The rule against perpetuities was developed to prevent land from being tied up for long periods. It was applied to options and was enshrined in statute by s9(2) Perpetuities and Accumulations Act 1964, which required options to acquire land to be exercisable within 21 years.
It is easy to be tripped up by the rules and conveyancers waved them a cheery goodbye when the Perpetuities and Accumulations Act 2009 came into force. However, the legislation was not retrospective and some oddities remain. Therefore, practitioners will need to understand how the rules work for many years to come.
Souglides v Tweedie [2012] EWHC 561 (Ch) is important because it is the first time that the court has considered s9(1) of the 1964 Act, which exempts certain leasehold options from the rules. The exemption was enacted for policy reasons. The legislature considered that leasehold options were in the public interest because they encouraged tenants to preserve and develop leasehold land. See too Muller v Trafford [1901] 1 Ch 54), where the court held that options to renew leases are valid even where a lease is longer than 21 years.
The proceedings concerned an option to take a new 60 year sub-lease of a flat in a valuable part of London. It was not an option to renew because there was a headlease to a third party, which still had many years to run when the option was granted. This gave the freeholders an opening. They suggested that the option was void because it was not exercisable within 21 years.
The tenants relied on s9(1). This provides that the rule against perpetuities does not apply to options to purchase “an interest reversionary (whether directly or indirectly) on the term of a lease”. It applies if the option is exercisable by the lessee or his successors in title and ceases to be exercisable within a year after the end of the lease.
The freeholder argued that s9(1) applies to the acquisition of the freehold or an existing superior leasehold interest. It claimed that a new interest carved out of a superior leasehold or freehold interest did not qualify – but the court upheld the option. The judge could not think of any reason to subject the option to the rule against perpetuities, when the rule does not apply to other leasehold options.
The judge dismissed several further objections to the exercise of the option, one of which turned on the status of the tenants. The freeholder claimed that they were not successors in title to the grantee of the option, as required by s9(1), because a subsequent tenant had varied the lease to include additional premises in the demise – and had inadvertently effected a surrender and regrant.
The freeholder argued that the current tenants had a different lease of different premises. The judge disagreed. He refused to accept that the phrase “successors in title” used in s9(1) should be limited in this way and did not believe that Parliament would have wanted tenants whose leases had been “varied” by the addition of extra premises to lose the benefit of an option to extend them.
Allyson Colby is a property law consultant
