Archive for the ‘option to renew’ Category

Surrender and regrant: the tenant under the new lease is not a successor in title of the tenant under the original lease

December 6, 2012

In Tweedie v Souglides ([2012] EWCA Civ 1456, CA (Eng)) a residents’ association was the tenant under a headlease of the property. T was the tenant of flat 5 under the terms of an underlease. As a result of a first deed of variation, an extra floor (in the roof space above the area originally demised) was added to the underlease. This amounted to a surrender and regrant by operation of law (Friends Provident Life Office v British Railways Board). T and his brother acquired the freehold of the property. They granted T (as underlessee) and ‘the successors in title of the Lessee’ an option to extend the lease for a term of 60 years from the expiry of the term of the headlease. S acquired the underlease of flat 5. The residents’ association (the head lessee) entered into a second deed of variation adding the roof terrace to the underlease of flat 5. Again, this amounted to a surrender and regrant. S then sought to exercise the option.

It was held that he was not entitled to do so. He was not a ‘successor in title of T since he held under the new lease that arose from the second surrender and regrant. He was not therefore entitled to exercise the option. The option was void for perpetuity. S could not take advantage of the exception in section 9 of the Perpetuities and Accumulations Act 1964 since this was only available to the lessee or successors in title (and S was not a successor in title). It was not possible to contract out of the surrender and regrant by operation of law and so S could not overcome these problems by recourse to a liberal construction of the terms of the option.

An argument that S took the benefit of the option by virtue of section 62 of the Law of Property Act 1925 (Conveyancing and Property Ordinance, s.16) failed.

The Chancellor concluded his judgment:

‘[T]he problem has arisen because the Tweedies, as freeholders and grantors of the Option, were not parties to the Second Deed of Variation and 53 Ennismore Gardens Residents Assocation Ltd, which was, was not also a party to the Option. In the more normal case where the grantor of the option is also the lessor there may well be scope for arguing that the regrant included a regrant of the option. In that event the present problems would not have arisen.’ (at [19])

Perpetuities and the exercise of an option

April 30, 2012

In Souglides v Tweedie ([2012] EWHC 561) (now overturned by the Court of Appeal) U1 was the underlessee of a fourth floor flat. U1 created a fifth floor out of the roof space and a roof terrace. The underlease was varied in 1986 to include the fifth floor. Later, in 1987, the freeholder granted U1 an option to extend the underlease for 60 years (the headlease would come to an end three days after the underlease). The option was exerciseable at any time between 25th December 2008 and 25th December 2008. U1 charged the underlease and, in effect, all ‘Related Rights’ to a building society. U1 failed to keep up with the mortgage payments and the building society took possession and the lease was sold to S and his then wife. The option was later registered. S sought to exercise the option in February 2009.

The freeholders claimed that the option was void for perpetuity. They argued that the exception for options contained in leases in section 9 of the Perpetuities and Accumulations Act 1964 did not apply since the option had not been granted by U1’s immediate landlord. This argument failed; there is no such requirement.

The option was said to be exerciseable by U1 and his successors in title. Was S a successor in title since he claimed through the building society and it was argued that, given the nature of a charge, the building society (and its successors) were not successors in title of U1. This failed too. The building society was sufficiently like a successor in title (Law of Property Act sections 1(2)(c) and 87).

The freeholders also argued that the variation of the lease was a surrender and re-grant given that it altered the extent of the demised premises. Did this invalidate the option since it referred to the original lease as varied while S held under the terms of a new lease? This argument was rejected too.

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

January 21, 2011

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.

Options to renew are void under LRO s.3(2) unless registered

January 14, 2011

An option to renew a lease is registrable under the Land Registration Ordinance. If not registered it is void, as a result of LRO s.3(2), as against a subsequent bona fide purchaser or mortgagee for valuable consideration. This is true even if the option is contained in a lease that falls within the exception set out in LRO s.3(2).

In Markfaith Investments Ltd v Chiap Hua Flashlights Ltd ([1990] 2 HKLR 84, PC) Chiap Hua had agreed to assign a lease of land in Kowloon to Markfaith. The sale was expressly made subject to certain leases. The sellers did not, however, disclose the fact that some of the leases contained options to renew. Neither the leases nor the options had been registered in accordance with the Land Registration Ordinance by the time the purchasers registered their agreement with Chiap Hua. The purchasers found out about the options and refused to complete the purchase on the basis that these were undisclosed encumbrances. The Privy Council confirmed the decision of the Hong Kong courts that the options were not binding on Markfaith as a result of LRO s.3(2)  (so that Markfaith had not been entitled to refuse to complete). Although there is an exception in LRO s.3(2) in favour of leases for a term not exceeding 3 years at a rack rent, this only applies to the ‘bare lease’ (per Lord Templeman at 87) and not to the separate interest created by the option.

Adverse possession and options to renew

October 29, 2010

In Chung Ping Kwan v Lam Island Development Company Limited ([1996] 2 HKLR 315, is a Privy Council decision. The Lam Island Development Company (‘Lam Island’)  held land in Sheung Shui under the terms of a Crown lease for 75 years from 1 July 1898 with the right to request a lease renewal for a further term of 24 years less three days. The contractual right to renew was superseded by the New Territories (Renewable Crown Leases) Ordinance (Cap 152). This provided that the right to renew contained in the Crown lease should be deemed to have been exercised. A new Crown lease for 24 years less three days (ie expiring in 1997) should be deemed to have been granted. Lam Island issued possession proceedings against, amongst others, Chung Ping Kwan. Lam Island claimed possession of the land from the defendants (now the appellants) who claimed to have been in adverse possession since as early as 1953.

There were two cases. In one case adverse possession began in 1953; in the other it began in 1959. In each case, the relevant limitation period (20 years) had not been completed by the time of the renewal but had been completed by the time that proceedings were commenced in 1993. The question was whether the lease renewal had started time running again in 1973 as against the squatters. As Lord Nicholls of Birkenhead put it:

‘[T]he question to be addressed is whether adverse possession bars the lessee from asserting against the squatter this specifically enforceable right, and the legal estate which flows from this right, as much as it bars the lessee from asserting against the squatter the other rights granted to him by the lease.’ (per Lord Nicholls of Birkenhead at 320)

The answer was in the affirmative:

‘The lessee has slept on his rights. There seems to be no compelling reason why, as between him and the trespasser, his rights under the renewal option in the lease should not be defeated just as much as his other rights under the lease. It is true that when he exercises the option the lessee obtains a new legal estate, but this is no more than implementation of a pre-existing contract. He acquires a new legal estate by virtue only of a right included in the lease whose title has been extinguished as against the trespasser. To ignore the legal source of the lessee’s entitlement to his new legal estate would be to exalt form (a new legal estate) over substance (a pre-existing right to the estate).’ (at 321)

The new lease was granted pursuant to the option, time does not start afresh (the tenant does not get a new, unencumbered right to possession):

‘Their Lordships agree with this conclusion. In their Lordships’ view, where a new lease is granted pursuant to a lessee’s option in the original lease the right to bring an action to recover the land from a trespasser within the meaning of s.7(2) accrues to the lessee on the date of the dispossession. Section 8(1) is applicable in such a case, and as against the trespasser s.17 operates to extinguish his title to the new lease as much as the original lease.’ (at 322)