A recent High Court case has highlighted a risk for tenants who dispose of leasehold property hoping to rid themselves of onerous lease obligations. In certain circumstances the assignment of the lease will become void and ownership of the property – including those onerous obligations - will revert to the assigning tenant.

The case

The case concerned a claim for rent arrears against a company in the Sports Direct group called Gilesports Ltd. Gilesports held the lease of a shop which was occupied by another company in the group, the Original Shoe Company (OSC). Sports Direct sold OSC to JJB Sports and Gilesports assigned the lease to OSC but, despite having assigned the lease, Gilesports was later held liable for large rent arrears.

The problem

The problem was caused by OSC failing to register the lease at the Land Registry. The lease did not need to be registered when it was granted in 1998 because it was not for a term exceeding 21 years.  However, in 2003 the threshold for registration was reduced to seven years, which meant that the lease should have been registered when it was assigned. In those circumstances, the Land Registration Act 2002 provides that the assignment becomes void and ownership of the lease reverts to the assignor.

This applies to leases that are not already registered and which have more than seven years left to run at the time of the assignment.  If the lease is not registered within two months after the assignment, then title reverts to the assignor (let’s call him A). A will be entitled to be indemnified by the assignee (let’s call him B), but if there are rent arrears it will often mean that B is not worth suing and so, as in the Gilesports case, A will have to bear the loss.

The solution

The solution is to ensure that the lease is registered within two months after the assignment. A does not have the right to apply for registration but should include in the documentation an obligation for B to do so. This should help ensure that registration is not overlooked and it will enable A to obtain a court order requiring the lease to be registered if B refuses to do so.

Does B escape liability?

What if A is insolvent and B is not, can the landlord pursue B for the arrears? B does not escape liability. Although B is no longer the tenant, the landlord is able to enforce the lease obligations against B, rather than A, if it chooses to do so. That is because the reverter of title to A is an assignment “by operation of law” and the provisions of the Landlord and Tenant (Covenants) Act 1995 by which a tenant is automatically released from liability when the lease is assigned do not apply when the assignment is by operation of law. However, because B is a former tenant, the landlord will have to give B formal notice of the arrears under section 17 of that Act within six months of the date on which the arrears fall due.  So the landlord needs to check whether the assignment has been registered, otherwise it may not realise that a section 17 notice is needed until it is too late.

Source: E.ON UK plc v Gilesports Ltd [2012] EWHC 2172 (Ch); Land Registration Act 2002 section 7; Landlord and Tenant (Covenants) Act 1995 sections 11 & 17.