Disposition of leases and reversions

Power of deposition

Both landlords and tenants have legal estates which may pass to others on sale, by way of gift or under the rules of testate or intestate succession. The following is primarily concerned with disposition on sale, but it must be remembered that there are other occasions besides sale on which leases and reversions may pass to new owners.

Sale of the freehold reversions

It is always possible for the owner of the reversion in fee simple to sell his estate in the land. This will be done in the normal manner by conveyance, in the case of unregistered land, and by transfer and registration, in the case of registered land.

Unregistered land

In the case of unregistered land, the purchaser will acquire the fee simple subject to any legal lease which exists, regardless of whether he knew of its existence, for ‘Legal rights are good against the world.’ Thus the purchaser of the fee simple becomes the tenant’s new landlord and takes over most if not all of the original landlord’s rights and duties under the lease.

Registered land

Where the lease is granted for not more than seven years it will be an overriding interest under LRA 2002, Sch 3, para 1 and so will bind the purchaser of the fee simple even if he did not know of it.

If the lease is for more than seven years it must have been registered in order for it to take effect as a legal lease. When this is done the lease will also be noted on the charges register of the landlord’s title, and anyone who takes the landlord’s estate for valuable consideration will take subject to the lease.

Sale of the lease by the tenant

A sale of his leasehold estate by the tenant is also possible. The disposition of a lease is usually called an ‘assignment.’

Express assignment

Since the assignment of a lease is the conveyance or transfer of a legal estate it should be made by deed. This rule applies even to leases for not more than three years, because s. 54(2) provides an exception only for the original grant of such leases and does not apply to assignments.

However, a defective assignment will be regarded in equity as a contract to assign, provided that it satisfies the formalities for a contract relating to land. Where such a contract arises, either party may then apply for an order for specific performance in order to effect a full legal assignment. Meanwhile of course, equity ‘regards as done that which ought to be done,’ and will regard the transaction as an equitable assignment. 

Assignment by operation of law

An exception to the requirement for a deed arises in cases in which the assignment takes effect due to operation of law. This can be important in cases in which a tenant purports to grant a sublease of the property but grants a term which is equivalent or greater than, the unexpired portion of his own lease.

If the purported sublease is for not more than three years it will probably have been made orally or in writing. If the effect of the agreement is to transfer the whole remaining term of the head lease to the ‘sublessee’ the result appears to be a valid legal assignment without the use of a deed. Lord Greene MR seems to have accepted this reasoning in the case of Milmo v Carreras [1946] KB 306 at p. 312, on the ground that such as assignment arose by operation of a rule of law and this approach has more recently been followed in Parc (Battersea) Ltd v Hutchinson [1999] 2 EGLR 33. 

Sale of a leasehold reversion  

The owner of a leasehold reversion performs two roles, being at the same time both the tenant of the head lease and the landlord of the sublease. Thus the sale of his estate must involve a consideration of the rules relating to both a lease and a reversion; the assignment of his lease must take the form described above, while the question of whether his purchaser takes subject to the sublease depends on principles similar to those relevant to the sale of the freehold reversion.