Granting a lease or underlease - Deduction of title by the landlord

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Overview

In property law, landlords' title deduction in lease and underlease transactions is essential for SQE1 FLK2 exam preparation. This process ensures the validity and security of leasehold interests, involving complex legal principles and practical considerations. Aspiring legal professionals must understand title deduction, as it is a major component of the SQE1 FLK2 syllabus. This article offers an in-depth exploration of the topic, covering statutory requirements, case law, and practical applications to equip candidates with the necessary knowledge for exam success.

Legal Framework for Title Deduction

Statutory Basis

The legal framework for title deduction is established by the Land Registration Act 2002 (LRA 2002) and the Law of Property Act 1925 (LPA 1925). These statutes are key to understanding landlords' obligations in demonstrating their title to grant leases or underleases.

The LRA 2002 governs land registration in England and Wales. Section 27 requires the registration of leases exceeding seven years, highlighting the need for title deduction as landlords must prove their capacity to grant such leases.

For unregistered land, the LPA 1925 applies. Section 44 outlines the requirements for conveying legal estates, including leases, and emphasizes the formal nature of title deduction.

Case Law Influence

Several landmark cases have shaped title deduction principles:

  1. Walsh v Lonsdale (1882) 21 Ch D 9: Established the principle that "equity regards as done that which ought to be done," impacting title deduction where formal requirements are unmet but agreements are clear.

  2. Abbey National Building Society v Cann [1991] 1 AC 56: Addressed priority of interests in property transactions, underlining the importance of thorough title investigation.

Registered vs. Unregistered Land

Title deduction varies between registered and unregistered land, reflecting the different legal frameworks.

Registered Land

For registered land, title deduction involves obtaining and analyzing official copies of the register from HM Land Registry. These documents provide important information about:

  1. The registered proprietor
  2. Any charges or encumbrances
  3. Restrictive covenants
  4. Easements and other rights

The landlord must demonstrate they are the registered proprietor or have authorization to grant the lease on behalf of the registered proprietor.

Unregistered Land

Title deduction for unregistered land is more difficult and time-consuming. It requires examining an unbroken chain of title documents, typically covering at least 15 years, as per Section 23 of the LPA 1925. This process involves:

  1. Analyzing an abstract or epitome of title
  2. Verifying authenticity of title documents
  3. Investigating gaps in the chain
  4. Examining deeds for encumbrances or restrictions

Example: A landlord granting a 20-year lease on unregistered commercial property must meticulously review title documents dating back at least 15 years, ensuring there are no breaks in the chain that could affect their ability to grant the lease.

Legal and Equitable Leases

The distinction between legal and equitable leases affects title deduction as it influences the nature of the interest granted.

Legal Leases

Legal leases comply with all statutory creation requirements. For a lease to be legal, it must:

  1. Be granted by deed if exceeding three years (Section 52, LPA 1925)
  2. Be for a definite term
  3. Take effect in possession (including future possession)
  4. Be properly executed and delivered

Landlords must prove they can create such an interest, often requiring demonstration of legal ownership.

Equitable Leases

Equitable leases arise when lease agreements fail to meet all formal requirements. The principle from Walsh v Lonsdale means such agreements can be enforced in equity, despite lacking legal validity.

In title deduction, equitable leases can complicate matters, as they may not be obvious from title documents. Landlords and solicitors must investigate any arrangements that could create equitable interests.

Example: A landlord agrees to a 10-year lease, with the tenant taking possession and paying rent without a formal deed. This creates an equitable lease. Future title deductions must identify and address this equitable interest.

Good and Absolute Leasehold Titles

The Land Registration Act 2002 introduced different grades of leasehold title: good leasehold title and absolute leasehold title.

Absolute Leasehold Title

An absolute leasehold title provides the highest level of assurance, indicating:

  1. Thorough investigation and verification of the landlord's title to grant the lease
  2. No uncertainties about the superior title
  3. A leasehold interest free from title defects

Title deduction for absolute leasehold title requires comprehensive proof of the landlord’s right to grant the lease, including necessary consents.

Good Leasehold Title

A good leasehold title is granted when the lease is valid, but there may be uncertainties about the landlord’s title or superior interests, such as:

  1. Incomplete tracing of the landlord's title over the full period
  2. Minor chain of title defects
  3. A superior title not having absolute registration

For a good leasehold title, the focus is on validating the immediate lease while acknowledging potential superior title uncertainties.

Example: A landlord seeks a sublease of commercial premises with a registered good leasehold title due to superior title uncertainties. In deducing title for the sublease, the landlord must:

  1. Provide evidence of their registered good leasehold title
  2. Disclose known superior title issues
  3. Comply with restrictions or covenants in their lease
  4. Obtain necessary consents from their superior landlord

This illustrates the complexities in title deduction for different grades of leasehold title.

Practical Considerations in Title Deduction

Role of Solicitors

Solicitors are key in the title deduction process, advocating for landlords and tenants. Their responsibilities include:

  1. Conducting thorough searches and enquiries
  2. Analyzing title documents and identifying issues
  3. Advising clients on title defects
  4. Negotiating solutions
  5. Drafting and reviewing lease documents

Common Issues in Title Deduction

Common issues in title deduction include:

  1. Missing Documents: Gaps in title chains can create uncertainty, requiring further investigation or indemnity insurance.

  2. Restrictive Covenants: These may limit the property's use or the ability to grant certain leases.

  3. Third-Party Consents: Requiring consent from mortgagees, superior landlords, or other parties can complicate the process.

Conclusion

A firm understanding of title deduction is indispensable for handling lease and underlease transactions successfully. It provides a legal basis and mitigates risks, thereby instilling confidence in property dealings. For those preparing for the SQE1 FLK2 exam, reviewing these principles is a critical step toward a comprehensive understanding of property law.

Continue refining your knowledge by reviewing statutory details and engaging with various case studies to deepen your understanding.