of not rewarding landlords for overcharging for management services. There is some suspicion, both from surveyors and campaigners, that a thumb may be placed on the scales to favour particular groups of freeholders or leaseholders, e.g., those leaseholders who have let their lease term run down below 80 years remaining, freeholders of leases with more than 150 years remaining, freeholders who are charities and so on.
So it's a good thing that there's still the price discovery mechanism through Right of First Refusal. Oh wait, the government has announced a review of that, supposedly only for "commercial" buildings ...