Q&A: Consequences of the registration gap

Question

I own commercial premises which were let to a company – CRS Co Ltd – on a lease of 10 years in 2015. The lease contains a personal right for CRS to bring it to an end on 30 June 2020 on six months’ notice. CRS assigned the lease to another company – LMC Co Ltd – earlier this year.

LMC is occupying the property and has paid the June and September quarters’ rent and service charge. This morning I received a notice terminating the lease on 30 June 2020, but served by CRS. Surely the notice cannot be valid?

Answer

The validity of the notice will depend on which company was the registered proprietor of the property at the Land Registry at the date the notice was given. If LMC has not registered the assignment of the lease to it, then CRS remains the legal owner of the property and can exercise the break notice.

Explanation

When registered freehold or leasehold land is transferred, the registration requirements under the Land Registration Act 2002 must be satisfied in order to vest the legal estate in the transferee or tenant.

In your case, this means that the transfer to LMC must be registered and noted on your title as landlord.

Until the assignment is registered, the transfer operates only in equity and the legal estate remains with CRS. The gap between the date of the deed of transfer/lease and the date that the legal estate vests in the transferee/tenant is known as the “registration gap”.

A break right contained in a lease can only be exercised by the registered legal owner of the interest.

In Brown & Root Technology Ltd and another v Sun Alliance and London Assurance Co [1997] 1 EGLR 39, the Court of Appeal decided that where the assignment had not been registered at the Land Registry the original tenant was entitled to exercise the break clause.

In the more recent case of Sackville UK Property Select II (GP) No 1 Ltd and another v Robertson Taylor Insurance Brokers Ltd and another [2018] EWHC 122 (Ch); [2018] EGLR 13, the unregistered assignee sought to get around the registration gap by arguing that – irrespective of the registration requirements – an assignee of a “new tenancy”, which would include the lease, was bound by the tenant covenants and entitled to the benefit of landlord covenants under the lease at the point of assignment under the provisions of the Landlord and Tenant (Covenants) Act 1995.

However, although the break clause could be viewed as a landlord’s covenant, because it obliged the landlord to treat the lease as ended, that obligation was only triggered once a valid break notice was served by “the Tenant”. In view of the lack of registration, “the Tenant” remained the original tenant.

So, if LMC has not registered the assignment at the Land Registry, the legal owner remains CRS and it is entitled to exercise a break notice which is personal to it.

Question

I have just acquired the freehold of a lock-up shop, which is subject to a lease. The tenant is in arrears of rent. One quarter’s arrears will have been due for more than six months before I am registered as proprietor at the Land Registry.

Can I preserve my position by serving a notice under section 17 of the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) on the tenant’s guarantor now?

Answer

The point remains undecided, but you probably can serve such a notice unilaterally.

Explanation

Provided that you applied to be registered within the two-month period required by section 6(1) of the Land Registration Act 2002, the transfer has taken effect in equity but will not vest the legal title in you until registration takes effect: section 27(1). Until registration, the legal owner holds the legal title on trust for the equitable owner: Rose v Watson [1864] 2 QB 90; Scribes West Ltd v Relsa Anstalt (No 3) [2005] 1 EGLR 22.

None of the recent cases on the registration gap have considered service of a notice under section 17 of the 1995 Act, and the Act itself is ambiguous.

Section 17(3) provides that a guarantor is not liable unless “the landlord” serves notice within six months of the rent claimed falling due. Section 28(1) defines “the landlord” generally as “the person for the time being entitled to the reversion”. Section 17(6) includes “any person who has a right to enforce payment” of rent within the definition of “landlord”. Section 3(3) says that where the landlord assigns his interest, the assignee is entitled to the benefit of the tenant’s covenants “as from the assignment”. “Assignment” includes an “equitable assignment”: section 28(1). So, a landlord whose title is not yet registered is “a person who has a right to enforce payment” of rent. Unfortunately, by section 28(4), any reference to the landlord refers to all persons who jointly constitute the landlord. If “the person for the time being entitled to the reversion” for the purposes of the definition of “landlord” in section 28(1) means the registered proprietor, entitled to the reversion in law, and the unregistered assignee, entitled to the reversion in equity, section 28(4) directs they must serve a section 17 notice jointly.

However, the better view is that section 17(6) expands the definition of “landlord” for the purposes of serving section 17 notices, thereby entitling “any person who has a right to enforce payment” to serve a notice. On that basis, a landlord by an assignment which has not yet been registered can unilaterally serve a section 17 notice, so you can seek to preserve your position now.

This article was written by  Louise Clark and Barrister Nic Taggart at Landmark Chambers and appeared on 10 December 2019 in Estates Gazette.