Landlords must ensure tenants register their lease

When you grant a lease (be it of a pub, restaurant, coffee shop or late night venue) you may need to make sure that the tenant registers the lease with the Land Registry. Most Landlords assume registration is only a tenant issue, but if you are a landlord who has a tenant who has failed to register a lease you may discover that you have significant unexpected issues and costs to deal with.

What are the potential consequences for a tenant who fails to register its lease?

A lease for a term of more than seven years, or a lease granted to take effect more than three months in the future, must be registered at the Land Registry within two months of grant. It is the tenant’s responsibility to complete the registration. Failure to register the lease within the relevant time period may mean that:

• the tenant will not have a legal interest in the property and the lease will only take effect as a personal contract between the original landlord and the tenant. This will mean that rights granted to the tenant in the lease over the landlord’s retained property/common parts (and any obligations on landlord to provide services or carry out repairs etc) may not be enforceable if the landlord sells its interest in the property;
• The tenant may find itself unable to sell the lease to a buyer or charge it to a lender (as they will expect to purchase or take security over a valid legal interest only); and
• The tenant may lose its rights to the property entirely if someone else has a competing claim over the land and has secured their registration at the Land Registry first.

What are the potential consequences for a landlord whose tenant has failed to register its lease?

A tenant with an unregistered lease (which was compulsorily registrable) can also cause a landlord a number of unexpected problems as 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). This may have the following implications for unsuspecting landlords:

• 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.

What can landlords do to protect themselves from the risks of unregistered occupational leases arising?

A landlord can take some pre-emptive steps to avoid being hostage to an unregistered lease before the lease is granted. It can ensure that the lease contains:

• An obligation on the tenant to register its lease at the Land Registry within the prescribed period for doing so (currently two months) and an indemnity for the all costs incurred by the landlord in seeking a declaration of specific performance to enforce the obligation on the tenant to register its lease;
• An ability for the landlord to step in to register the tenant’s lease in circumstances where the tenant has failed to do so and an indemnity from the tenant for payment of SDLT (if applicable) required to be paid in order to register the lease and for payment of the Land Registration fees themselves.

Any sums payable under the indemnity should also be reserved as rent under the lease in order that the landlord can utilise the threat of forfeiture to enforce payment if necessary.

For further information contact Leo Skinner.