Investment Purchase with Unregistered Lease

[jaymondo]

Hi,
We're looking at purchasing a commercial investment. It has a 10 year lease which commenced in 2020 but we've just discovered the tenant failed to register the lease with land registry. Any thoughts / options / advice appreciated.

[Lawcruncher]

Well, the lease cannot now be registered. If the tenancy has the security afforded by Part II of the Landlord and Tenant Act 1954 it is continuing. However, it would seem that the tenant only has an equitable lease. That may present a problem in that certain steps, such as serving notices, may not be available to the landlord. The position needs to be regularised before you buy.

[rentreviewspecialist]

If a lease which ought to have been registered is not registered within the prescribed time limit it takes effect as a contract to grant the estate. It is therefore only the grant aspect that is affected; the contractual obligations of the parties remain intact.

The potential consequences for a landlord whose tenant has failed to register its lease which was compulsorily registrable are:

The lease terms may be unenforceable against third parties or by purchasers or lenders (due to the lease taking effect only as a personal contract between original landlord and tenant unless and until it is registered).

The landlord may not be able to recover unpaid rent from any guarantor if the tenant fails to pay; in fact, the guarantor will not be on the hook for any liabilities;

If the landlord wants to sell the property the lease will not transfer to the purchaser and the purchaser will not be able to enforce any covenants against the tenant (including the obligation to pay rents or to keep the property in repair). There will therefore be delays as the buyer will insist that the lease is properly registered before completion in order that tenant obligations are enforceable by them; and

The landlord may also find it difficult to obtain finance on the property that is subject to the lease. A lender will expect a secure income stream and ability to enforce tenant convents. Not having the lease registered would thereby impact on value and increase lending risk.

[CStevens]

you should obviously ask the seller to register the lease before you purchase. Even though they are out of time the land registry can agree to register it in any case (their discretion) but i have seen applications like this accepted provided that the applicant sends a letter to the Land Registrar explaining the situation and why they did not register the lease in time. As others have said though, this is the sellers problem to resolve.

[Lawcruncher]

CStevens,

The seller cannot register the lease as he is not the tenant. The tenant cannot register the lease as it has less than seven years to run and has passed its term date. A new lease needs to be granted. That would be advisable in any event in a case where the term date has passed.

Whether the position is quite as dire as set out in post 3 is something I would have to think about. Whatever it is, the advice is clear: Do no buy until either the tenant has left or a new lease has been granted.

[jaymondo]

Thank you all for your responses.

Lawcruncher,
The lease ends Dec 29 so remaining term is still greater than 7 years (albeit that there is a break in 24). Sounds like a new lease is the best way forward else the seller would have get the tenant to write to land registry to get agreement to register the existing lease.

[Lawcruncher]

Oops! Had a mental aberration and read 2020 as 2010. In that case no need for a new lease unless the Land Registry insists on it. If they do a short confirmatory lease should do the trick. The tenant should register the lease if told it is only equitable until registered.

[CStevens]

Lawcruncher,

No problems - i thought it was me for a minute...although i take your point regarding the seller/tenant. i thought the seller was the tenant - that will teach me for responding when i am half awake!

[CStevens]

jaymondo,

The new lease will require the seller having to get the tenant to sign a new lease which might be harder than you think depending on how the tenant is doing so the sellers best approach might simply be to contact the tenant and tell him that it appears his lase hasn't been registered yet and he should speak to his solicitor (if he had one) who acted for him when taking the lease or find a solicitor now to deal with the registration. As i say, whether its a new lease or a letter to the Land Registry, the tenant will have to sign something and i would have thought it not in the sellers best interest to ask a tenant to sign a new lease because it may lead them to question the validity of what the have already signed which may be unwise.

Good luck in any case...and be thankful it is not your problem to solve!

[Lawcruncher]

For the record, the law is that if a lease is not registered within 2 months of its grant it becomes void to grant a legal estate and takes effect as a contract to grant a legal estate. That means that the tenant has an equitable lease. In many respects an equitable lease is as good as a legal lease - at least so long as the original parties remain the same. When the parties change it gets more complicated.

A tenant who has not registered his lease in time can apply to the Land Registry to register it and they may do so if satisfied there is a good reason for the delay. If the Land Registry declines to register the lease, the tenant will have to get the landlord to regrant it. The landlord is under an obligation to regrant because there is a contract to grant the lease. The landlord's cost of the regrant must be paid by the tenant.

If the tenant is sensible he will co-operate to get the lease registered because as things stand he does not have a good title. If the seller is sensible he will not be looking for his costs to be paid. If the tenant fails to co-operate the landlord can enforce the contract,

See the following sections of the Land Registration Act 2002: 7(1); 7(2)(b); 8.

[CStevens]

Lawcruncher,

I have seen the 'good reason' of 'we are incompetent and couldn't locate the file' be accepted by the Land Registrar so i think you would be very unlucky for them to reject a request for registration received by the tenant...although the Land Registry can be a bit of a law unto themselves on occasions.

[jaymondo]

Thanks all, much appreciated!

[flyingfreehold]

I would not be put off buying because the tenant had not registered his lease. So much the better actually, because if the lease is registerable and yet it was not registered the tenant is prevented from serving valid notice on the landlord. Anyhow leases registered/not registered, these are only snapshots in the property's history. You've got to be in the game to win the game. The secret of my success has been to buy stuff that other people wouldn't touch As they say in Yorkshire, Where there's muck there's brass!

[Lawcruncher]

I would not be put off buying because the tenant had not registered his lease. So much the better actually, because if the lease is registerable and yet it was not registered the tenant is prevented from serving valid notice on the landlord. Anyhow leases registered/not registered, these are only snapshots in the property's history. You've got to be in the game to win the game. The secret of my success has been to buy stuff that other people wouldn't touch As they say in Yorkshire, Where there's muck there's brass!

Your philosophy is fine, but has the risk of getting fingers burned.

The notice point is not one I can comment on without doing research which is difficult, if not impossible, with only the internet at my disposal. A point which does occur to me though is that if the tenant cannot give notice then surely neither can the landlord. I tentatively suggest that notices can be given because a tenancy is a tenancy whether the tenant has a legal estate or not.

[flyingfreehold]

so far as the tenant is concerned the lease is equitably owned only but the tenancy exists so the landlord serves notices on the assignor who holds in trust for the tenant ( and also serves on the tenant on the basis that it can do no harm to make sure that the intended recipient has notice of it) But thats assuming as landlord you want to get rid of tenants.Personally my appproach has always been to avoid paying empty rates at all costs, so I d rather have a tenant paying a rent that is a bit low than a void. Probably could do better if tougher but thats my approach. Fingers dont get burnt unless you have to sell