The Seven Year Itch
A lease that has been granted for a term of more than seven years must be registered at the Land Registry. Until the registration is complete, the tenant does not have a legal title to the property and the transaction will operate in equity alone.
On the surface, the parties might be unaware of the distinction, as the tenant will most likely be in occupation and using the property, and the landlord will be collecting rents and service charges. But there can be serious issues for landlords and tenants alike if the lease remains an equitable one. For example, the tenant may find that he is unable to sell his interest or exercise a break option, whilst the landlord may find that he struggles to enforce the covenants if they are subsequently breached by the tenant.
It is therefore important for both parties to ensure that the lease is registered.
Currently, all leases of registered land with a term longer than seven years must be registered at the Land Registry to ensure that the new tenant will have legal title to the property in question. It should be noted that there are plans to lower this period to three years in the future.
The new tenant has a statutory obligation to register the transaction within two months of the date on which it completed. If it fails to do so, at the end of the two month period, the transaction becomes void in respect of the legal interest, which reverts to the original transferor to hold on trust for the new tenant. If the transaction is the grant of a brand new lease, the effect is to create an agreement for lease rather than a formal lease.
If the tenant applies for registration after the two months has expired, the Land Registry may extend the two month period if it considers that there is good reason to do so. In our experience, the Land Registry is unlikely to prevent any late registration as long as the lease has at least seven years left to run from the date of the application.
The Registration Gap
Once registration has been completed by the Land Registry, the legal estate will belong to the new tenant with effect from the date on which the application for registration was made.
As even the speediest application will take some time to process, there will be a period when the legal estate remains with the transferor. This is known as the "registration gap". The longer the tenant takes to make the application for registration, the longer the registration gap will be.
Failure to register the transaction, or any requirement to take action during the registration gap, such as a deadline for serving a notice, can have difficult and unintended consequences for the parties.
The registration gap affects the actions that can be taken by both landlord and tenant. We set out some of the most important examples below:
Implications for Tenants
The most famous case on the point is that of Brown & Root Technology v Sun Alliance and London Assurance Co  1 EGLR 39. In this case, the landlord granted a lease to a tenant which was registrable at the Land Registry and was indeed duly registered. The lease included a break clause giving the tenant an option to terminate the lease. This option was expressed to expire if the lease was assigned by the tenant.
The tenant subsequently wished to assign the lease to another company within its own group and obtained the landlord's consent. Following the assignment, the transferee received rent invoices and was generally treated as the tenant. However, no application was made to register the assignment, and so the legal interest in the lease remained with the original tenant.
A few months later, the tenant wished to terminate the lease, and so the original tenant served a break notice. The landlord disputed its right to do so, arguing that the lease had been assigned, and thus that the option no longer existed.
The case went to the Court of Appeal, which held that the original tenant was still entitled to exercise the break clause. Unless otherwise specified, "assignment" means a legal assignment. In the case of registered land, there is no legal assignment until registration is completed and the assignee (transferee) is registered at the Land Registry. As such, the transfer did not take effect in law; the lease had remained with the original tenant; and therefore the break option had not expired.
In this case, the original tenant and the new tenant were group companies, and so the new tenant was able to ensure that the notice was signed by the original tenant. There would have been a very different outcome if the original tenant could not be persuaded to serve a break notice, or if the company no longer existed.
The Court has found that a transferor remained liable to comply with an enforcement notice on the property until the transaction to the new tenant was properly registered. Similarly, if a landlord wishes to enforce a breach, he will have to join the original tenant to the proceedings if the original tenant remains the legal owner. This could mean the original tenant incurring the time and costs of dealing with a dispute over a property that it no longer owns.
Ability to Sell the Lease or to Sublet
As a consequence of the above, the tenant is likely to find it difficult to sell or otherwise transfer his interest if it has not been properly registered. Similarly a subtenant's solicitors are likely to require evidence that the lease has been registered before completing any subletting. This can be a real issue if the tenant needs to complete the transaction swiftly.
Implications for Landlords
There can be some administrative difficulties for the landlord if the tenant fails to register its interest.
Service of Notices
If the lease or statute requires notice to be served on the legal owner, there could be some confusion over which is the correct party. Failure to serve on the right party could lead to a vital deadline being missed.
If the landlord wishes to serve a break notice or other type of notice, such as a self-help repairing notice or a Landlord and Tenant 1954 Act renewal/termination notice, it will have to ensure that this is served on the right party. This may well not be the party that the landlord believes to be the current tenant.
Enforcement of Breaches and Forfeiture
As noted above, the landlord may have to issue proceedings against the original tenant if the registration has not been completed. This could mean incurring additional time and costs.
If the landlord wishes to forfeit the lease, to be on the safe side, he should serve the notice and documents on both the original and the new tenant. However, even if the new tenant only has an equitable interest, he may still apply for relief from forfeiture.
Whether you are a landlord or a tenant, you should be aware of the importance of registering the transaction at the Land Registry.
For the grant of new leases, we would usually recommend including a covenant in the lease that requires the tenant to make the application within a specified time limit, as well as to notify the landlord once the application has been made. This would enable the landlord to take some control over the tenant's obligation to make the application to the Land Registry, and would give rise to a cause of action if the tenant fails to do so.
For the assignment of existing leases, we would recommend careful instructions to check that the registration has been completed promptly.
If you discover that a lease has not yet been registered, you should seek prompt legal advice on the implications and how to remedy the situation before it becomes difficult in practice.