The recent High Court case of E.ON UK Plc v Gilesports Limited is a convenient reminder that adequate consents for assignment must be sought from all the relevant interest holders in leasehold premises.  In current market conditions, it can be all too common for assignments to take place in similar circumstances to this case, and in particular for notices to superior landlords or sub-tenants to be missed in protracted business asset transfers and for registration rules to be overlooked.

The factual background

The case concerned a retail unit within the Abbeygate shopping centre in Nuneaton.  The freehold interest was owned by the Royal London Mutual Insurance Society.  When the case was heard, the head leasehold interest in the premises was vested in E.ON UK Plc, acquired by way of various assignments from the original tenant, Central Networks East plc (“Central”).  At all times relevant to the hearing, Central was the head landlord.

Central granted a sub-lease to Gilesports Limited in 1998 for the retail sale of sports clothing and equipment.  Gilesports was, and still is, a subsidiary of the well-known high street retailer Sports Direct International plc. 

In spring 2006 Sports Direct acquired the Original Shoe Company (“OSC”) and from October 2006 OSC took occupation of the property.  The sub-lease was drafted as a lease by reference to the head lease and permitted parting with or sharing possession of the property within the same group of companies. Accordingly this right to share occupation would end if sub-tenant and tenant were no longer part of the same group.

In 2007 Sports Direct agreed to sell OSC to another retailer, JJB Sports plc.  As OSC would no longer be part of the same group of companies, the decision was made to assign the interest in the sub-lease from Gilesports to OSC.  Sports Direct incorrectly identified its immediate landlord as Royal London, the freeholders.  Therefore, despite being identified as a necessary party to the licence in the draft documentation, Central was not actually approached for consent to assign in advance and did not enter into the licence.  The solicitors for Sports Direct and the in-house counsel for Royal London both assumed the other was handling this aspect.

On 28 May 2008, despite the missing consent from the immediate landlord, the lease was formally assigned from Gilesports to OSC.  Central was not served a notice of assignment and the assignment was not registered at the Land Registry.

Trouble on the High Street

In January 2009, as high street retailers strained under the pressure of the preceding years’ economic crisis, OSC entered into administration.  No formal notice of this was given to Central as immediate landlord of the property, however their agents notified them in March 2009.  In August and September, Central’s solicitors wrote to Sports Direct requesting proposals for the payment of rent arrears accrued since April 2008.  Sports Direct advised Central that the sub-lease had been assigned in 2008, and that therefore neither Sports Direct nor Gilesports were liable.

In June 2010, and in every subsequent quarter, Central and then E.ON UK Plc served notices under section 17 of the Landlord and Tenant (Covenants) Act 1995 without prejudice and contending that Gilesports remained the tenant of the property.

The legal background

Section 17 of the Landlord and Tenant (Covenants) Act 1995 allows a landlord to recover certain sums from former tenants who have not been released from their liabilities.  This could be because an assignment was made by law, was made without the required consents or was made with an authorised guarantee, whereby the person assigning the lease effectively agrees to warrant the new party.  A former tenant will not be liable to pay any sums due from a current tenant unless a notice in accordance with the 1995 Act is served within six months of the date that the arrears first became due.  However, the amount which the former tenant is liable for must not exceed the amount stated in the notice, except in special circumstances.

Section 7 of the Land Registration Act 2002 further provides that when registration (if required by the rules) does not take place, the transfer of a legal estate becomes void.  The title to the freehold or leasehold title will remain with the original transferor, and they hold it on simple trust terms for the intended new party.  The 2002 Act requires that the Land Registry must be notified of a change in registered proprietor where there has been a transfer for consideration in a leasehold estate for a term that has more than seven years to run from the date it is granted.  The Gilesport sub-lease was in this category at the time of the intended assignment to OSC.

The decision

The High Court held that in accordance with the terms of the sub-lease (which imported the same terms as the head lease), Gilesports was obliged to obtain the consent of its landlord to the assignment, in the same way that Central was obliged to obtain freeholder consent. Gilesports failed to do so adequately.

The assignment of the leasehold interest from Gilesports to OSC was intended to be an assignment of both beneficial and legal interest in the sub-lease.  The parties’ intention was that OSC would be the legal tenant.  However, because the solicitors for Sports Direct failed to register the assignment, the assignment of the legal estate to OSC was void.  The High Court found that the transfer did not take place, Gilesports held the legal interest on bare trust for OSC, and as such remained liable to perform the tenant covenants under the sub-lease, including the payment of rent.

Finally, Gilesport contended that any claim in excess of the amount stated under the Section 17 notices could not be sought.  However, as the High Court already decided the transfer had not been valid due to lack of registration, the terms of the Landlord and Tenant (Covenants) Act 1995 did not apply and, because Gilesports never effectively made the assignment, Gilesports liability was not limited to the amounts in the notices.  It was liable for all amounts recoverable under the terms of the sub-lease, as it remained a party to that agreement.

Keeping it simple or getting it right?

Whilst the facts of this case are unique, the decision is a stark reminder for commercial landlords and tenants that the assignment of a leasehold interest must be carried out diligently and appropriately notified to all parties.  There is always a balance in transactions where time is critical, between getting the documentation processed swiftly, and making sure it is validly drafted and properly registered.  The cost implications of not getting the latter right can be considerable.

To read the case of E.ON UK Plc v Gilesports Limited click here