Sale ‘subject to’ an unregistered option. Is the option binding on the purchaser?

An unregistered option to renew a lease is not binding on a purchaser of the reversion because of section 3(2) of the Land Registration Ordinance. The mere fact that the sale is expressly  ‘subject to’ the option will not make it inequitable for the purchaser to rely on s.3(2). This exposes the seller of the reversion to a claim by the tenant for breach of contract and the seller should take steps to protect himself.

Wellmake Investments Ltd v Chan Yiu Tong ([1996] 2 HKLR 44, CA) concerned  a lease for three years that contained an option to renew for a further two years. The landlord sold the reversion ‘subject to’ the option. The sale agreement was registered within one month but the lease was registered after that (and nearly two years after being granted). When the lease ended the owner of the reversion sought an order for possession and claimed not be bound by the option because of section 3(2) of the Land Registration Ordinance.

The Court of Appeal agreed. The mere fact that the sale of the reversion had been expressly subject to the option did not make it inequitable for the purchaser to rely on s.3(2). This was not like Lyus v Prowsa Developments Ltd ([1982] 1 WLR 1044) where the purchaser had undertaken an obligation to honour the contract.

The result is that the purchaser of the reversion was not subject to the option and was entitled to possession at the end of the original lease. This means that the seller of the reversion is in breach of the option agreement and is exposed to the possibility of a claim for damages for breach of contract. The seller of a reversion subject to an option to renew should check that the option has been registered. If not, the seller should obtain a contractual commitment from the buyer to honour the option.

2 Responses to “Sale ‘subject to’ an unregistered option. Is the option binding on the purchaser?”

  1. annathecatcat Says:

    If the purchaser of Wellmake Investments Ltd v Chan Yiu Tong ([1996] 2 HKLR 44, CA), seeks to take possession before the lease end, will he still be successful to rely on s3(2) and take possession? Or this exception only operates to “option to renew”?

    • Michael Lower Says:

      The leases were already in existence and the purchaser was subject to them because of the exception for short term leases at a market rent. So the purchaser was not entitled to possession. The effect of the decision is that the purchaser was not subject to the unregistered options.

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