In Weir v Area Estates Ltd, Mr Weir successfully bid for a freehold property at auction in January 2008. A lease was noted against the freehold title and also registered under its own title number. The sale contract stated that the lease had determined by operation of law, and that the buyer was not entitled to raise any requisition in relation to it. The contract also provided for the property to be sold with vacant possession.

The seller contended that it had accepted a surrender by operation of law from the tenant, who was an individual, on 31 August 2006. However, a bankruptcy petition had been presented against the tenant on 8 August 2006. This was noted against the tenant's leasehold title on 11 August. On 11 October 2006 a bankruptcy order was made against the tenant. A restriction was accordingly entered on the leasehold title on 2 November 2006.

The seller served notice to complete under the sale contract on 7 March 2008. However, the buyer refused to complete, and claimed to be entitled to rescind the contract on the ground that the lease had not been validly terminated.

Section 284 of the Insolvency Act 1986 provides that a disposition of property by a person who is bankrupt, which is made between the presentation of a bankruptcy petition and the making of the bankruptcy order, is void unless the consent of the court is obtained.

The Land Registration Act 2002 contains provisions which protect those acquiring property from a bankrupt where there is no notice of the bankruptcy on the register and the buyer has no other knowledge of the bankruptcy.

Unfortunately the landlord could not rely on these provisions because there was a notice of the bankruptcy petition on the register at the time the surrender was taken. The purported surrender was therefore void, by virtue of section 284 of the Insolvency Act 1986.

The seller argued that the defect in title caused by the subsisting lease was a technical defect, which was insufficient to allow the buyer to rescind the sale contract. The court disagreed. It ruled that it could not treat the presence of a subsisting lease encumbering property which was sold with vacant possession as a "technical conveyancing defect". This was not a case where there was simply a redundant entry on the register which had yet to be removed; here there was a subsisting lease.

The court thought that good title had not been shown by the seller. The buyer was therefore entitled to rescind the contract and get his deposit back.

Things to consider

The seller managed to secure a disclaimer of the lease from the tenant's trustee in bankruptcy on 15 May 2008, but that was too late to rescue the sale contract.

It is important to note that delivering vacant possession does not just mean that the premises are empty; there must be no third parties with a right to possession.

Before accepting a surrender of a lease, it is important to make some searches and enquiries, in the same way as on a purchase. The landlord needs to ascertain whether the lease is registered and, if so, make a search at Land Registry. This will reveal whether, as in this case, the tenant is subject to insolvency proceedings. It will also show whether the tenant has charged the lease (in which case the charge will need to be removed as part of the surrender). In addition, where (as is often the case) the tenant does not have legal representation in relation to the surrender, Land Registry will require evidence of the tenant's identity in order to process the surrender and close the leasehold title.