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The implications of protecting the priority of an agreement for lease 11 September 2015

Is it important whether the wording of a lease granted pursuant to an earlier agreement for lease follows exactly the form annexed to the agreement?  There might be SDLT implications, I suppose.  But there is a definite possibility that it could affect the effectiveness of any priority protection for the agreement for lease at the Land Registry.

I wrote about the case of A2 Dominion Homes Ltd v Prince Evans Solicitors [2015] EWHC 2490 (Ch) in my article “Effect of registering a notice at the Land Registry to protect an agreement for lease” on 21 July 2015.  At the time all we had was a Lawtel summary.  The court ruled that a notice lodged to protect an agreement for lease was effective also to provide priority for the lease granted pursuant to the agreement for lease.  In that case, the landlord had granted a mortgage over the property between exchange of the agreement for lease and the grant of the lease itself (there were 33 of them, in fact).  The court held that the tenants’ leases took priority over the mortgage, and therefore that the mortgagee’s consent was not needed under the terms of the mortgage.

That made sense.  In fact, it was what we had always assumed to be the case – had we stopped to think about it.

The devil is in the detail

But, as usual, the devil is in the detail.  The transcript is now available (although only available so far to Lawtel subscribers).  In summing up what the judge considers to be the law, there is a nasty sting in the tail:

“32.  In relation to the two points raised by Mr Denehan, in what I must say was a most attractive argument, it seems to me that a clear distinction between the agreement for the leases and the leases themselves is rather artificial. The latter are the product of the former.  In my view, so long as the leases themselves strictly conform to what the agreement for the leases provides, it is wrong to make a distinction between equity and the law in the way that Mr Denehan does [ie to distinguish between the priority afforded to the agreement for the lease and the priority afforded to the resulting lease].  In the result, I will answer the preliminary issue in the negative.” (My underlining)

The underlined wording is where a problem may lie in the future.  Grudgingly, I think I have to agree with the judge’s view.  From the point of view of the mortgagee in this case, for example, the terms of the lease were known, and the mortgage was granted subject to that lease – but not any other lease.  So when will a change in the wording of a lease take it beyond what any prior agreement provides for?

Keen landlord and tenant anoraks (are there any other kind?) will remember that a similar issue arose in Receiver for the Metropolitan Police District v Palacegate Properties Ltd [2001] Ch 131.  This was a case under the old contracting-out system under the Landlord and Tenant Act 1954, which required a court order to be obtained.  The question in that case was whether the contracting-out agreement was still valid if the wording of the lease had been changed after the court order (which exhibited a copy of the lease) had been made.  The alteration in that case was merely that the rent would be payable in advance rather than in arrears.  Pill LJ in the Court of Appeal in that case said —

“The words “that tenancy” in section 38(4)(a) [of the 1954 Act] require its terms to bear a substantial similarity to that before the court when authority was given.  In particular, changes material to the need for protection may nullify the authority granted.  For example, the length of the term would be a material consideration in the case of a lease which contemplated substantial capital expenditure by the tenant.”

So, on the facts of that case, the (extremely minor) amendment to the lease did not vitiate the parties’ agreement to contract out the lease.

In passing, the issue is, of course, still relevant to the more modern contracting-out procedure involving the landlord’s warning notice and tenant’s declaration (or statutory declaration) introduced in 2004.  At what point does one start worrying that the lease that the tenant is entering into is no longer in the same form as the lease in respect of which the landlord’s notice was served?  In other words, does the Palacegate ratio still apply under the current procedure?  (Or, to complicate matters, does it even matter, as I suspect that it was assumed by the civil servants who wrote the new procedure that the warning notice would be served at heads of terms stage, long before any draft lease had even been proffered to the tenant.  On that view, no variation of the wording would be relevant so long as the core details of the transaction have not changed.)

So where does that leave us, in relation to protecting an agreement for lease?  My feeling is that Palacegate is irrelevant, as it related solely to a specific statutory procedure under which it was important for the tenant’s interests to be protected.

So we are in completely unknown territory.  I imagine that the court (if ever asked) would say that one looks at the question from the mortgagee’s point of view.  Is the mortgagee disadvantaged by the lease that has been granted as compared by the lease that was envisaged to be granted by the agreement for lease to which the mortgagee took subject.  That would be something that the mortgagee would probably find it difficult to show – perhaps a materially lower rent, or a longer term.

McCausland

It might also be necessary to consider the implications of McCausland v Duncan Lawrie Ltd [1996] 4 All ER 995.  In that case the Court of Appeal held that the effect of varying a contract is to create a new contract.  In that case the variation (of the completion date) was by exchange of letters, which was held not to satisfy the requirements of section 2 Law of Property (Miscellaneous Provisions) Act 1989.  That meant that, on the facts, there was no new contract.

Of course, if there had been a new contract, it would be necessary to consider whether any notice to protect the old (superseded) contract would also protect the new contract.  That could be relevant in a case like this.  However, in our case, the likelihood of a new contract coming into existence where the form of lease is varied slightly between exchange and completion is slim, I think, as there would probably be no one document that would satisfy section 2.

The practical answer

Of course, some agreements for lease may provide for the lease to be granted “in the form of the attached lease with such amendments as the landlord and the tenant may agree“.  Might that solve the problem entirely?  Would that mean that a mortgagee would be subject to any changes that the parties agree?  Perhaps, but it must be rare for this type of problem to arise – so we may never find out.

Click here for the transcript on Lawtel (subscription required)

 

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