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Lease assignments and break clauses – ensure that a break notice is properly served

20 Feb 2018

 

Incorrectly serving break notices, or any notice under a lease, can have far-reaching consequences if served incorrectly.

 

Break clauses within leases are fairly common and can give the tenant or the landlord the option to bring the lease to an end earlier than it would otherwise do so. Break clauses are more often used in favour of tenants rather than landlords. This article focuses on break clauses exercisable by tenants.

 

The effect of not exercising, or incorrectly exercising, a break clause means that the tenant continues to be bound by the lease until the end of the lease term. As a result, the tenant continues to be liable for the tenant covenants in the lease, including payment of rent and repairs (which can lead to a dilapidations claim).

 

A tenant does not have to be granted a brand new lease, a person can become a tenant by taking a transfer (at law called an “assignment”) of the lease from the existing tenant.

 

If a lease is granted for 7 years or more the lease needs to be registered at the land registry. Thus, a 10 year lease with a tenant break clause exercisable after 5 years should be registered at the land registry.

 

Only being registered at the land registry constitutes someone as the legal owner of a property. If they are not registered as such at the land registry then they are only the equitable owner.

 

The recent case of Sackville UK Property Select II (GP) No.1 Limited v Robertson Taylor Insurance Brokers Limited (2018) highlights the importance of taking extra care when dealing with the transfer of leases which contain break clauses.

 

Facts

 

Sackville, as landlord, granted a 10 year lease to Robertson Taylor Insurance Brokers (“RTIB”) in 2013. The lease contained a break clause allowing the tenant to bring the lease to an end after 5 years if the tenant correctly exercised a break right in the lease. In essence, correctly exercising the break right would halve the liabilities of the tenant under the lease.

 

In the usual way, because the lease was initially granted for 10 years, RTIB registered it with the land registry.

 

In 2017 RTIB transferred the lease to Integro Insurance Brokers (“IIB”). IIB’s solicitor did not realise that the lease was registered and as such a non-standard form for the transfer of a registered lease was used. Importantly, IIB did not apply to register itself as the new legal owner of the lease at the land registry until quite a long time after it should have and only did so when it was brought to their attention that they should have done.

 

After the transfer of the lease from RTIB to IIB occurred, IIB attempted to exercise the break clause in the lease. Sackville argued that, because IIB had not applied to be, and was not, the legal owner of the lease (because it had not applied to be so at the land registry), the break notice was invalid as it should have been served by RTIB who remained the legal owner.

 

The court had to decide who the “tenant” under the lease was – was it RTIB or IIB? If IIB then the break right had been correctly exercised and the lease could end. If it was RTIB then the break right had not been correctly exercised and the lease remained in place for a further 5 years.

 

Decision

 

The court decided that the tenant under the lease was RTIB notwithstanding that all parties knew that in practice IIB was the tenant as it was paying the rent and complying with the other tenant obligations in the lease.

 

The court reached this conclusion on the basis that notices under a lease can only be served by the “legal owner”. As noted above, a person is not the legal owner until they have been registered as the owner at the land registry, even if the other formalities have been attended to.

 

As such the court decided that the break notice served in order to exercise the break right was incorrectly served because it identified IIB as the tenant and not RTIB. Even though RTIB had transferred the lease to IIB, without IIB being registered at the land registry, legal standing to serve the break notice remained with RTIB. As such IIB remained tied into the lease until 2023 and its obligations to pay rent continued. The rent from 2018 until 2023 totalled over £1 million.

 

Comment

 

This case may turn on its own facts. However, if IIB had been registered as the tenant of the lease at the land registry the problems evident in this case would not have arisen and they would have saved themselves, amongst other things, 5 years’ worth of rent and dilapidations claims.

 

It is therefore important to ensure that post-completion matters in relation to lease transfer, particularly of registered leases, are dealt with as soon as possible after a transfer has taken place so that the person who everyone thinks is the tenant actually has the legal standing to act as the tenant. Otherwise it can be costly to a tenant.

 

If you wish to discuss this or any other aspect of property law please contact Chris on 0191 211 1515 or at chris.morgan@srflegal.co.uk.

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