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A tale of two titles - lease mergers

Posted: 10/04/2017


It has been some time since the Law Commission published its report, Making Land Work: Easements, Covenants and Profits à Prendre (2011), Law Com. No 327 (The Report). Readers will be forgiven, therefore, if they have forgotten the Commission’s recommendation concerning easements on the merger of leasehold and freehold interests. However, with the possibility of a Law of Property Bill in 2017 to take these recommendations forward, it seems an appropriate time to review the subject of merger.

The basics - three elements for merger

There are three elements that must be satisfied for merger to occur:

  • Common ownership - two estates must unite in the same person without any intervening estate (Burton v Barclay 131 E.R. 288; (1831) 7 Bing 745) - the leasehold interest and the reversionary interest in a property must come into common ownership;
  • Same capacity - the person in whom the interests unite must hold both interests in the same capacity. For example, if the tenant holds the lease for himself, but holds the reversion in his capacity as an executor or an administrator, then there is no merger: Chambers v Kingham (1878) 10 Ch. D. 743;
  • Intention to merge - there must be an intention to merge the two estates: section 185 of the Law of Property Act 1925 and Re Fletcher [1917] 1 Ch. 339.

If all three elements are satisfied, the leasehold interest is submerged into the reversionary interest and comes to an end.

Intention to merge

Intention can either be presumed or express. Express intention can be shown by including a declaration as to merger/non-merger into the document transferring the relevant estate into common ownership. The Encyclopaedia of Forms and Precedents suggests wording along the following lines:

"The [transferee] declares that the lease shall [not] merge in the freehold reversion immediately expectant on the determination of the lease [to the intent that the term shall determine and be extinguished]."

In the absence of express intention, there is an equitable presumption against merger where there is a benefit in keeping the two interests separate: Capital Counties Bank Ltd v Rhodes [1903] 1 Ch. 631. Presumed intention will, therefore, be a question of fact and is ascertained by looking at the interest of, or benefit to, the party holding the two estates. Where merger would be against that person’s interests, merger will not be presumed: EDF Energy Networks (EPN) plc v BOH Ltd [2011] EWCA Civ 19; [2011] L. & T.R. 15.

In contrast, where an express declaration of merger is used, this will take effect even though it may not be in the interests of the party holding the two estates: Golden Lion Hotel (Hunstanton) Ltd v Carter [1965] 1 W.L.R. 1189.

Effect of merger on easements benefiting the leasehold title

Prior to 2007, it was widely believed that easements benefiting the leasehold title ceased to exist on merger. The current position is, however, different. In 2007, the Court of Appeal decided in Wall v Collins [2007] EWCA Civ 444; [2007] Ch. 390; [2008] 1 P. & C.R. 19 that when a lease is determined on merger, the tenant does not automatically lose any rights which were granted to it for the benefit of the leasehold property. These easements may continue to exist and to be exercisable by the freehold owner of the dominant tenement for a period equivalent to the original term of the lease. Some believe that the decision was wrong, whilst others see its practical benefits. In the Report, the Law Commission stated that:

"… consultees felt that the practical benefits of the decision outweighed the theoretical indignation that it aroused. They found persuasive the idea that just because a tenant acquires a greater interest in the land, he or she should not lose the benefits attached to the estate if he or she chooses to extinguish, by merger, the redundant lease."

In response, the Law Commission recommended that:

“(1) the decision in Wall v Collins, that an easement that benefits a lease survives the termination of the leasehold estate by merger with the freehold, be reversed by statute but

(2) that statute should provide a mechanism to enable the reversioner, on merger and surrender, (or the tenant, where there is a surrender and re-grant) to elect to keep the benefit of interests appurtenant to the lease surrendered or merged."

Clause 26 of the draft Law of Property Bill, announced in the Queens Speech 2016 will put that policy into effect.

Land registry practice on merger

Where merger is intended, an application may need to be made to the Land Registry to deal with the merged lease. What applications are needed depends upon what is registered (see table 1 below).

More information on what applications are necessary and what evidence is required is given in Land Registry Practice Guide 26.

Non-merger

Whilst it will often be administratively more convenient if the lease merges, this will not always be the case and there may be good reasons why a tenant may not want to effect a merger of its interests. Indeed, before Wall v Collins, see above, freeholders often decided not to merge a lease with the freehold in order to preserve the benefit of a leasehold easement. In addition, the Land Registry will not register a merger where there is an existing charge over the lease. It is not uncommon, therefore, to come across property registered under two titles.

Lease interest Reversionary interest Application required
Registered at Land Registry Registered at Land Registry Form AP1 - to close the registered leasehold title and to remove the notice of the lease from the registered reversion
Unregistered but noted on the reversionary title Registered at Land Registry

Form CN1 - to cancel notices that are not unilateral notices

Form UN4 - to cancel a unilateral notice

See Land Registry Practice Guide 19 for further information

Registered at Land Registry Unregistered and not subject to first registration application Form AP1
Unregistered Unregistered but subject to application for first registration Form FR1

Dealing with a lease where merger has not taken place

A downside of non-merger is that there can be problems dealing with the property. These problems stem from the fact that a party cannot covenant with himself alone; such a covenant is "senseless": Faulkner v Lowe (1848) 2 Exch. 595. The House of Lords also ruled in Rye v Rye [1962] A.C. 496; [1962] 1 All E.R. 146 that a freeholder cannot grant a lease of land to himself alone (notwithstanding the exceptions and wording of section 72(2), (3) and (4) of the Law of Property Act 1925. Lord Denning stated:

"I have come to the clear opinion that even under the 1925 Act a person cannot grant a tenancy to himself: for the simple reason that every tenancy is based upon an agreement between two persons and contains covenants expressed or implied by the one person with the other. Now, if a man cannot agree with himself and cannot covenant with himself, I do not see how he can grant a tenancy to himself."

In practice, this makes dealing with a lease difficult. For example, can a person who is both landlord and tenant enter into a deed of variation, say to clarify a lease plan or rectify an error? Can that person grant themselves a licence to carry out works?

Whilst the lease and reversionary interest remain vested in the same person, rectifying a problem or granting a licence may be unnecessary. The question really arises if there are plans to dispose of one or other of the interests. In that situation, it may be desirable to regularise the position in readiness of a sale. But can this be done? Arguably, based upon Lord Denning’s reasoning above, the answer is no. Such documents will contain covenants and agreements between the same person and "a man cannot agree with himself and cannot covenant with himself".

Conclusion

Given that it is possible to keep a lease in existence (either through a declaration of non-merger or because of the presumption of non-merger), some commentators believe that it should be possible for the same person to operate in two different capacities (ie as landlord and as tenant otherwise the benefit of the lease could be compromised. Whilst it has been held that a person holding as nominee for a principal may grant a valid lease to his principal (Ingram v IRC [1999] 2 W.L.R. 90; [1999] L. & T.R. 85), there is no authority that the same person can act as both landlord and tenant in relation to an existing lease. It would also not assist if a variation amounts to a surrender and re-grant. That would clearly fall foul of the Rye v Rye decision.

In practice, a work around may be the best option, for example, transferring one of the interests to a nominee so the freeholder and tenant are not the same parties.

This article was published in the Landlord and Tenant Review in January 2017.


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