Lease – Legal charge – Unilateral notice – Priority – Defendant acting for claimant’s predecessor entering unilateral notice against freehold title to protect agreement for lease – Freeholder granting charge over freehold to bank – Agreement for lease being completed without bank’s consent – Whether bank’s legal charge ranking in priority to leases tried as preliminary issue – Preliminary issue determined in favour of defendant
The claimant was the successor to a housing association (C) which had entered into an agreement with the freehold owner of a block of flats for the grant of 33 long leases of flats in the building, known as Stephenson House, Bletchley. The leases were to be granted following completion of certain building works. The defendant acted as C’s conveyancing solicitors in the transaction. The purchase price was £3,730,450. C paid a deposit of £1.25m. The defendant caused a unilateral notice to be entered against the freehold title at the land registry to protect the agreement. The freeholder granted a charge over its freehold interest to its bank.
Under the terms of the charge, the freeholder was not entitled to grant leases of the flats without the bank’s prior consent. The defendant made an official search in respect of the freehold title and obtained a certificate showing that an application had been lodged to register the bank’s charge. The agreement for lease was completed without the bank’s consent. The charge was registered and then the leases.
The claimant commenced proceedings against the defendant alleging professional negligence. It contended that the defendant had been negligent in respect of the grant of the leases because the bank’s charge had priority over them. The defendants argued that the leases had priority over the charge so that the bank’s consent to the grant of the leases had not been required. The court was asked to determine the issue of priority as a preliminary issue.
The claimant contended that the equitable interest created by the agreement for the lease and the legal estates created by the leases had to be treated separately. The leases had been created later in time than the charge and had been granted wrongfully because the bank’s consent had not been sought and obtained. The defendant argued that the agreement was protected by the unilateral notice and took priority over the bank’s charge. The bank’s charge did not have priority because of the notice entered against the freehold title in respect of the agreement for lease. Accordingly, the fundamental premise in which C’s claim was based was misconceived.
Held: The preliminary issue was determined in favour of the defendant.
The entry of a notice on the register of title, under the Land Registration Act 2002, to protect an agreement for a lease, conferred priority on the lessee after completion of that agreement, over a charge which had been granted by the lessor before the agreement was completed.
In the present case, the agreement was protected by the unilateral notice and so took priority over the bank’s charge. Otherwise the unilateral notice would not confer any protection at all, if there was a significant gap between an agreement for lease and the grant of the leases. That would be a surprising conclusion where the association had paid a deposit of £1.25m. A purchaser of the freehold would have been bound by the agreement and a mortgagee should be in no different position. If the bank had taken possession it would also have been bound by the agreement. The bank’s searches before it took its charge had revealed the unilateral charge. Under section 27 of the Land Registration Act 2002, a disposition of a registered estate or registered charge was required to be completed by registration. The basic rule of section 28 of the 2002 Act was that the priority of an interest affecting a registered estate or charge was not affected by a disposition of the estate or charge and it made no difference whether the interest or disposition was registered. Under section 29(1), where a registrable disposition of a registered estate was made for valuable consideration, completion of the disposition by registration had the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority was not protected at the time of registration. By section 29(2), an interest was protected if it was the subject of a notice in the register, in the present case the unilateral notice. The priority afforded to the agreement for lease by a notice entered against the registered title to the reversion would protect, equally, the completed leases resulting from the agreement: Williams v Burlington Investments (1977) 121 SJ 424 considered.
Edward Denehan (instructed by Winckworth Sherwood LLP) appeared for the claimant; Adam Rosenthal (instructed by Bond Dickinson LLP, of Bristol) appeared for the defendant.
Eileen O’Grady, barrister