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Right Of Pre-Emption - T to sell lease to L Print

Background:

The Court of Appeal has upheld the High Court decision in the case of Tiffany Investments Ltd v Bircham and Co Nominees (No2) Ltd [2003] EWCA Civ 1759. (For a report of the High Court decision, see the March 2003 edition of Real Estate Update). A tenantís obligation to offer to sell its lease to its landlord was breached immediately before the tenant entered into a binding contract for sale with a third party.

The landlord acquired an equitable interest in the lease at that point in time.

A right of pre-emption, sometimes called a right of first refusal, differs from an option. In an option agreement, the seller gives the buyer the right to buy the property, either at a specific price or at a price to be agreed or determined. Thus the buyer can create the mutual commitment to sell and buy by giving notice exercising the option. By contrast, in a pre-emption agreement, the buyer has no right to buy the property unless and until the seller decides that he wishes to sell it. Only then must the seller offer the property to the buyer and only then is the buyer able to create the commitment to sell and buy by accepting that offer.

Before the Land Registration Act 2002 (the "2002 Act"), it was not clear whether a right of pre-emption created an interest in land only when the sellerís offer was accepted by the buyer or at some earlier point. It was clear that no interest in land was created at the time the pre emption agreement was entered into (Pritchard v Briggs [1980]). Bircham and Co Nominees (No 2) Limited v Worrell Holdings Limited [2001] decided that, if the sellerís offer was revocable during the acceptance period, no interest in land was created until the offer was accepted. However, that case did not decide that an interest in land would arise when the offer was made if the offer was irrevocable during the acceptance period.

In relation to registered land, the 2002 Act provides that a right of pre emption is an interest in land from the time of creation. In relation to unregistered land, and pre emption agreements entered into before 13th October, 2003, the uncertainty as to the status of a right of pre emption remains. The point in time at which an interest in land is created is important because that is when the buyer can protect it (by a notice in registered land or a land charge in unregistered land) so that it will bind a person who buys the land if the seller has sold it without complying with his obligation to first offer it to the buyer.

Rights of pre-emption are sometimes contained in leases. These rights are useful if the landlord wishes to control, for example, the tenant mix in a shopping centre. They provide that the tenant cannot assign the lease without first offering the lease back to the landlord. If the landlord does not wish to take back the lease, the tenant may then go ahead and assign the lease to a third party on specified terms, usually that the sale price is no greater than the price offered to the landlord. In effect, if the landlord agrees to take back the lease, an agreement to surrender arises. This has implications for Section 17 of Part I of the Landlord and Tenant Act 1954 (the "1954 Act"). Part I of the 1954 Act provides security of tenure for occupying tenants under certain long leases of residential property at low rents. Section 17 prohibits any agreement to exclude Part I of the Act, such as an agreement to surrender, but does not prevent an actual surrender. There is a corresponding provision for business leases under Part II of the 1954 Act.

The Tiffany case has considered at what point in time the duty to offer back arises, in circumstances where a tenant sold the land in breach of his obligation to first offer the lease back to the landlord. This case involved the same landlord as the Bircham case mentioned above.

Facts:

A lease of a residential property let at a rack rent contained a landlordís right of first refusal. In 1986, the tenant contracted to sell the lease to Tiffany Investments Ltd ("Tiffany") for £250,000. The landlord was not informed. The transfer to Tiffany was never completed. In 1999, Tiffany directed the tenant to enter into a contract to assign the lease to Mrs Chantry, who would pay Tiffany £475,000. The landlord did not want to buy at that price. The tenant sought the landlordís consent to assign the lease. In proceedings between the landlord and the tenant, a court order was made for the tenant to execute a transfer in favour of the landlord at £250,000. The money was placed on deposit pending determination of Tiffanyís claim.

Tiffany and Mrs Chantry took proceedings against the landlord and the tenant claiming that they were entitled to have the lease transferred to them. They claimed that the pre-emption right did not create a positive obligation on the tenant to offer anything to the landlord upon his merely forming the wish to dispose, and that there was no breach of the right until there had been an actual transfer (the transfer to Tiffany had never been completed). Accordingly, the tenant had not committed a breach and Mrs Chantry was entitled to the lease. Tiffany and Mrs Chantry had an equitable interest which took precedence over any interest which the landlord might have.

In the alternative, they claimed that, even if there had been a breach, the tenant could not validly contract to surrender the lease because an agreement to surrender is prohibited by Section 17 of the 1954 Act. Consequently, the landlordís pre-emption right was void.

On either of these analyses, the landlord had no equitable interest which could take priority over the interests of Tiffany and Mrs Chantry.

The success of Tiffanyís first argument depended on there being no breach of the pre-emption clause by a contract to transfer the lease, as opposed to its actual transfer. The court held that the pre emption clause conferred a positive obligation upon the tenant to make the required offer to the landlord not later than immediately before entering into a binding contract to sell the lease. Consequently, the tenant should have offered the lease back to the landlord in 1986 at £250,000, but had failed to do so. This meant that the landlord had an equitable interest in the lease which took priority over any interest of Tiffany or Mrs Chantry.

The second limb of the claimantsí argument would only succeed if the contract to surrender was void under Section 17 of Part I of the 1954 Act. If it was, then the landlord could not have acquired rights prior to the rights acquired by Tiffany or Mrs Chantry. The success of this argument depended on the operation of the pre-emption clause amounting to an agreement to surrender. If the pre-emption clause had been operated in 1986 and the landlord had accepted the offer, the resulting contract for the transfer of the lease back to the landlord would have been unenforceable.

But the court said that a distinction had to be drawn between the making of the offer, which did not itself lead to a contract to surrender, and the acceptance of the offer, which would lead to a contract to surrender. Section 17 makes void an agreement to surrender. However, until it is known whether the landlord has accepted or rejected the offer to surrender, it is not known whether there is any agreement to surrender which falls foul of the 1954 Act (Allnatt Properties v Newton [1981] 2 All ER 290). Thus the offer is not struck down by the 1954 Act.

This meant that the landlord was entitled to take the lease at £250,000 free from any interest which Tiffany or Mrs Chantry may have acquired. The claimants appealed to the Court of Appeal.

Decision:

The Court of Appeal upheld the High Court decision and dismissed the appeal. The tenant was in breach of the pre-emption right immediately before it entered into the contract for sale and should have offered to sell the lease to the landlord for £250,000. As a consequence of the breach, the landlord had an equitable interest in the lease. Section 17 of Part I of the 1954 Act did not invalidate the obligation to offer the lease to the landlord and therefore had no effect on the creation of the landlordís equitable interest.

Comment:

Rights of pre-emption in leases giving the landlord the right to take back the lease have to be carefully drafted to ensure that a contract to surrender which is void does not arise. One way this might be achieved is to provide that acceptance by the landlord creates a contract conditional on obtaining a court order authorising the contract to surrender.  © Allen & Overy

February 2004
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