Elizabeth Cook and Anastasija Kozlova offer guidance on what to do when it transpires that a lease deemed compulsorily registrable has not been registered
Imagine this. You have been instructed to act for a purchaser on its acquisition of a multilet retail park. There are 25 tenants – a mixture of independent and national retailers. The leases are straightforward institutional leases in a relatively standard form. All leases have been granted post-2003, and a number of them have been granted for a term of more than seven years.
It then transpires that a number of the leases which are deemed compulsorily registrable have not been registered. The seller believes it to be a tenant problem, with nothing further for them to do. However, it raises the question as to the legal status of the leases, together with the practical and legal implications.
The legal position
Under section 27(2)(b)(i) of the Land Registration Act 2002 (the 2002 Act), a lease has to be registered if the term is for more than seven years from the date of grant. This has to be done within two months of the lease being granted (section 6(4) of the 2002 Act). Additionally, a reversionary lease is also compulsorily registrable if the term commencement date is more than three months from the date of grant.
Another point that needs to be considered is section 29 of the 2002 Act. This section states that completion of a disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration. As such, a tenant’s failure to register the lease may result in a tenancy which is subject to unprotected interests.
So what happens if the tenant hasn’t registered its lease which is compulsorily registrable?
The equitable position
For the purchaser, the failure to register a compulsorily registrable lease means that the grant of such lease cannot “operate at law”. This is where the unsung hero, equity, steps in to honour what was clearly the intention of the parties with its well-known maxim that “equity looks upon that as done which ought to be done” (also known as the doctrine in Walsh v Lonsdale (1882) ChD 9). This will, however, only happen if the remedy of specific performance is available to the parties. If specific performance is not available, the equitable lease is vulnerable, and the most likely outcome would be an implied periodic tenancy, which creates its own problems.
Assuming that specific performance is available, the legal rights which the parties would have had under the lease operating at law are also capable of existing in equity. The unregistered lease will take effect as an equitable lease for a term of years equivalent to the terms of years intended to be created at law.
Risks
There are then a number of risks to consider if the landlord is faced with an equitable lease:
- Enforceability of covenants – if the lease exists only in equity, should an incoming landlord be concerned that it may not be able to enforce the covenants against the tenant? Might the lease be construed as a personal contract between the original parties? This could be potentially problematic in the event that the tenant is in breach of its covenants (eg repair, payment of rent, etc), as the incumbent landlord needs the ability to directly enforce the covenants within the lease.
- Easements may be void – any easements granted in the lease to benefit the tenant are only legal once they have been registered at the Land Registry. Therefore any easements contained within the lease may be void if the lease is not registered and unenforceable against the new landlord.
- Security – both the landlord and the tenant may struggle to obtain any secured lending against an interest if the lease is equitable only. A lender may require leases to exist legally so that there is no ambiguity as to the enforceability of covenants. There is also the consideration that the seller’s mortgagee (if applicable) did not consent to the lease in the first place, and so the lease will be vulnerable as against the lender.
- General disposal of the lease – from the tenant’s perspective, if the lease is unregistered, then it will create an issue for any future alienation or charging of the lease. As a minimum, any assignee or underlessee will want to ensure that they are either taking on a legal interest or being granted an underlease out of the legal title. By not registering the lease, the tenant risks delaying the entire transaction or entering into a conditional contract, or losing it entirely.
- Guarantor – the landlord may also find itself in a situation where the guarantor’s guarantees of the tenant’s obligations under the lease are not enforceable. This issue was considered in the Australian case of Chan v Cresdon Pty Ltd (1989) 168 CLR 242 which held that the guarantee covering obligations “under this lease” referred to a registered legal lease, not an unregistered equitable lease, and the guarantor was therefore not liable. The failure to register a compulsorily registrable lease may result in the landlord being stuck with a guarantor that cannot be held liable for the tenant’s breach of covenants under the lease.
Practical rebuttal
If the landlord is treating the lease as continuing (by demanding rent, etc) and assuming the tenant is in occupation of the property, it is likely that the parties are bound by the equitable lease. According to section 28 of the Landlord and Tenant (Covenants) Act 1995, a tenancy includes an agreement for a tenancy/lease, which the equitable lease falls within. As such, the benefit and burden of the covenants in the equitable lease should be enforceable.
Reducing risks
When granting a compulsorily registrable lease, it would be prudent to include an obligation on the tenant to register the lease post-completion. It should also require the tenant to send proof of registration to the landlord. The landlord should ensure they receive this and, if required, raise appropriate enquiries with the tenant as to the timeframes involved for completing the lease registration.
If the lease contains an obligation on the tenant to register the lease and the tenant has failed to do so, the landlord can seek an order for specific performance of that obligation. However, specific performance is an equitable remedy and the courts are in a position to decide whether to grant the remedy. This will depend on a number of factors such as whether an innocent third party would suffer from the order and the conduct of the parties. The parties should also consider usual aspects of litigation such as the risks (eg the tenant’s insolvency) and the costs involved.
Another potential way to deal with the tenant’s failure to register a lease is to include a clause allowing the landlord to register the lease on the tenant’s behalf if the tenant fails to do so within a certain period of time. This will have to be considered further as the lease cannot be registered without payment of SDLT (if applicable) and registration fees. The landlord’s solicitors may want to obtain an undertaking from the tenant’s solicitors to pay such disbursements.
Some commentators suggest that it is also possible to protect the equitable lease and its easements by way of a unilateral notice. This should be possible but, again, it cannot be guaranteed.
Generally speaking, registration must be effected within two months of the completion of the lease. But pursuant to section 6(5) of the 2002 Act, an order can be made by the registrar extending the period of registration if there is a good reason for doing so. The Land Registry is typically helpful in situations such as these, but there can be no guarantee that the late registration will be accepted.
Forewarned is forearmed
While it is always advisable (and common practice) that a compulsorily registrable lease should be registered, as long as the parties are taking steps to acknowledge the existence of the lease, the incoming landlord should be able to take comfort that they will be able to enforce the covenants during their ownership. Despite this, both parties should take all reasonable steps to ensure compliance with the 2002 Act so as not to create any ambiguity or face the risks above. Forewarned is forearmed after all.
Elizabeth Cook and Anastasija Kozlova are solicitors in the real estate department at Irwin Mitchell
