Leases and Agreements

Brown & Root

Richard Hanson considers the implications of this case

Introduction - What is Brown & Root?

The facts of the recent case of Brown & Root Technology Limited v Sun Alliance & London Assurance Company Limited case, are as follows. In 1989 Alliance granted a lease to Brown & Root which was registerable at the Land Registry. By the terms of the lease Brown & Root had a "personal" right to terminate the lease early at the end of the 7th year of the 25 year term. This right was stated to "cease to have effect upon the assignment of the lease by the lessee". In December 1993 Brown & Root (with licence from the landlord) assigned the lease term to its parent company; all the necessary documents were executed, Brown & Root vacated and its parent company took up occupation and the parent company paid the rent. Registration of the transfer at the Land Registry never took place and therefore due to the technical rules relating to the registration of land, the legal estate remained with Brown & Root. In September 1994 Brown & Root served a notice on Sun Alliance purporting to terminate the lease on the expiry of the 7th year.

The question was whether or not the personal option to terminate the lease early could still be exercised by Brown & Root.

The Court of Appeal said unanimously that it could because the meaning of assignment on the facts of this case meant "assignment of the legal estate". This, they said, only occurs on the registration of the transfer at the Land Registry.

This case has ramifications beyond the facts of the case and probably beyond what was in the minds of the Lords Justice of Appeal. It means that where there is an assignment of either the landlord's or the tenant's interest great care must be taken to ensure that the correct party serves or receives any notice or proceedings in relation to the lease. This case will remain with us for some time as we understand it is not being appealed to the House of Lords.

Therefore when dealing with any notice that has to be served under a lease or with any proceedings to be made the first question must be whether or not there has been a recent assignment. If there has (assuming the lease is registrable), has the registration of that assignment been completed? If it has not then it is the legal owner (whether of the reversion or the lease term interest) who must serve any notice or commence any proceedings and be the party upon whom such a notice or proceedings are served (subject to a few exceptions referred to below).

Set out below is what should now happen as a result of the Brown & Root case pending registration of the assignee as registered proprietor at the Land Registry.

Notices Under the Lease

All rent review, break or other notices under the terms of any lease must be served by the assignor, assuming the lease does not permit otherwise. Such notices must be served, likewise, on any assignor. If they are not, then they are likely to be invalid, subject to the effect of the Land Registration Rules 1925 which are discussed below.

The same applies to all statutory notices (except those under the Landlord & Tenant (Covenants) Act 1995, which is explained below) including notices under the Landlord & Tenant Act 1954 and section 146 notices under the Law of Property Act 1925. In the case of section 146 notices these must be served on both the assignor and assignee.

Legal Proceedings

Any proceedings, for example, for arrears of rent, damages or possession are to be issued by the legal owner (ie the assignor landlord) against the assignor tenant.

However, proceedings for relief from forfeiture can be taken by the assignee tenant pending registration as the relief sought is equitable. Also other proceedings seeking remedies to enforce equitable, as opposed to legal, obligations can be taken by the assignee owner.

Peaceable Re-Entry

It is the legal owner as landlord who has the right peaceably to re-enter premises and take possession. But this right is exerciseable against both the legal owner tenant and his assignee pending registration.

The Right to Distrain

The assignor landlord has the right to distrain until the new assignee landlord has been registered. However, if the tenant "attorns tenant" to the assignee landlord prior to registration (for example, by paying rent to the assignee landlord and thus recognising him as landlord) then the assignee landlord has the right to distrain for arrears of rent from the tenant.

The landlord's rights against an assignee tenant are unaffected as the distraint is against goods on the premises and can be made against goods belonging to a person with a beneficial interest in any tenancy

(ie an assignee pending registration).

A notice under section 6 of the Law of Distress Amendment Act 1908 by the landlord upon an underlessee must be made by and served on the assignor (as legal owner) of the respective interest.

Rule 83 of the Land Registration Rules

Rule 83 provides that an application for registration of a lease is completed as from the date of the application for registration. This means that the completion of registration is backdated and we consider that, as a result, the legal title is deemed to have been vested in the assignee as from that date. Inevitably, the consequence of this is that acts undertaken by the assignee in the period between the date of the application for registration and completion of registration will be retrospectively validated to the extent that the act could only be done by the legal owner. This could be a saving grace if an error is made when serving a notice.

The Landlord & Tenant (Covenants) Act 1995

By section 5 of the 1995 Act a tenant of a "new" tenancy is released from the tenant's covenants in the lease upon an assignment; and under the Act assignment includes an equitable assignment. Therefore, the assignor is released and the assignee becomes liable as from the date of the execution of the transfer: the date of registration being irrelevant. This probably fosters more confusion than with "old" tenancies.

Further, an assignor of an old or new tenancy becomes a "former tenant" as from the date of the execution of the transfer and if a problem arises the section 17 procedure can be utilised against the "former tenant".

Some Practical Recommendations

Before any notice is served under a lease or proceedings are taken, a check should be made as whether or not there has been any recent assignment, and if there has, whether it has been registered;

During the period pending registration all notices and proceedings should be served on both the assignor and assignee.

Conclusion

The Brown & Root case has important ramifications for leases not subject to the 1995 Act and care should be taken by landlords and tenants where an assignment takes place and any notices or proceedings are to be served before registration of the assignment.