A lease granted for a term of 7 years or more will be compulsorily registrable at the Land Registry. A tenant may decide to assign (i.e. transfer) their interest in the lease, by either a Deed of Assignment or a Transfer (TR1), depending on the remaining lease term and whether the lease was registered in the first instance.

The application to register the transfer operates in equity only, and so the legal estate will not pass to the assignee until completion of registration. The period between completion of the transfer and the assignee being registered as the legal owner is known as the “registration gap”. This can present an assignee with a number of difficulties as a break right can usually only be exercised by the registered legal owner.

In Sackville UK Property Select II No. 1 Ltd and another v Robertson Taylor Insurance Brokers Ltd and another [2018] the court considered if a break notice served on behalf of an assignee was sufficient to trigger a valid break, even though the assignee had not yet been registered as the legal owner.

Facts of the Case

A tenant (T) was granted a 10 year lease on 14 March 2013. The lease contained a break clause allowing ‘T’ to terminate the lease on 14 March 2018, giving not less than 9 months notice.  ‘T’ applied to assign the lease to ‘A’ and a licence was granted on 23 March 2017.

The lease was assigned to ‘A’ on 29 March 2017 but a Deed of Assignment was used instead of a TR1. On 2 May 2017, ‘A’s solicitors (S) sent a notice to the landlord (L) to exercise the break clause. ‘S’ was not aware the lease was registered and therefore believed that a Deed of Assignment was sufficient to transfer the legal interest.

‘L’s solicitor contended that the notice was invalid as it was served by the beneficial and not the legal owner.

Decision

The High Court agreed that the notice was invalid and the lease therefore continued. Under section 27(1) of the Land Registration Act 2002, a transfer of a registered lease does not operate at law until completed by registration.  ‘A’ did not complete registration until 7 July 2017, and so did not become the legal owner until this point.

‘A’ argued that as the assignee, it was bound by the tenant covenants in the lease and therefore benefitted from the covenants on the part of ‘L’ from the date of assignment. The court held, however, that ‘L’s covenant to treat the lease as having come to an end could only be exercised once a valid break notice had been served by the “tenant”. In this case, the court concluded that the “tenant” for the purposes of the break notice was ‘T’, and not ‘A’.

The court dismissed any argument that as ‘A’ was entitled to be registered as the legal owner it was therefore entitled to serve the break notice on the basis that an equitable owner does not have the same powers as the legal owner. Any argument to suggest the notice was served by ‘A’ on behalf of ‘T’ was also dismissed, even though ‘A’ and ‘T’ were part of the same group of companies.

Comment

This case emphasised that a break notice cannot be served by an unregistered assignee, but by the legal owner only. It is the legal owner that has rights under a lease and an assignee will only have a beneficial interest until completion of registration. If a notice is served by, or on, the wrong party it is invalid and cannot be saved.

It is important to consider the remaining lease term when dealing with an assignment. In this case, had a TR1 been used instead of a Deed of Assignment, the break notice would likely have been valid. Instead, ‘A’ lost the right to end the lease and must continue paying rent until the end of the contractual term. This was a costly mistake by ‘S’, and one that could have easily been avoided.

For further information contact Conor Wells on 0191 261 0096 or by email at conor.wells@markswattsmorse.co.uk.