Unregistered Commercial Leases: Landlords Beware

Emme KentWhether you are a landlord or tenant, it is essential to be aware of your legal rights and obligations. When it comes to leasing a commercial property, a tenant’s failure to register the lease can result in a significant legal headache for the landlord, as Emme Kent, solicitor from leading law firm, Harrison Clark Rickerbys explains.

Any lease of more than seven years must be registered at the Land Registry, with such leases usually making it the tenant’s responsibility to complete that registration. However, if the tenant fails to do so within two months of completion, it is not a valid legal lease and only takes effect as an agreement for a lease (i.e. a contract). The landlord continues to hold the legal estate rather than the tenant until the lease is registered. So, what does this mean for the landlord?

The Risk

Registration at Land Registry constitutes notice of the lease to all parties and for all purposes. If the lease is not registered, it follows that this notice is not given and means that the grant of the lease cannot operate at law.

The consequence of this is that a landlord may not be able to recover unpaid rent from the guarantor if the tenant fails to pay. In addition, if the landlord sells the property, the lease will not transfer to the purchaser and will remain as a personal contract between the landlord and the tenant. A landlord may also find it difficult to obtain finance on the strength of a lease that is contractual and not legal.

 What can the landlord do?

It seems like common sense that the landlord would simply register the lease himself in this situation. Unfortunately, common sense does not prevail here. The Land Registry will only register the original lease signed by the landlord, but this will be with the tenant’s solicitor following completion.

If the tenant refuses to cooperate, the landlord can apply to court for an order for specific performance. This will compel the tenant to perform the lease covenant to register the lease at Land Registry. The costs of this application are likely to be recoverable from the tenant under the terms of the lease. However, if the tenant becomes insolvent in the meantime the landlord will be left to pick up the costs.

Another option may be to forfeit the lease.

If you happen to be a landlord, it is imperative that you check that your tenant registers the lease within two months of completion. If they fail to do so, you must act quickly and seek professional advice.

For all tenants out there, check that your solicitor has registered the lease for you or you could face significant additional costs, and possibly even lose your lease.

Case Studies

The Commercial Property team at Harrison Clark Rickerbys has been involved in three real cases below that illustrate the mess that can be created if a lease is not registered:

  1. We acted for the purchaser of a prime retail site on Cheltenham’s Promenade. Our client’s intention was to purchase the freehold as an investment property with the tenant in situ. We discovered that the tenant had traded for 18 months and never registered their lease. The property was useless as an investment because the lease would not transfer to our client on completion of the purchase. As a result, the tenant had to vacate and a new tenant had to be signed up before the purchase could go ahead.
  1. Another case related to the sale of a business located at a significant retail investment property in Cheltenham. The lease of the property had been assigned by the original tenant, but the assignment had not been registered. This meant that the transfer of the lease was not effective and, as a consequence, the lease was not capable of being transferred to the buyer. This oversight caused major issues in the sale of the business and led to significant delays and increased costs for the seller.
  1. This final example acts as a reminder to tenants to check their solicitor has not overlooked registration. We represented the landlord in the renewal of a lease of a commercial property. After completion the tenant’s solicitor failed to register the new lease – and failed to advise the tenant that registration was necessary. He has refused to co-operate and we are now faced with the prospect of issuing proceedings to compel registration. The tenant would have to pick up the costs of this application, which could be in the thousands, or face losing his lease for breach of covenant.

Emme is a solicitor from the Commercial Property team at Harrison Clark Rickerbys. Based at the firm’s Cheltenham office, she deals with a range of general commercial property and property finance transactions which include lease checker reports as well as buying, selling and renting commercial property. For further information, contact Emme on 01242 246464 or at ekent@hcrlaw.com.