Equitable leases – Issues Surrounding Registration and Signature Formalities of Leases
My lease isn’t signed correctly – that doesn’t matter does it?
In cases where the lease has been ineffectively signed, this could leave parties with what is known as an equitable lease (a lesser class of lease than a legal lease), or even a periodic tenancy which causes issues regarding enforcement and uncertainty surrounding the length of term and whether a tenant is contractually bound to honour the full term of the lease.
We have seen numerous cases whereby leases were put in place and incorrectly executed and no one took action to rectify the situation. One case in point related to the freehold purchase of a multi let site, whereby correct execution formalities had not been observed by numerous tenants. In the case of tenant companies, only one director had signed and the signature was not witnessed; in the case of individual tenants, again the tenant personally had signed but the signature was not witnessed. The documents were therefore not signed as a “deed”. This was the case for many of the leases on the same estate.
A lease of 3 years or more should be signed as a deed and failure to do that means the lease is not a legal lease, merely an equitable one, or even a periodic tenancy or mere contract. This could call into question the validity and enforceability of the lease itself. Think about a break right, a rent review clause or even trying to enforce a dilapidations claim at the end of the lease – these clauses could all be thrown into doubt leaving parties in a difficult legal situation with uncertain rights. Equally if the lease was intended to be contracted out of the Landlord and Tenant Act 1954, this could be invalid, leaving the tenant with security of tenure under the 1954 Act and leaving the landlord with tenants who are difficult, if not impossible to remove.
As a seller this could seriously de-value the investment. As a buyer you are unlikely to be able to finance the purchase on standard borrowing terms and if the issues are not rectified before you come to sell, then you face the same issues regarding valuation and hoping that you find an amenable buyer.
My lease isn’t registered at Land Registry – that doesn’t matter does it?
A lease of more than 7 years should be registered at Land Registry and it’s the tenant’s role to do this. In some cases, a tenant may be unrepresented which means they have never taken advice from a solicitor and are unaware of their obligations to register the lease and registration gets missed or forgotten about.
A lease becomes void if it has not been submitted to Land Registry for registration within 2 months of legal completion. This means that the lease is no longer valid and no longer takes effect. Applications can be made to Land Registry out of time, but note that Land Registry has a discretion as to whether to register the lease or not; they may choose to reject your application.
A void lease might then be incapable of passing to a successor in title so it would give a huge issue for a landlord when trying to sell the investment interest in the property or for a tenant when trying to assign its lease; is a landlord of a lease which has not been correctly registered going to consent to a tenant’s application for assignment? Doubtful until the issues are resolved (and the issues may not be capable of being resolved) leaving the tenant with an unsaleable asset. Also the obligations contained in the lease may be unenforceable.
As a landlord, having a lease which is void for non-registration is far from ideal and parties could end up with an equitable lease or mere contract only (as commented on above). Our standard lease does include a clause requiring the tenant to submit the lease to Land Registry for registration – however, if this is not done then the only remedy would be one for breach of a (void) contract.
Our recommendation in both these situations is to always take sound legal advice at lease inception, whether you are landlord or tenant. Legal advice on the grant of a lease may be costly, but it is likely to be much less costly than trying to sort these issues out later. Your solicitor will check execution and signature formalities are observed and, when acting for tenant will ensure the lease is correctly registered. If the lease plan isn’t suitable for Land Registry purposes or an SDLT return has not been submitted, then it is often too late post completion to try to rectify these issues. If these issues are not picked up until after completion it can be very difficult to get them rectified, so legal advice in advance and throughout the process is by far the best option.
Kate Palmer is a Partner in Keelys Real Estate team.