No break for unregistered assignee

The assignee of a lease was not entitled to serve a valid break notice before it became the registered proprietor.

Law

The Land Registration Act 2002 section 27(2) requires that a transfer of a registered lease must be completed by registration to take effect at law. Until such time as the transfer is registered, the assignment of the lease is equitable only. The gap between completion of the deed of transfer and completion of that transfer by registration is called the 'registration gap'.

Facts

The recent case of Sackville UK Property Select II (GP) No.1 Ltd v Robertson Taylor Insurance Brokers Ltd concerned a lease of premises at America Square, London.

The lease had been granted for a term of 10 years running from March 2013 and the rent payable was just under £220,000 a year. The lease was registered at the Land Registry with its own title and it contained a break right allowing 'the Tenant' to terminate the lease on 14 March 2018, subject to not less than 9 months' written notice and subject to other conditions.

Robertson Taylor was the original tenant and it assigned the lease to Integro Insurance Brokers Ltd on 29 March 2017. In April, notice of assignment was given to the Landlord, Sackville.

Integro did not apply to the Land Registry to register the assignment immediately and registration was only completed on 7 July 2017, some three months after the lease was assigned.

On 2 May 2017, Integro's solicitors served a break notice on the landlord.

The dispute

The landlord contended that the break notice was invalid because Integro was not the legal tenant on the date when the break notice had been served. It was not the legal tenant because the transfer had not been completed by registration and so the legal title to the lease had not yet been vested in it.

The decision

The Court of Appeal agreed: at the time of the service of the break notice Robertson Taylor was still the registered proprietor of the lease and so still the legal owner of it. Accordingly, it was the person who was entitled to serve the break notice.

Various arguments put forward by Integro as to why its break notice should have been valid were dismissed by the court. It argued:

• That because the benefit and burden of landlord and tenant covenants pass on an equitable assignment under the Landlord and Tenant (Covenants) Act 1995, Integro became entitled to serve the break notice and became entitled to the benefit of the landlord's covenant to treat the lease as terminated in the event of the service of a valid notice. The court said that the 1995 Act does make provision for the transmission of the benefit and burden of covenants on assignment, but the landlord's obligation to treat the lease as at an end arises only if a valid option to break is served. The operation of the 1995 Act did not vary the meaning of the condition in the break option that required service of the break notice by 'the Tenant'. 
• That by virtue of section 24 of the Land Registration Act 2002, Integro was entitled to exercise 'owner's powers', which include the power to make a disposition. However, the court pointed out that Integro was not seeking to make a disposition, it was seeking to exercise a contractual right to terminate. 
• That the notice served by Integro was served on behalf of the original tenant. Demonstrably this was not the case. The notice had been given by Integro and named Integro as the tenant. 
• That a reasonable recipient of the notice would understand that the server intended to give the name of the original tenant and not the assignee. The court disagreed.

Conclusion

Complications arising as a result of the registration gap are not new but continue to cause problems.

The point at issue in this case was very similar to that considered in Brown & Root Technology v Sun Alliance and London Assurance Co [1997] 1 EGLR 39, but the facts are opposite. In the Brown & Root case a registered lease contained a tenant's break option that was personal to the original tenant. As part of a group reorganisation, the lease was transferred to a group company but no application to register the transfer was made. Some months later, the original tenant purported to exercise the break clause. The landlord argued that the original tenant had no right to do so because the lease had been assigned but the Court of Appeal held that the original tenant was still entitled to exercise the break because legal title was still held by it.

Where there is likely to be a gap between completion of documentation between the parties and the completion of that transaction at the Land Registry, it can be prudent for the parties to consider whether they should include provisions in their sale contract governing how the seller should act as legal owner during the registration gap.

Sackville UK Property Select II (GP) No.1 Ltd v Robertson Taylor Insurance Brokers Ltd [2018] EWHC 122 (Ch)