- A split reversion occurs when land subject to a lease is sold off in parts, so that the tenant has more than one landlord
- If the lease is protected by the Landlord and Tenant Act 1954, all landlords must join together in order to terminate the lease
- This can give rise to difficulties if the tenant itself acquires part of the reversion
Where a tenant acquires the reversion to its own lease, the lease may be extinguished. However, this process - known as "merger" - is not automatic. Whether merger has occurred will usually depend on the intention of the relevant parties. Often it will be administratively more convenient for the tenant if the lease merges, particularly if it is registered at the Land Registry. However, this will not always be the case and there are good reasons why a tenant may not want to effect a merger of its two interests.
What happens if the tenant acquires not all of the reversionary interest to its lease, but only part of it? This is what happened in BOH Limited (1) Layhawk Consultants Limited (2) v Eastern Power Networks Plc.
Facts of BOH Limited (1) Layhawk Consultants Limited (2) v Eastern Power Networks Plc
An electricity company had a lease which comprised two plots of land, one immediately north of the other. On the northernmost plot (plot 2) the tenant built an electricity substation. The cables and access to the substation were over the southerly plot (plot 26). However, plot 26 had no direct access to the highway. The lease therefore granted the tenant a right of access, and to lay and maintain cables, over a third plot (plot 20) immediately to the south of plot 26. Plot 20 abutted the highway.
The landlord subsequently sold off its freehold interest in the three plots individually, so that each plot became vested in a different owner. In other words, the reversion to the lease had been split. Eventually, the freehold of plot 2 was bought by the electricity company. The electricity company was therefore in a relatively unusual position, becoming the freehold owner of part of the land of which it was also tenant under the lease. However, plots 20 and 26 remained owned by third parties.
The landlords of plots 20 and 26 wanted to prevent the electricity company from using those plots for access and cabling. The landlords argued that, on the purchase of the freehold of plot 2 by the electricity company, the lease had merged with the freehold so far as plot 2 was concerned. The lease would not have merged in relation to plot 26, and therefore in theory the tenant still had the rights over plot 20 which were set out in the lease. However, the tenant would not be able to use those rights to access plot 2, since easements attached to one piece of land (plot 26) cannot be used to obtain access to another piece of land (plot 2).
Had the lease merged with the freehold in relation to plot 2?
The court accepted that it was possible for a lease to merge in part. Whether merger had occurred depended on the intention of the parties. In the absence of any direct evidence of intention, the court would presume that merger was not intended, if it was to the interest of the party that merger should not take place.
Where the reversion to a lease has become split, it is possible that it might not be in the interests of the remaining landlords for the lease to merge. For example, if the lease contained a covenant against a noxious or offensive use, and the lease merged in part, then the landlords of the adjoining premises would not be able to prevent the merged part from being used for that purpose.
Conversely in this case, the landlords of plots 20 and 26 argued that it was in their interests for there to have been a merger. This was because the contractual term of the lease had expired, and the lease was continuing under the Landlord and Tenant Act 1954. In order for a notice to be served under section 25 of the Act to bring the lease to an end, all the landlords would need to act together. The commercial interests of the remaining two landlords in giving a notice under section 25 may not be shared by the tenant, which owned the reversion to the other plot demised by the lease.
The court did not think that the interests of the other landlords mattered. It was open to a person owning both a lease and its reversion to form an intention - and declare - that there should be no merger. Where no such intention was declared expressly, there was a presumption against merger if that would be contrary to the combined owner's interests. The focus was entirely on the person who owned both interests.
Merger would clearly be to the detriment of the electricity company, because there were no rights of access or cabling attached to the freehold of plot 2. When the tenant acquired the freehold to plot 2, it was under no obligation to consider any interests other than its own. It was irrelevant that merger might be contrary to the other landlords' interests. This was reinforced by the fact that if the electricity company had made an express declaration of merger, it was inconceivable to think that the landlords could have had it set aside.
Human Rights Act
The landlords also argued that, if the lease had not merged in respect of plot 2, then the Landlord and Tenant Act 1954 should be read as if the tenancy did not include plot 2. This argument was based on section 3 of the Human Rights Act 1998, which provides:
"So far as it is possible to do so primary legislation and subordinate legislation must be read and given effect to in a way which is compatible with the ... rights [under the Convention for the Protection of Human Rights and Fundamental Freedoms]."
The landlords argued that their Convention right to the peaceful enjoyment of their possessions was infringed by section 44(1A) of the 1954 Act. This provides that the "landlord", for the purpose of the Act, means all landlords collectively. The landlords contended that, to be compatible with the Convention, that section must be read as excluding from the definition of landlord any person who is also the tenant of the tenancy. If the section was read in that way, then the tenant would not need to join in with the service of a section 25 notice to bring the tenancy to an end.
The court declined to rule on this point, as no section 25 notice had actually been served. The court did however note that any section 25 notice would need to be given in respect of all three plots, as the Act provides that such a notice must relate to the whole of the property in the tenancy.
Things to consider
The landlords argued that the result in this case could enable a tenant to continue in occupation under a protected lease paying less than the then market rent, because the landlords were not able to act together to bring the lease to an end and grant a new lease at a market rent. The tenant, through being a part-owner of the freehold, would be able to block the giving of a section 25 notice and thereby protect itself against market forces. The landlords argued that this was an abuse of the 1954 Act. While it was the purpose of the Act to confer security of tenure on business tenants, it was not its purpose to provide tenants with protection of that nature.
This is one of several factors which landlords should bear in mind before selling off - in separate parts - land which is subject to a lease, and which investors looking to purchase part of a split reversion must consider. Those granting leases should consider whether the reversion is likely to need to be sold off separately in future and, if so, whether it would be better to grant separate leases of individual parts.
Even if the court had concluded that the lease had merged as to part, it is possible that the tenant may have been able to argue that the easements over plot 20 survived the merger, under the rule in Wall v Collins. The Court of Appeal held in this case that an easement must attach to a piece of benefited land (here, plot 2), but not necessarily to a particular interest in that land. So when a lease is extinguished on merger, the tenant does not automatically lose any easements granted to him or her or to previous tenants; these easements continue to exist and to be exercisable by the occupier of the benefited land for the period for which they were granted.