10 April 2018

Break Notices: Mind the (registration) gap...

Sackville UK Property Select II (GP) No 1 Ltd and another v Robertson Taylor Insurance Brokers Ltd and another [2018] EWHC 122 (Ch)

Summary

The High Court has ruled that a break notice served by the assignee of a lease was invalid because the transfer of its interest had not been registered at the Land Registry. Although a deed of assignment had been completed to transfer the lease to the assignee before the break notice was served, legal title to the property only passed on registration. Before registration, only beneficial title to the property had passed to the assignee, leaving the assignee within the "registration gap" when it could not serve a notice as the "legal" tenant. This does not constitute new law, but the case highlights the difficulties that arise with the registration gap and the importance of anticipating this, so that provisions to mitigate its effect can be incorporated into transactional documents.

The facts

This case concerned commercial premises at America Square, London EC3, let for a 10 year term at an annual rent of £219,575.03 by the Claimants (the "Landlords"). The lease contained a break option exercisable by the tenant on 14 March 2018, by giving the landlord not less than nine months' prior written notice and complying with various pre-conditions. Being a lease of over seven years in term, it was registered at the Land Registry shortly after completion.

The first Defendant was the original tenant under the lease and on 23 March 2017, it was granted a licence by the Landlords to assign the lease to the second Defendant, Integro, following the Integro Group's acquisition of the original tenant's business. Under the terms of the licence deed, Integro covenanted to register the consented assignment within 10 business days of completion. The assignment was duly completed on 29 March 2017, albeit the form of deed used was not suitable for registration purposes. Nevertheless, on 20 April 2017, Integro gave notice of the assignment to the Landlords and the Landlords subsequently invoiced Integro for the June quarter rent.

On 2 May 2017, Integro's solicitors sent a notice to the Landlord's purporting to exercise the break option in the lease on their client's behalf. However, at this stage, Integro was yet to be registered as the tenant under the lease. Consequently, the Landlords' solicitors wrote back to reject the validity of the break notice, on the basis that Integro was not the legal tenant under the lease, but merely a beneficial owner. The assignment of the lease was eventually registered on 7 July 2017.

The applicable law

Pursuant to section 27(1) of the Land Registration Act 2002, a disposition of a registered estate does not operate at law until it is completed by registration. There will be an inevitable gap between the date of completion of a transfer deed and the date that the transaction is registered, known as the "registration gap". During the registration gap, the buyer is not the legal owner of the land and for this reason, it will usually be precluded from serving valid break notices in respect of the property.

Arguments before the Court

In response to the Landlords' claim for a declaration that the break notice would be of no effect, the solicitor acting for the Defendants argued that:

the Landlords were aware from an early stage that his firm acted for both parties to the assignment;
it was, in any event, obvious what the intention behind the notice was and that there had been a mistake;
the corporate relationship between the parties to the assignment was such that notice given by Integro was given with the "necessary authority" of the original tenant.

Judgment

The Court held that the break notice was of no effect. In doing so, it came to the following conclusions:

The break notice should have been served by the original tenant, as the disposition of a registered estate does not take effect at law until it is registered. Until 7 July 2017, Integro were only an equitable assignee, with the legal title remaining vested in the original tenant. Therefore, although the definition of "Tenant" in the lease included successors in title, Integro could not be described as a successor until its interest was registered.
Although Integro was entitled to the benefit of the Landlords' covenants in the lease following completion of the deed of assignment, and subject to the burden of the tenant's covenants, a break option should be treated differently, as it confers a unilateral right.
It could not be argued that the break notice was, in some way, given by or on behalf of the original tenant. The evidence did not establish that Integro's solicitors had served the notice on behalf of the original tenant, with the intention to bind it. Integro's solicitor had simply failed to appreciate that the lease was registered.
It was not correct to assert that a "reasonable recipient" of the break notice would have appreciated the mistake, either because the original deed of assignment was not made in the Land Registry approved form or because the recipient should have understood the intention of the server. On the contrary, Integro had covenanted in the licence to assign to register the assignment within 10 days of the completion of the deed, so the Landlords would have expected this to have been done. The relevant names were also significantly different, being Robertson and Integro.

In the circumstances, the Defendants failed to convince the Court that the break notice was valid and the Court awarded summary judgment on the matter to the landlords.

Our comment

This Judgment affirms previous case law on the topic of the "registration gap" and the result will be unsurprising to many with previous experience in this field. Nevertheless, it is an important reminder of a practical difficulty that arises in may transactions, particularly in cases where the Land Registry is slow to complete an application for registration, or the application is held up for other reasons.

It should also be noted that the same rules apply when serving other notices, such as those to renew a lease under Part II of the Landlord and Tenant Act 1954.

If it is likely that a buyer of property will be required to serve notices after an acquisition, then the matter should be dealt with in the relevant contract. For example, a covenant can be granted by a seller to serve a notice after the deal completes, but before registration, if instructed to do so by the buyer.