Pascal Lalande examines the new practices adopted by the Land Registry concerning leases under mortgage and sub-leases with limitations
Following a review of its practice, the Land Registry has made significant changes from 19 June in how it will deal with leases granted by mortgagors and with sub-leases where there is a limitation on alienation in the lessor's lease.
Where the lessor's estate is subject to a mortgage, the registry's current practice, on first registration and where the lease has been granted out of a registered title, is to approve absolute title only if the mortgagee's consent has been given, the lease falls within section 99 of the Law of Property Act 1925 and the statutory power of leasing has not been excluded, or the mortgage gives an express power to grant the lease. If those conditions are not met, the Land Registry normally approves good leasehold title only but has allowed the title to be upgraded to absolute on the subsequent lodgement of the consent.
This practice has caused annoyance to some solicitors who have argued that, in the absence of a restriction on the register in favour of the chargee where the lease is a registrable disposition, the lack of the chargee's consent should not prevent the approval of absolute title. The Land Registry has considered this point and agrees that a mortgagor or chargor is still able to create a legal lease despite the lender not having consented and the lease being outside section 99 and not expressly authorised by the mortgage/charge, but takes the view that such a lease is vulnerable to being lost as the result of action by the mortgagee/chargee or someone deriving title from them.
From 19 June, the Land Registry's new practice is normally to approve absolute title where the mortgagee's or chargee's consent is not lodged if this class of title would have been approved had there been no mortgage or charge. However, it will make the following entry in the Property Register of the new leasehold title: 'The title to the lease is, during the subsistence of the charge dated... in favour of... affecting the lessor's title (and, to the extent permitted by law, any charge replacing or varying this charge or any further charge in respect of all or part of the sum secured by this charge), subject to any rights that may have arisen by reason of the absence of chargee's consent, unless the lease is authorised by section 99 of the Law of Property Act 1925.'
The purpose of this entry is to alert any potential purchasers to the possible vulnerability of the registered lease. It should also reduce the possibility of the chargee's right effectively to determine the lease being lost as a result of section 29 of the Land Registration Act 2002.
This entry will not be made if the lender's consent is produced at the time application is made for the registration of the lease, and it will be cancelled, where it appears, on subsequent lodgement of the consent. An application for the cancellation of the entry will have to be made in form AP1, but no fee will be payable.
If the lease is granted out of a registered title and there is a restriction in that title against the registration of dispositions without the consent of the chargee, consent will still be required before the Land Registry will complete the registration of the lease.
The Land Registry's current practice is also not to approve absolute title where, on the first registration of a sub-lease, the applicant fails to lodge the consent of the head lessor or a superior lessor, and that consent is required under the terms of the head lease or superior lease. The registry also does not award absolute title where the head lease or superior lease contains an absolute prohibition on sub-letting.
Where the sub-lease has been granted out of a registered title, the registry looks for the following entry in that title made under rule 6(2) of the Land Registration Rules 2003: 'There are excepted from the effect of registration all estates, rights, interests, powers and remedies arising upon, or by reason of, any dealing made in breach of the prohibition or restriction against dealings therewith inter vivos contained in the lease.'
This entry is made when the lease contains a provision prohibiting or restricting dispositions. If there is such an entry, the registry checks the lease. If the lease prevents sub-letting without consent and the consent is not provided, or if it contains an absolute prohibition on sub-letting, the registry will only register with good leasehold title.
Regardless of whether or not there is an alienation clause in respect of sub-letting, and regardless of whether or not consent has been produced, the registry's new practice will normally be to register with absolute title, whether it is completing a first registration or registering a lease granted out of a registered estate. This new practice is on the basis that the sub-lease is not prevented from being a legal lease simply because there has been a breach of the alienation clause, albeit that this breach is likely to make the sub-lease liable to determination through forfeiture of the head lease or superior lease.
However, the registry will be making the following entry in the Property Register of the new sub-leasehold title where no consent has been lodged and formerly it would have registered with good leasehold title because of an alienation clause: 'The registrar has not seen any consent to the grant of this sub-lease that the superior lease, out of which it was granted, may have required.'
The registry is making this entry following a request from the Law Society that the issue of lessor's consent is dealt with in the individual registers for sub-leases. The registry will not check to see whether the consent lodged is a sufficient consent. In particular, it will not be checking the terms of the head lease or superior lease nor whether any consent has been given by the correct person.
It is the registry's view that while a sub-lease in breach of a prohibition or restriction in a head lease or superior lease is a valid lease that may be registered with absolute title, this does not prevent the forfeiture of that lease and determination of the sub-lease, with consequent closure of the sub-lease title.
This entry will not be made if the requisite lessor's consent is produced at the time application is made for the registration of the sub-lease, and it will be cancelled, where it appears, on subsequent lodgement of the consent. An application for the cancellation of the entry will have to be made in form AP1, but no fee will be payable.
Pascal Lalande is registration change group leader at the Land Registry's head office in London
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