It is sometimes the case that parties to a transaction fail to complete correctly the necessary documentation or formal process to legally complete the deal. This can sometimes call into question the legal status or legal effect of the incomplete documents or process.
In the case of a tenant failing to effectively transfer its interest in a lease, the impact can be significant as the tenant continues to be liable under the lease covenants.
In the recent case of Lankester & Sons Limited v Robert David Rennie and Annie Rennie [2014] EWCA Civ 1515, the Court of Appeal considered whether a signed, but undated transfer resulted in an equitable assignment of the lease or, if not, whether the landlord was prevented from subsequently arguing that the tenant was still liable under the lease covenants.
What does this mean?
For both landlords and tenants
The case is a useful reminder to both landlords and tenants of the effects of failing to comply with all the necessary formalities for an assignment of a lease.
For landlords
If a landlord is approached by a tenant with a proposal to assign a lease, it should make clear the terms on which it would be prepared to consent to the proposed assignment. Once those terms are set out, the landlord should not act or make representations which do not reflect those terms or confirm to the tenant that an assignment on different terms has been accepted.
Dependent on covenant strength, the landlord may wish for the incoming party to be liable under the lease covenants as soon as possible.
Therefore, it will be important from the landlord’s point of view to ensure that the assignment is effectively completed. If not, he may find himself having to pursue an impecunious previous occupier.
For tenants
If the tenant wishes to ensure that it is released from the tenant’s covenants in the lease, then it must complete the assigning formalities. If it fails to do so, it will remain liable and could be pursued sometime after it has vacated the premises.
Want to find out more?
The case details
In the Lankester case, in 2008 the landlord had entered into a lease with the tenant of a car showroom. The tenant gave the usual covenants to pay rent and not to assign the benefit of the lease without the landlord’s consent. The lease also contained a tenant’s break clause which was personal to the tenant and could not be exercised after May 2012.
In October 2008, the tenant approached the landlord to discuss the possibility of surrendering the lease or assigning it to a company with the benefit of the break clause. The landlord made it clear that it would only consent to an assignment of the lease if the directors of the incoming company guaranteed that the company would comply with lease covenants and the break was not to be assigned. Negotiations continued for a while but no such guarantees were forthcoming.
In November 2008, the tenant vacated the premises and allowed the company to take up occupation without completing a formal assignment with the landlord. A transfer deed was prepared by solicitors acting on behalf of both the tenant and the company. The transfer was signed, but undated and held on the solicitor’s file.
Once the company entered into occupation, it made payments to the landlord on account of rent, carried out improvements to the premises and also asked the landlord to carry out repairs.
However in February 2010, the company gave notice to the landlord of its intention to vacate the premises. The landlord sought to pursue both the tenant and the company in respect of breaches of covenant. In this regard, the landlord’s case was sought to make both the tenant and company liable and its correspondence was confused in this respect. This allowed the tenant to later argue that the landlord was prevented from claiming that the company was not a formal assignee. The company settled its liability to the landlord, but the landlord had to issue proceedings against the tenant for outstanding rent arrears.
The county court held that there had been no effective assignment of the lease from the tenant to the company. It was clear that the landlord had only been prepared to consent to the assignment subject to the provision of personal guarantees and the completion of a formal assignment. The Court held that even though the tenant allowed the company into occupation of the premises, the tenant remained liable under the lease covenants as there had been no valid assignment of the lease.
The tenant appealed to the Court of Appeal.
The Court of Appeal dismissed the tenants appeal. In the Court’s view, it was clear that the document prepared by the tenant’s and company’s solicitor could not transfer legal title to the company. This was on the basis that registration of the transfer had not taken place. The case confirms that when registered leasehold land is transferred the registration requirements of the Land Registration Act 2002 must be satisfied in order to vest a legal estate in the new tenant. From the date of the transfer until the application for registration, the transfer operates only in equity. Therefore, in this case, the legal interest in the lease remained with the tenant.
The court also pointed out that the document prepared by the tenant’s and company’s solicitor had not been delivered as a deed to the landlord. The transfer was held by the solicitors whilst the parties negotiated several outstanding matters, including the landlord insistence on personal guarantees.
The Court also rejected the tenant’s arguments that the landlord had made representations and/or had acted in such a way so as to now be prevented from pursuing the tenant.
The case is a useful reminder to both landlords and tenants of the effects of failing to comply with all the necessary formalities for an assignment of a lease. If the tenant wishes to ensure that it is released from the tenant’s covenants in the lease, then it must complete the assigning formalities. If it fails to do so, it will remain liable and could be pursued sometime after it has vacated the premises.
If a landlord is approached by a tenant with a proposal to assign a lease, it should make clear the terms on which it would be prepared to consent to the proposed assignment. Once those terms are set out, the landlord should not act or make representations which do not reflect those terms or confirm to the tenant that an assignment on different terms has been accepted. Dependent on covenant strength, the landlord may wish for the incoming party to be liable under the lease covenants as soon as possible.
Therefore, it will be important from the landlord’s point of view to ensure that the assignment is effectively completed. If not, he may find himself having to pursue an impecunious previous occupier.
