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Is The Gap Widening?

As is widely known, legal title to land does not formally pass to a transferee of that land until the legal disposition has been registered at the Land Registry - assuming of course that it is a registrable disposition. Although the legal estate remains vested in the transferor, for most parties the deal is done before the ink on the page has dried.

This article was originally written for Property Law Journal, Nov 2015

In the case of first registration, if the registration requirements are not met within the registration period, legal title reverts back to the transferor.  The legal estate is held by the transferor on a bare trust for the transferee or assignee (in the case of a transfer or assignment), whereas with the grant of a lease or the creation of a mortgage it will instead take effect as a contract for valuable consideration. 

In the case of all subsequent registrations a gap is created between completion and registration, which is commonly known as the “registration gap”.   

We owe the gap to Section 27 of the Land Registration Act 2002 (“the Act”), and previously the Land Registration Act 1925.  The legal consequence being that until the Land Registry completes the registration of a transfer of land, the legal and beneficial ownership is fractured between the seller and the buyer (or the assignee and assignor, or the landlord and tenant, as the case may be).  This article considers the problems posed by the registration gap, as well as some practical ways to alleviate them.

The gap has introduced many hurdles, which are cross-discipline; it impacts the service of statutory notices, break notices, the commencement of and relief from forfeiture proceedings, and even prevents transferees of land from entering into certain planning agreements, e.g. leaving the responsibility of complying with a planning enforcement notice with the seller.

Neither the gap nor its associated hurdles are something that the Act specifically envisaged.   Sections 91 to 95 of the Act anticipated a type of e-conveyancing system to introduce simultaneous completion and registration, the intended result of course being that there would be no gap.  This has not been implemented, and although the problem of the gap is rumoured to be on the radar of the Law Commission, it is not one for which there is yet a solution.  

Statutory and Break Notices

There are many occasions when a party to a lease might need to serve a notice; for example a landlord could want to break a lease with a difficult tenant or get the property back, or a tenant with security of tenure might want to request a new lease from its landlord in accordance with the Landlord and Tenant Act 1954.  There are however many additional considerations when the backdrop is a sale and purchase situation. 

The case of Brown & RootTechnology v Sun Alliance and London Assurance Co [1997] 1 EGLR 39 is a well known example of the consequences which flow from failing to register the transfer of a registrable disposition, exposing the perilous registration gap.   In this case, a landlord granted a lease to a tenant, which included a right for the tenant to break the lease early.  This right was expressed to end on a legal assignment of the lease.   As is correct and usual, the lease was registered.

However, the lease was then assigned as part of a corporate reshuffle and this assignment was not registered.  The previous tenant, the assignor, purported to exercise the break provision contained in the original lease, intending to bring the lease to an end.  The landlord disputed the break notice as invalid, because the tenant’s break option was supposed to have fallen away when the lease was assigned to one of its group companies.   The tenant, on the other hand, claimed it was valid, and the parties fought the dispute all the way to the Court of Appeal. 

It was held that the break option was intended to fall away on a legal assignment of the lease only.  As the assignee’s name had not been entered into the Proprietorship Register at the Land Registry, it did not hold the legal title.  As such, the assignment was not ‘legal’ so the break provision remained in the lease and the former tenant (still the legal owner) was able to validly exercise it.

Practically it would be difficult for a landlord to anticipate this scenario, but thorough due diligence of the underlying contract before an assignment, insisting on the registration of assignments, or obtaining an indemnity from a tenant for any losses arising out of the failure to register an assignment may provide a remedy.

Statutory Notices

Under the Landlord and Tenant Act 1954 (“the 1954 Act”) similar problems can arise.   Let us say that a landlord has recently purchased a large shopping centre.   Each unit is let on different terms, and the contractual term of some leases has expired.   The landlord is keen to tidy up its new portfolio.   As market rents have risen, the landlord is keen to achieve a higher rent from some tenants and in other cases would like to end some secured tenancies on statutory grounds, with a view to obtaining vacant possession.   As many tenants benefit from the security of tenure provisions contained in the 1954 Act, in order to re-gear, terminate, or renew these tenancies, the regime laid down by the 1954 Act must be followed. 

Although completion of the purchase has occurred, the landlord is not yet the registered legal owner.   Due to the size and complexity of its purchase, the Land Registry has anticipated that the registration will take at least 6 weeks to complete.  As the landlord has paid the purchase price, it does not want to delay the service of Section 25 Notices to terminate the current leases of some tenants, and propose some more favourable terms to others.

A Section 25 Notice is only valid if served by the “competent landlord”.  If a tenant wishes to serve a Section 26 Request for a new lease this also must be served on the “competent landlord”.   It is not a problem to serve either once registration has completed, but it becomes tricky prior to a transferee’s name being entered into the Proprietorship Register.   

The landlord is defined in Section 44(1) of the 1954 Act, and the case Biles v Caesar [1957] 1 W.L.R. 156 CA has confirmed that this is the person in whom the legal, not equitable, title is vested.   The above landlord cannot therefore validly serve a Section 25 Notice until at least 6 weeks after legal completion of its purchase, because at the date of the notice (if served earlier), it would not be the competent landlord for the purposes of the 1954 Act.    

The practical consequence of this is that renewal leases may become delayed, as might the new landlord’s receipt of increased rents, and its ability to obtain vacant possession on statutory grounds.  Logic follows that a new tenant of a leasehold interest acquired by assignment, teetering in the gap before its disposition is registered, also could not validly serve a Section 26 Request on its landlord. 

Although Section 74 of the Act retrospectively applies the effect of registration, this is only the case when the Land Registry issues its completion of registration certificate.  The leading text Reynolds & Clark considers the argument that the effect of registration being retrospective (to the date of the making of the application to the Land Registry) might actually validate the service of a Section 25 notice by a landlord who is not yet the registered legal owner.  Although a little unclear, the conclusion widely reached is that the validity of the notice must be considered at the date when it is served.  If legal title is not vested in a landlord at the date on which it serves a Section 25 Notice under the 1954 Act, it will not be considered the competent landlord, and its notice would be invalid.

Furthermore, the case of Smith v Express Dairy [1954] JPL 45 decided that a simple notice to quit could not be served by a transferee of a registrable legal estate until its registration has completed.

Enfranchisement

Long leaseholders have the right to collectively purchase the freehold interest out of which their leases are granted under the Leasehold Reform, Housing and Urban Development Act 1993 (“the LRHUD Act”), as amended by the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002. This is known as Enfranchisement.

The case of Renshaw and others v Magnet Properties South East LLP (2008) 1 GLR 42 offers another warning to landlords who find themselves in the registration gap.   In this case the tenants of four flats served notices under Section 13 of the LRHUD Act exercising their right of collective enfranchisement.   The landlord later sold its interest in the freehold reversion, and its purchaser then served a counter-notice on the tenants under Section 21 of the same Act.   The buyer used the counter-notice to dispute the price proposed by the leaseholders to collectively purchase the freehold interest.   The Central London County Court held that the counter-notice was invalid.  Although the landlord had exercised its right under Section 21, it was held that this could only be done so validly by the registered legal proprietor.  At the time the landlord served the counter-notice it was not the registered legal owner.  As such, the leaseholders were entitled to a declaration that no valid counter-notice had been served.

Forfeiture

Sometimes a landlord wants to exercise the remedy of forfeiture, i.e. to terminate its lease to a tenant by re-entering the demised property, or by the commencement of proceedings for possession.  The right of a landlord to forfeit arises when a tenant is in breach of covenant e.g. has failed to pay rent.  However, in circumstances where either the landlord or tenant is not yet the registered legal proprietor, caution should be taken.

If a landlord is not yet the registered legal owner, forfeiture can occur in equity, as was held in the case Scribes West Ltd v Relsa Anstalt (No 3) [2004] EWCA Civ 1744, which means that during the registration gap it may be possible for a landlord to forfeit lawfully.   On theother hand, if a tenant (an assignee) is soon-to-be the registered legal owner, the situation is less clear.   In these circumstances, if the landlord wishes to issue a forfeiture claim at the Court, it should only do so once the legal estate has vested in the new tenant, unless it is prepared to issue and serve those proceedings on both the old and new tenants.   

The situation differs if forfeiture is to be carried out by peaceable re-entry.   A new landlord who is not yet the registered legal owner can usually forfeit by re-entry, due to the implication that the seller has authorised such action, as was held in Rother District Investments Ltd v Corke [2004] EWHC 14 (Ch).   

Interestingly, if a tenant has recently transferred its leasehold interest, then Section 4 of the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) will step in to assist a landlord wishing to forfeit for the new tenant’s breach.   Section 4 explicitly transmits a right of re-entry under a tenancy on assignment.   Here ‘assignment’ includes when it is only equitable.   As such, a tenant in breach of covenant is still at risk of forfeiture by re-entry even if it is not yet the legal assignee.  

Charges

One registration gap peculiarity exists in the case of lenders registering a charge against a property’s title at the Land Registry.  As is often the case, a lender will take real property as security for sums advanced under a loan or facility agreement.   Their security is usually registered at the Land Registry in conjunction with the transfer of legal ownership.   However, in the case of Bank of Scotland plc v King and Okoronkwo [2007] EWHC 2747 (Ch) it was held that a bank lending to a purchaser of property could have its legal charge registered against the title at the Land Registry, even if the sellers remain the registered legal owners.  

Practical Lessons

The registration gap presents all sorts of unique and peculiar challenges to property professionals. These can be problematical for conveyancers, surveyors and planners alike.  

Where an equitable owner serves a notice and the effect is that this is invalid due to the registration gap, the practical ramifications have the capacity to be wide ranging.   However, as the case law above highlights, the risk that the registration gap poses is not one to be underestimated, particularly in the case of an awkward recipient of a notice.  Nevertheless, there are ways to anticipate and alleviate these problems.

Practical Solutions

First and foremost, it is important not to take things at face value.   A party may claim to be the owner of a property, but there is a chance that this is only of the beneficial interest.  As legal title to the land may still be vested in the seller, assignor or landlord, it always pays to check the registered title documents before any action is taken.  The key point being whose name is entered into the Proprietorship Register.   

In a sale and purchase situation, where a buyer wants to serve statutory notices, it should get its seller on board before contracts are exchanged.  The buyer could ensure that the contract authorises it to act as agent of the seller until registration has completed.   

Alternatively, the buyer could provide that the seller must serve any statutory notices requested by the buyer until registration is effective.  Another alternative might be that the buyer ensures that the seller covenants to deal with all property management issues, as instructed by the buyer.   

Although these clauses may be tricky to negotiate into a contract for sale, if a seller is aware of a buyer’s specific property management intentions at the outset of a deal, it may be more willing to buy into such an arrangement.

Scope for Improvement

Recent changes could serve to narrow the registration gap.  For example, the Land Registry has introduced an e-Document Registration System, which enables conveyancers to directly upload transactional documents to the Land Registry’s portal immediately after completion, the intention being that they can be allocated to registrars swiftly.  

Although this is not the same e-conveyancing system envisaged by the Act, it goes some way to reducing the registration gap when applications are straightforward.   However, complex purchases are prone to delays, which results in a lengthy registration gap.  This is often protracted further by queries raised by land registrars, which are now returned to conveyancers through the same online portal.   By the time responses to such requisitions have been provided, it may be that several weeks have already elapsed since the completion of a transaction.  The Land Registry often owes these delays to a backlog of similar difficult applications.  Might it therefore be that a narrowing of the registration gap could be achieved by increasing the Land Registry’s resources? 

Conclusion

Although in simple cases the registration gap is not as long as it once was, the Land Registry appears at times to be stretched, so until the bottleneck of applications is cleared the registration gap problems will continue.  Unless dramatic reforms to the registration process are implemented, it appears the challenges that the registration gap poses for all parties in property transactions may continue to rise.  

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Helena Davies

Director

I specialise in real estate litigation, having over 14 years’ experience advising a broad range of clients on property disputes.