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. The effect of incorrectly exercising a break clause means that the tenant continues to be liable for payment of rent and repairs (and other lease obligations) which can lead to a dilapidations claim.
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.
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 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 did not apply to register IIB as the new legal owner of the lease at the land registry until quite a long time after they should have.
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 IIB remained on the hook for the lease for a further 5 years.
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”. RTIB remained the legal owner because of IIB’s failure to register. IIB therefore remained liable for rent and other tenant obligations in the lease.
It is important to ensure that post-completion matters in relation to lease transfers, 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 (such as in relation to serving break notices). Otherwise it can be very costly to a tenant.