There is a fantastic article in this week’s Estates Gazette by Guy Fetherstonhaugh QC (“Humpty Dumpty and break clauses” - EG 21 January, page 86) which should be read by every tenant, and tenant’s advisor, who is struggling to convince its landlord that it has complied with all of the pre-conditions of the break. In this article, Guy Fetherstonhaugh QC encourages judges to take a “commercially purposive” approach to the interpretation of break clauses and their conditions: in effect, to perceive ambiguities in the drafting, so as to open the door to interpretation and construction of clauses that clearly flout business common sense. He says “…it is difficult to see why break clauses should be singled out for special [literal] treatment.”

The article must have been written before the report in Avocet Industrial Estates LLP v Merol Ltd & Anor [2011] EWHC 3422 (Ch) in which the tenant was denied its break because of £130 of unpaid default interest. Holding a tenant to a lease for a further 5 years (and in excess of £300,000 of rent) simply because the tenant had not paid £130 of default interest that the landlord had not asked for clearly flouts business common sense. The Appeal Court should be asked to intervene, to more closely analyse the clause, and to construe. In that case, was default interest really a payment that was “due to have been paid” before the break date? On what date did it fall “due”?

Can you give if you haven't got? Can you create legal title when you do not have legal title? In Cook v The Mortgage Business Plc [2012] EWCA Civ 17 (24 January 2012) Etherton LJ says, at [59], in relation to the creation of a short-term lease (not exceeding 7 years) by a transferee of a registered title in the "registration gap" between transfer and registration:

"Prior to the registration of the purchaser as the proprietor, the purchaser’s interest in the property can subsist only in equity. As a matter of basic land law, an equitable owner of land cannot grant a legal interest. A person cannot grant a greater interest than he or she possesses. No doubt, for good policy reasons, the legislature could provide in sufficiently clear and precise language for a different position. I do not regard section 29 or indeed any other provision in the LRA as providing for so remarkable a position in clear and precise terms, and I cannot see any good policy reason for Parliament to do so."

However, this statement slightly overlooks section 24(b) LRA 2002 which accords "owners' powers" to any person who has the right to apply for registration. A transferee, pending registration, can exercise owners’ powers. The exercise of those powers may create something that is itself subject to registration requirements, and which can therefore only exist in equity until those requirements are met. But if not, the exercise may create a legal interest or estate, such as a lease for a term not exceeding 7 years. It is a separate matter whether that estate then has priority under section 29(4) over later registered dispositions. (The CA decision on the facts of this case determines that it would not).

The case itself is a sad tale of homeowners losing their homes through a defective, possibly fraudulent, sale and leaseback "equity release" scheme. The scheme involved a sale to an entity called North East Property Buyers at a price that would clear mortgage debt, with a promise that the owners could stay in occupation by virtue of tenancies created by the buyer. (Strangely, it seems that the "sale and leaseback" contracts were contracts for sale with vacant possession - for some reason, making no mention of the obligation of the buyer to grant tenancies back to the now former owners). Unfortunately, the buyer's acquisitions were funded by contemporaneous mortgages, and the Court of Appeal has held that any interest of the owners arising at completion (and not before, since exchange and completion was simultaneous) arose after the creation of the mortgage, and not in a scintilla of time between the buyer's purchases and the creation of the charges. For a full consideration, see this month's CPI Update.

Tenants often find trouble where a break right is to be exercised. In Avocet Industrial Estates LLP v Merol Ltd & Anor [2011] EWHC 3422 (Ch), the tenant had to ensure that, at the break date (17 March 2010), “any payment under this lease due to have been paid on or before that date” had been paid, and that the tenant had “paid to the Landlord a sum equal to 6 months Annual Rent.” The tenant served a valid notice to determine. On 16 March 2010, the tenant’s solicitors sent a letter by hand enclosing a cheque for a sum equal to six months’ annual rent, in order to satisfy the second requirement. Was that too late? In general, debts are to be settled by legal currency, and a cheque is not legal currency. However, the parties may, by express or implied agreement, agree that a cheque will be accepted. The course of dealings between the parties (e.g. the acceptance of rent paid by cheque) may infer an agreement to allow payment by cheque. This was the case here. Hence, the second requirement had been complied with. However, the first requirement had not: the tenant had, on several occasions, been late in paying sums to the landlord, and had therefore incurred interest charges under the lease. Even though no formal demands had been made for the interest, the amounts unpaid resulted in a breach of the first requirement. The judge held that the landlord was not estopped from relying on that requirement by its failure to demand those sums. This case will be considered more fully in the CPI Update.

Following issues of concealment of unlawful development exposed in the case of Welwyn Hatfield Borough Council v Secretary of State for Communities and Local Government [2011] UKSC 15, the Localism Act 2011 inserts new sections 171BA, 171BB, and 171BC into the Town and Country Planning Act 1990. These provisions are expected to come into force this spring. They will enable local planning authorities in England to apply to the magistrates’ court for a planning enforcement order within 6 months of the date upon the authority becomes aware of evidence of an apparent breach of planning control. This will enable the authority to enforce certain breaches of planning control outside the normal planning enforcement periods. The order will only be made if the court is satisfied, on the balance of probabilities, that the breach of planning control has to any extent been deliberately concealed, and that it is just in the circumstances to make the order. Once the order is made, the order enjoys a 12 month enforcement period. Note: the difficulty for the local planning authority is that they will have to show that the concealment was deliberate. This ought to require more than mere oversight; rather, something akin to a concerted effort to develop without consent and without the authority being able to find out that there has been development without consent.

The problem for conveyancers is that late enforcement under these provisions could affect subsequent purchasers. Enforcement is made against the owner or occupier of the property. However, the magistrates’ court has to be satisfied that it is just in the circumstances to make a planning enforcement order. One would hope, as against a bona fide purchaser who has carried out full searches and enquiries, and who has ascertained that, to the extent work has been carried out without consent, it was carried out outside the normal enforcement period, and where there is no reason to suspect that there had been any deliberate concealment of development, that it would not be just to make the order. However, the prudent buyer will not wish to take a chance, and may require a certificate of lawful use/development before proceeding. That will open a few cans of worms.

The January 2012 edition of the Commercial Property Information Update is published today on this website.

The City of London Law Society Financial Law Committee has published, on the City of London Law Society website, a guide to the questions to be addressed when providing opinion letters on English law in financial transactions. The guide suggests the questions which a law firm practising English law should consider addressing when seeking or providing an opinion letter under English law in a financial transaction, and explains the key considerations which might be relevant in answering them. However, the guide does not extend to opinion letters on corporate or property transactions.

Care must be taken to draw a clear line between a break right and a surrender agreement.

As was shown by the House of Lords in Barrett v Morgan (2000) 2 AC 264, there are fundamental differences between the two types of agreement. Whilst both agreements bring about the termination of a tenancy, one method of termination is unilateral, and the other is consensual. In general, unilateral termination of a lease (e.g. by the exercise of a break right) ends any derivative interests such as sub-leases, subject to rules of statutory security of tenure, whereas consensual termination (e.g. by way of a surrender) does not.

For one reason or another, the parties to a lease might be tempted to dress up what would otherwise be a break right as an agreement to make (or accept) a surrender. For example, where premises are sub-let, conscious that the exercise of a break right will terminate the sub-tenancies, the parties may try to re-cast a break right as a covenant for surrender, or as a covenant to accept a surrender. The case of PW & Co. Ltd v Milton Gate Investments Ltd [2003] EWHC 1994 (Ch) casts doubt upon the effects of such agreements. In that case, Mr. Justice Neuberger stated (in obiter) that “where the surrender of the head-tenancy is effected pursuant to a unilateral right to require a surrender contained [in the lease]” the effect of the surrender would be to determine the sub-tenancies – as if a break had been exercised. He stated further that the distinction between a break and a surrender was a distinction between “a unilateral right to determine the head-tenancy contained in the head-tenancy itself [whether by way of break clause or right to require a surrender] and a bilateral agreement to determine the head-tenancy entered into after it had been granted”. Only the latter could properly be classified as an agreement for surrender, the completion of which would preserve the existence of the sub-tenancies.

One must therefore take care over the structuring of a unilateral termination clause. Surrenders and breaks are different, but the distinction between the two can become blurred.

Earlier this week, commentators in the national press, seemingly in the know, were predicting that the draft legislation to be published to implement announcements in the Chancellor's Autumn Statement would signal the introduction of an increase in stamp duty on the sale of shares in property-rich companies. (See Daily Telegraph). At present, selling the company that owns a property, instead of selling the property itself, gives rise to a significant stamp duty saving, in that stamp duty on share sales is set at 0.5% of the purchase price, whereas the top rate of SDLT is 5% (or 4% in the non-residential market). However, as the Law Society's Gazette explains, the predictions were wide of the mark. See "Stamp duty land tax and the chancellor's autumn statement" written by Anthony Hennessy of Brecher Solicitors.

The Law Society has updated its practice note for solicitors in cases where a lender is requesting that a solicitor discloses information or documents contained in a joint conveyancing file (i.e. a file maintained on an acquisition for the buyer and its lender). The update is motivated in part by renewed requests by lenders for information – perhaps investigating possible mortgage frauds – and in part by the decision of the High Court in the case of Mortgage Express v Sawali [2010] EWHC 3054 (Ch). In this case, the claimant lender sought an order for the delivery up of a number of conveyancing files from a firm of solicitors. The defendant firm's insurer argued that the court had no jurisdiction to order the delivery up of the entire file since some of the documents in the file would belong to the borrowers and/or would be covered by legal professional privilege. Some of the information in the file was confidential to the borrower, and disclosure would breach the SRA Code of Conduct. However, Mortgage Express relied upon an express declaration signed by the borrowers as part of their mortgage application which stated as follows: “I/We declare and agree that... I/We irrevocably authorise my/our conveyancer to send their entire file relating to the whole transaction (not just the loan) to you at your request.” Most other mortgagees rely upon similar waivers of privilege and confidentiality. The judge held that the waiver was valid. It was not unduly onerous or unfair and he therefore ordered the delivery up of the files. It made commercial common sense to uphold the waiver. Without it, a lender would be unable to police a transaction and to discover whether the solicitor has been in breach of duty.

Specifically on the issue of consent, the Law Society’s practice note says: “It is a matter of law whether any document signed by the borrower at the time of accepting the mortgage offer will constitute the required authority. That consent might have lapsed and you must be satisfied that there is a valid current consent. You should request a copy of the signed consent of the borrower relied on by the lender, rather than accepting an assurance from the lender that it holds a valid consent.”

The December 2011 edition of the Commercial Property Information Update is published today on this website.