Assignment of a lease - Deduction of title by the assignor

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Overview

The assignment of leases and the title deduction process are vital aspects of property law, essential for the SQE1 FLK2 exam. This complex procedure ensures a transparent and legally compliant transfer of leasehold interests. For those entering the legal field, fully comprehending title deduction is key to performing due diligence, reducing risks, and protecting clients’ interests. This article dives into the legal framework, procedural steps, and challenges linked to title deduction in lease assignments.

Legal Framework of Title Deduction

Statutory Basis

Key legislation forms the basis of title deduction in lease assignments:

  1. Law of Property Act 1925: Sections 44 and 45 require provision of satisfactory proof of title.

  2. Land Registration Act 2002: Modernized land registration, affecting how title is deduced for registered land.

  3. Landlord and Tenant Act 1988: Section 1 requires landlords to consent to assignments, unless refusal is reasonable.

Case Law Influence

Notable cases have shaped title deduction:

  • Topland Portfolio No.1 Ltd v Smiths News Trading Ltd [2014] EWCA Civ 18: Emphasized strict compliance with lease covenants, highlighting the need for thorough title deduction.

  • EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch): Explored complexities in assigning leases with guarantors, stressing on careful examination.

The Process of Title Deduction

Registered Land

For registered properties:

  1. Official Copies: Obtain current official copies of the register and title plan from the Land Registry for conclusive proof as per Section 67.

  2. Examination of Entries: Review the register for any encumbrances or notices affecting assignment ability.

  3. Leasehold Information: Review the lease, including any variations, to understand the leasehold interest and assignment constraints.

Unregistered Land

For unregistered properties, the process is more detailed:

  1. Epitome of Title: Prepare ownership history covering at least 15 years, as per Section 44.

  2. Abstract of Title: Create a chronological summary of relevant deeds and documents.

  3. Root of Title: Identify a solid root of title, typically over 15 years old.

  4. Verification: Examine original documents or certified copies to confirm accuracy.

Landlord's Consent and Legal Considerations

Obtaining Consent

  1. Lease Review: Examine alienation covenants to determine landlord consent requirements.

  2. Application Process: Submit a formal application with:

    • Financial references for the assignee
    • Business plans or projected accounts
    • Details of proposed guarantors
  3. Reasonableness Test: Landlord's consent cannot be unreasonably withheld, factors include:

    • Assignee’s financial condition
    • Proposed property use
    • Protection of the landlord’s reversionary interest

Legal Considerations of Consent

  1. Timing: Lack of consent can result in breach and potential lease forfeiture.

  2. Conditional Consent: Landlords may impose reasonable conditions such as rent deposits or AGAs.

  3. Refusal of Consent: Assignor may seek a court declaration if consent is unreasonably withheld.

Practical Applications and Case Studies

Example 1: Complex Title Deduction

Consider Company A's attempt to transfer its lease to Company B. The lease from 1995 has complex provisions and several variations.

Step 1: Company A's solicitors acquire official copies, revealing:

  • Restriction requiring landlord's consent
  • Sublease notice to a third party

Step 2: Lease examination shows:

  • A 2005 variation requires assignee's parent company guarantee
  • A sublease with pre-emption rights

Step 3: Solicitors must:

  • Seek landlord's consent
  • Negotiate the guarantee
  • Investigate pre-emption rights

This example shows the complexities of title deduction, requiring careful document analysis and consideration of stakeholders.

Example 2: Restrictive Covenants

Scenario: Assigning a commercial lease in a shopping center with a covenant against alcohol sales.

Title Deduction: Assignor must disclose this to the assignee, who must decide if it fits their business plans. Failure to disclose might lead to disputes.

Example 3: Leasehold Charges

Scenario: Assigning a lease for a warehouse subject to a charge from the assignor's loan.

Title Deduction: Assignor must disclose this charge. Assignee must consider implications, possibly requiring lender's consent.

Risks and Mitigation Strategies

Potential Risks

  1. Incomplete Title: Missing documents or interests affecting the lease.

  2. Breach of Covenants: Ignoring restrictions that could breach assignment.

  3. Consent Issues: Misinterpreting consent requirements.

  4. Hidden Liabilities: Missing disputes or financial obligations.

Mitigation Strategies

  1. Comprehensive Due Diligence: Check beyond the standard 15-year period if needed.

  2. Expert Consultation: Seek specialist advice for complex issues.

  3. Clear Communication: Maintain open dialogues with all parties.

  4. Contractual Protections: Include warranties and indemnities in the contract.

  5. Insurance: Consider title insurance to cover defects or unknowns.

Conclusion

A thorough understanding of title deduction in lease assignments is essential for the SQE1 FLK2 exam and future practice. This complex process requires attention to detail, solid knowledge of property law, and the ability to handle complex challenges. By understanding legal frameworks, procedural needs, and potential pitfalls, future legal professionals can ensure effective due diligence in lease transactions.

Key takeaways include:

  • The necessity of detailed examination for registered and unregistered land titles
  • The important role of landlord consent