The “Boomerang Lease” - Registration of Lease Assignments and why it is important

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The “Boomerang Lease” - Registration of Lease Assignments and why it is important

During these Covid times, businesses across all sectors continue to look to reassess and reconfigure their real estate requirements. In some cases, space has been found surplus to requirements for occupiers of offices, for example (where a workforce proves able to work from home effectively and without a significant drop off in productivity or quality) or leisure or retail occupiers, where (for the foreseeable future) there will always be a real threat of not being able to occupy and enjoy their premises.

Consequently, tenants in such circumstances with leases with long terms left to run, and with break clauses not yet exercisable, may by choice or necessity consider assigning the lease, effectively transferring their ownership of the premises to a new tenant. However, it is important for assignors (i.e. the outgoing tenant) to be aware of how to legally rid itself of its obligations under the lease; in certain circumstances, the assignment may become void, and ownership of the property (including those onerous lease obligations) could revert back to the assignor.

The recent matter relating to the Sports Direct group company, Gilesports Limited, has highlighted the importance of registration. Gilesports Limited held a lease of a shop and they later decided to sell that company to JJB Sports, assigning the lease of the shop accordingly.

In doing so, they believed to have rid themselves of any of the obligations contained within the lease, given that upon effective assignment of the legal title to a lease created after 1st January 1996 (i.e. completion of the registration of the assignment at the Land Registry), a tenant is automatically released from the burden attached to the agreement, provided they are not required to enter into a separate agreement with the landlord.

However, despite having completed the assignment, Sports Direct was later still held liable for large rent arrears as the lease was never registered.

Whilst it does appear harsh for a previous tenant to ultimately be held liable for the new tenant’s failure to pay rent and perform any other tenant’s covenants, this will be the case if the assignment is one which needs to be properly registered at Land Registry (i.e. any assignment of a registered lease or an assignment of an unregistered lease which has more than seven years left to run) and isn’t properly registered. The new interest, without being registered/until it is registered, only takes effect as an ‘equitable’ interest in land (as opposed to a legal one), leaving the assignor as the legal owner.

Outgoing tenants/assignors should also be warned that once an assignment has been completed (notwithstanding that registration may be outstanding), the assignor will ordinarily not have any right to apply for registration at the Land Registry itself unless specific provision is made, meaning that there is very little they can do to remedy the situation.

Whilst the pandemic has exposed the potential for business expenditure savings on real estate, failure to understand your legal position and protect yourself accordingly can have frustrating and costly consequences. The Real Estate Commercial team at JMW are experts in all landlord and tenant related matters (including lease assignment) and will ensure that you are properly advised at the outset of any key considerations and potential pitfalls.

If you are considering assigning your lease or taking an assignment of a lease, please contact us.

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