Formalities for an Assignment of a Lease

The recent Court of Appeal decision in the case of Lankester & Son Ltd v Robert Rennie and Anne Rennie [2014] EWCA Civ 1515 highlighted the dangers for tenants of allowing a third party into occupation without ensuring strict compliance with the formalities for an assignment under the lease.

Facts

The Tenants, Mr and Mrs Rennie, had taken a lease of premises comprising a car showroom and associated facilities for a term commencing on 1 May 2007. They covenanted to pay the rent and not to assign the lease without the Landlord’s written consent. The lease also contained a break clause granting them the option to terminate the lease upon giving six months’ notice, provided that the option was exercised prior to 1 May 2012. The break clause was personal to Mr and Mrs Rennie, and thus was not available to any person to whom the lease might later be assigned.

In 2008, Mr and Mrs Rennie decided that they wished to surrender the lease. The Car Agency Ltd (TCA) had expressed an interest in taking over the premises, and the Landlord confirmed that it would be prepared to grant its consent on the condition that the directors of TCA entered into a personal guarantee with the Landlord; no such guarantees were given. In addition, TCA wanted to retain the benefit of the break clause which, under the terms of the lease, would be lost upon assignment.

In pursuit of the assignment, Mr and Mrs Rennie delivered to their solicitor, who also acted for TCA, the signed transfer deed (although it remained undated). TCA took occupation of the premises, asked the Landlord to effect various repairs and also sought the Landlord’s permission to make improvements. The rent was paid by TCA. The registration of the transfer, however, was hindered by separate issues concerning the Landlord’s freehold title, requiring prior rectification of the title register. The Landlord had highlighted to Mr and Mrs Rennie that allowing TCA into occupation would be at their own risk.

In early 2010 TCA gave the Landlord notice of its intention to vacate. The Landlord wrote to Mr and Mrs Rennie and to TCA. In its letter to Mr and Mrs Rennie, the Landlord asserted that the assignment had never been completed and therefore Mr and Mrs Rennie remained liable under the lease. Conversely, in its letter to TCA, the Landlord asserted that TCA’s actions in occupying the premises and paying the rent prevented it from denying that it was the proper assignee.

By July 2010, TCA had settled with the Landlord for £15,000 and the Landlord sought to pursue Mr and Mrs Rennie for the balance of the rent arrears. Since Mr and Mrs Rennie had not exercised their rights under the break clause, and it was too late to do so now, the Landlord asserted that they remained liable under all of the tenant’s covenants for the full term.

Decision

The Court of Appeal upheld the decision at first instance and found that Mr and Mrs Rennie remained liable. The Landlord had made it clear that it would only consent to the assignment on the condition that personal guarantees were obtained, and the parties had not resolved the issues concerning the break clause. The parties had failed to complete the assignment, and the transfer deed was merely being held by their solicitor pending final instructions. Consequently, the transfer deed had not been dated and, thereafter, delivered for registration; it was accepted a transfer could not have taken place in law.

As to whether an assignment took place in equity, the Court rejected the Mr and Mrs Rennie’s argument that the Landlord was estopped from denying the assignment by virtue of its own treatment of TCA as a tenant. The Court held that an estoppel by representation is personal to the parties and it was clear that the Landlord had not represented to Mr and Mrs Rennie that it had accepted TCA as the assignee; indeed, it had been made clear to Mr and Mrs Rennie that, if they allowed TCA into occupation without a formal assignment, they would remain liable. In addition, there was no estoppel by convention because there had been no shared understanding between the parties that TCA had become the tenant. Regardless of this, for an argument of estoppel to succeed, Mr and Mrs Rennie would have needed to show that they had relied upon the Landlord’s representation to their detriment. This was clearly not the case; the rent had continued to be paid and the right to exercise the break had not been lost until after TCA had vacated.

Overview

It is not uncommon for a tenant to wish to allow a third party into occupation, often as part of but before completing an assignment. This decision serves as a useful reminder for a tenant that it must comply with all the requisite formalities for a valid assignment, or it will risk remaining liable for the tenant’s covenants despite having allowed a third party into occupation. In addition, a landlord should make expressly clear from the outset the terms on which it would be prepared to consent to an assignment, and the parties must work to resolve any issues early on. A landlord should also ensure that it does not, by its actions, represent an alternative position to the tenant and thus render itself estopped from denying that a valid assignment has taken place.

For further information regarding this topic or any other property and construction matter, please contact the Edwin Coe Property team.

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