The registration gap – give it a break
In this case, Sackville (the landlord) had granted a 10 year lease to Robertson (the original tenant) which contained a tenant break option on 14 March 2018 requiring at least 9 months prior written notice. The rent was over £200,000 per annum and the lease was registered at the Land Registry.
Robertson was then acquired by the Integro Group and as a part of the restructuring process Robertson successfully applied for a licence to assign from Sackville to assign the lease to Integro. One condition imposed by Sackville on the assignment was that the assignment was registered within 10 working days of the assignment at the Land Registry. On 29 March 2017 Robertson assigned the lease to Integro.
Integro through its solicitors then served notice on the Sackville on 2 May 2017 purporting to exercise its break option. However, Integro had not complied with its registration covenant in the licence to assign and was only registered at the Land Registry from 7 July 2017. Sackville argued that the break notice was invalid as it was served by a party which was not the legal tenant and as such the term should continue until the contractual expiry in 2023.
Law and decision
Section 27(1) Land Registration Act 2002 provides that the legal title does not operate at law until it is completed by registration at the Land Registry, leaving the proprietor with an equitable estate. Registration of a property disposal can often take weeks or months following completion of that transaction. In the intervening period, the registered proprietor holds the registered estate on trust for the proprietor of the equitable estate.
The definition of tenant in the lease included successors in title. Sackville argued that that Integro was not, at the time the notice was served, a successor in title. The court agreed with Sackville. Although the court acknowledged that the Integro was the bound by the tenant covenants and benefited from the landlord covenants, this did not make them the owner of the legal estate. Therefore the break notice was invalid and the lease term continued. The court commented that break could have been given by Robertson as proprietor of the legal estate as trustee for Integro, the owner of the equitable estate.
Interestingly the purported break notice was served by Integro’s solicitors who were also the solicitors acting for Robertson and this was known to Sackville. Robertson and Integro argued that Sackville should have known that the notice was intended to be served by Robertson despite the notice being expressly given on behalf of Integro. The court disagreed with this argument and held that it was extremely unlikely that Sackville should have inferred this.
Break clauses need to be considered carefully before parties seek to exercise them beyond the notice requirements and the conditions of the break. The registration gap means that a party seeking to exercise a break must consider whether it is entitled to do so and is it serving the notice. As shown in this case, failure to correctly exercise a break do can be costly as a tenant will still be required to comply with its covenants (including paying rent) even if it does not want the premises any longer.
The wider context and intentions of parties should be considered from the outset so steps can be taken to mitigate the registration gap. For example, a contract between a buyer and seller of a registered lease could include a provision for the buyer to act as agent for the seller in exercising the break notice prior to the title being registered.
If you have any queries arising out of this article or want to find out more about commercial leases, please contact Daniel York, Partner, Real Estate department.