Update: residential property

Preventing a sub-sale

The majority of residential sale and purchase contracts use the Standard Conditions of Sale, Fourth Edition, as the basis of the contract with special conditions to augment or vary the Standard Conditions.

Standard Condition 1.5 states that the buyer is not permitted to transfer the benefit of the contract. It does not provide that the seller cannot be required to transfer the property to anyone other than the buyer, as is contained in the Standard Commercial Property Conditions, Second Edition. Consequently, when the Standard Conditions are used, unless this additional constraint is provided in a special condition, the residential sale contract will contain nothing to prevent a sub-sale.

In Pitack v Naviede [2010] EWHC 1509 (Ch) contracts had been exchanged for the sale of a leasehold property. The contract incorporated Standard Condition 1.5, but no other provisions regulating to whom the property could be transferred at completion. The buyer agreed a sub-sale of the property. The buyer's solicitors sent the seller's solicitors a draft transfer in favour of the proposed sub-buyer for approval. The seller refused to transfer the property to anyone other than the buyer on the basis that the contract was not assignable. The seller served notice to complete on the buyer. The buyer did not comply with the notice and rescinded the contract, citing the seller's failure to complete the sub-sale. The seller then sought to rescind the contract, claiming the buyer was in breach of Standard Condition 1.5 and forfeited the buyer's deposit.

When the buyer applied to the High Court for the return of the deposit, the court allowed the buyer's claim and held there was a clear distinction between an assignment of the benefit of a contract and a transfer at completion to a third party, and, in the absence of an express provision in the contract forbidding it, the buyer was entitled to require the seller to transfer the property to the sub-buyer.

This case is a useful reminder to ensure the sale contract reflects the structure of the transaction envisaged. The general law provides, with limited exceptions, that a buyer is entitled to request a transfer either to himself or as he directs. In its decision the court confirmed that Standard Condition 1.5 does not alter this position. Clients often feel aggrieved if their property is sub-sold before completion, even though they have suffered no loss. Consequently, it is prudent when using the Standard Conditions of Sale to include a special condition allowing the seller to refuse to transfer the property to anyone other than the buyer.

Assured shorthold rent threshold

From 1 October 2010 a tenancy cannot be an assured or assured shorthold tenancy if the annual rent exceeds £100,000. This is an increase from the previous threshold of £25,000. This change will have implications, both during a current tenancy '“ which now finds itself below the threshold '“ and also upon renewal.

The Housing Act 2004 requires that any tenancy deposit paid in connection with an assured shorthold tenancy must from the time received be held under a tenancy deposit protection scheme. It is thought landlords who granted common law tenancies that became assured shorthold tenancies on 1 October may not need to follow the tenancy deposit protection scheme regime immediately, because the tenancy did not come within the requirements when the deposit was received '“ but they will need to comply upon renewal or when taking a new deposit.

The Department for Communities and Local Government has, however, pointed out that ultimately it is for the courts to decide when deposits should be protected, and has declined to give unequivocal confirmation that it is lawful to do nothing in relation to any deposits currently held.

Care must also be taken on serving notice where a tenancy has become an assured shorthold because, if the notice expires on or after 1 October, it will be ineffective unless it is not less than two months notice served in accordance with section 21 of the Housing Act 1988. Particular care must be taken with periodic tenancies as the day on which the notice expires must be the last day of a period of the tenancy and this period will depend upon how often the rent is payable. Landlords will also have to follow the procedures laid down in the Housing Act 1988 when proposing rent increases.

A minority of tenancies affected by the increase in the threshold will have become fully assured tenancies on 1 October, rather than assured shorthold tenancies. Before 28 February 1997, a landlord granting an assured shorthold tenancy, rather than an assured tenancy, was required to serve notice on a tenant before the tenancy commenced. Where a common law tenancy began before 28 February 1997, the landlord could not have served such a notice and consequently the tenancy will have become fully assured on 1 October if the rent is less than the new threshold.

Cleary this places serious limitations on the recovery of possession, and the implications of this for the limited number of tenancies affected is significant.

Land Registry identity requirements

Towards the end of June the Land Registry relaxed its identity evidence requirements for attorneys executing forms DS1 and DS3 and deeds of substituted security on behalf of a lender, although identity evidence is still required for the lender itself. This change was confirmed last month in a revised Land Registry Practice Guide 67. It appears that the main reason for this relaxation was the inconvenience being caused to large lenders who often nominate an internal officer as an attorney to execute forms DS1 and DS3 and deeds of substituted security.

Practitioners had been experiencing difficulties obtaining the necessary identity evidence on attorneys from lenders, so this change of policy is welcome. This change does not, however, extend to any other Land Registry forms executed by an attorney, where identity evidence will still be required. In particular, when acting for buyers, practitioners should negotiate a special condition into the contract either requiring the seller to provide valid forms ID1 or ID2, as appropriate, at completion where a TR1 has been executed by an attorney or preventing the seller from executing the TR1 by way of an attorney.

Shifting the risk of a title defect

In Area Estates Limited v Weir [2010] EWCA Civ 801, the Court of Appeal considered whether the wording of a special condition in a sale and purchase contract was effective to transfer the risk of a defect in title to the buyer.

The buyer, at auction, contracted to buy the property with vacant possession. There was a special condition stating that the registered title referred to a lease, but that the lease had been surrendered by operation of law. The special condition also prohibited the buyer from insisting on proof that the lease had been determined or from raising any requisition on it.

In the event, the surrender was void as it took place after the presentation of a bankruptcy petition against the tenant and without the consent of the court. The buyer purported to rescind the contract following receipt of a completion notice on the ground that the lease was an encumbrance and full title guarantee was not being given. The seller had in the meantime obtained a disclaimer of the lease by the tenant's trustee in bankruptcy, so the lease had by now been terminated.

The buyer still refused to complete and demanded a refund of the deposit. The seller attempted to rely on the special condition that prevented the buyer from raising a requisition about the termination of the lease. The court held that the special condition prevented the buyer from asking about the surrender, but not from taking issue with the fact that the lease still existed at the completion date. As the surrender was void at completion, the buyer was entitled to rescind the contract and obtain repayment of the deposit. The court did not accept the seller's argument that its inability to offer clear title at completion was a mere 'technical' defect on the basis that the lack of validity of the surrender could be ratified by court order or disclaimer by the trustee in bankruptcy.

This judgment indicates that, when drafting a special condition intended to shift the risk of a defect in title from the seller to the buyer, the description of the defect must be clear and comprehensive. Case law has long established that a generic condition will not excuse defects or encumbrances known to the seller or which should reasonably have been known.

Conditional contracts and longstop dates

Another recent reminder of the need for clear drafting is the case of McGahon v Crest Nicholson Regeneration Limited [2010] EWCA Civ 842, in which the Court of Appeal considered a contract for the purchase of a flat bought off plan from a developer, which was conditional upon the grant of a headlease.

The contract provided that, if a headlease had not been granted to the developer by the longstop date of 1 June 2008, then either party would have the right to rescind. The headlease was not granted until early September. At the end of September, the buyers purported to rescind the contract because the headlease had not been granted by the longstop date. The developers argued that the buyers must complete because the headlease had been granted before the buyers' attempted rescission, although after the longstop date.

The Court of Appeal held that, although the contract was conditional on the grant of the headlease, there was no provision making time of the essence, so the contract would become unconditional even if the headlease was granted after the longstop date. The right of rescission could only be exercised before the contract had become unconditional. The court's view was that if the right to rescind had continued after the grant of the headlease, it would have to subsist for the benefit of both parties and that this could be disadvantageous to either depending on whether it was a rising or falling market. The court considered this interpretation to be 'uncommercial'.

As well as those acting for developers ensuring that their provisions on rescission and longstop dates are tightly drawn, practitioners acting for buyers should seek to negotiate an obligation into the contract for the seller to inform the buyer whether the condition has been satisfied by the longstop date '“ although it may of course be possible to find out from other sources whether a condition has been satisfied.