Service Of Break Notices Following Assignment – Mind the Registration Gap6th April 2018

The recent High Court decision in Sackville UK Property Select II (GP) No.1 Ltd and another v Robertson Taylor Insurance Brokers Ltd and another [2018] EWHC 122 (Ch), serves as a reminder as to the potential pitfalls when breaking a lease in particular where a recent assignment has taken place.

In this case the Court considered if a break notice served on behalf of the original tenant’s assignee was sufficient to trigger a break in the lease, in spite of the assignee not being registered as proprietor of the leasehold title at the Land Registry.

 

The Facts

A 10 year lease was granted to Robertson Taylor Insurance Brokers Limited (“Robertson”) in March 2013. Robertson’s leasehold interest was registered at the Land Registry. The lease contained an option allowing the tenant to terminate the lease on 14 March 2018 by giving the landlord no less than nine months’ prior written notice, subject to the tenant’s compliance with various conditions.

The definition of the “tenant” within the lease included successors in title: “the personal representatives of the tenant and any person in whom this lease may from time to time be vested by whatever means”.

Robertson applied to the landlord to assign the lease to Integro Insurance Brokers Limited (“Integro”) (a group company) with the licence being granted on 23 March 2017. The licence contained a direct covenant by Integro to register the assignment of the lease at the Land Registry within ten business days of the assignment’s completion.

Robertson assigned the lease on 29 March 2017, but a deed of assignment was used instead of a form TR1 (as appropriate for a registered lease). Integro failed to comply with its covenant to apply for registration within ten working days of the assignment as Integro’s solicitor has not realised that the leasehold interest was registered.

Notice of assignment was given to the landlord on 20 April 2017, and a certified copy of the assignment was supplied with that notice.

On 2 May 2017, Integro’s solicitors served a notice on behalf of Integro purporting to exercise the break option to terminate the lease on 14 March 2018. Integro was not registered as the leasehold proprietor until 7 July 2017.

 

The Legal Position

Under section 27(1) of the Land Registration Act 2002, a transfer of a registered interest in land does not take effect legally until the registration is completed.

Following a transfer of a registered lease:

· From the date of the transfer until the application for registration, the transfer operates only in equity. The legal estate remains with the transferor.

· From the date of the application to register the transfer until completion of the registration, the transfer takes effect only in equity, and the legal estate does not pass.

· Once the registration is completed, the legal estate vests in the transferee with effect from the date of the application for registration (section 74, LRA 2002).

The gap between the date of the transfer and completion of its registration is known as the “registration gap” and can often be several weeks. The registration gap can therefore cause problems in a number of situations, especially where notices have to be served as in this case.

 

Decision

The break notice was invalid because it had been served on behalf of Integro at a time when the legal leasehold interest remained registered at the Land Registry in the name of Robertson. The lease would therefore continue until the contractual termination date in March 2023.

In general, if a notice is served by, or on, the wrong party, it is invalid and cannot be saved. This was the position here; the break notice could only be served by the tenant under the lease and that was Robertson. The notice had been served by Integro and was therefore ineffective. A reasonable recipient of the notice would not have assumed that the notice’s reference to Integro was a mistake, and that it should instead have referred to Robertson.

 

Practical Considerations

This case highlights that when dealing with lease assignments, it is important to consider if the lease is registered (and, if not, if it will be registrable following the assignment), in order to ensure that the form of the assignment is correct and that any registration obligations are dealt with within the correct timescales.

Whilst rigorous checks will be carried out before exercising a break clause as to the wording of any conditions and of the Landlord’s identity, this decision shows that it is also essential to ensure that a tenant’s break option is exercised by the correct party particularly following an assignment, and to always check whether the tenant or the assignee’s interest is registered (or registrable) at HM Land Registry. This is just as important when the assignment is between companies in the same group.

The financial implications for the assignee in this case is that the lease will continue at the annual rent of £22,000 highlighting yet again the serious financial implications when an option to break is not exercised correctly.