Q&A: Protecting freehold interest prior to transfer

Lauren Fraser and Admas Habteslasie address an important query from tenants concerning the right to the freehold of a residential block under section 19 of the Landlord and Tenant Act 1987. Question We are tenants of a residential block who have exercised our rights to acquire the freehold. We have obtained an order under section 19 of the Landlord and Tenant Act 1987 requiring the landlord to transfer the freehold to a nominee company and have entered a notice against the freehold title protecting the interest under the section 19 order. However, the transfer has yet to occur. Meanwhile, and after the making of the order, the landlord has sought to devalue the freehold by granting a series of long leases of various parts of the property (for no premium), which have not been registered. The landlord is arguing that the freehold interest that is going to be acquired by the nominee company will be bound by those leases. Is he right? Answer No. The priority of the order made by the court under section 19 of the 1987 Act is protected against future equitable interests, such as unregistered leases. It constitutes an interest in land from the moment it is made. Explanation The Land Registration Act 2002 sets out a series of rules governing the priority of interests in registered land. There is a general rule that the priority of competing equitable interests is determined by the order in which they were created. In order for the rules on priority to be applicable, the interest must be proprietary (binding on third parties), rather than personal to the person benefiting from the right. Section 27 of the 2002 Act provides that, in order to take effect in law, a lease must be registered. In this situation, because the leases have not been registered, they take effect as equitable leases. In Prescott Place Freeholder Ltd and others v Batin and another [2023] EWHC 1445 (Ch), Mr Justice Richards considered a similar situation. The landlord of a residential block had sold the freehold without following the right of first refusal procedures under the 1987 Act. This failure triggered the right for the tenants of the block to seek an order under section 19 of the 1987 Act requiring the freehold to be conveyed to them on the same terms as the previous disposal. The section 19 order was made, but instead of conveying the freehold to the tenants, the landlord subsequently granted long leases of flats in the building to an associate. The landlord argued that the future freehold estate acquired would be subject to those leases, and that the priority rules in the 2002 Act did not apply because the section 19 order only created a personal, rather than proprietary interest. There was no existing authority as to whether an order under section 19 of the 1987 Act constitutes an interest in land. However, the judge rejected the landlord’s arguments and reached his conclusion by applying the following principles: An interest in land can only be created by someone who has sufficient title to create proprietary rights; Rights which are purely personal in nature are not capable of constituting interests in land; and An interest in land must be “definable, identifiable by third parties, capable of assumption by third parties and have some degree of permanence and stability”. The central question was whether or not the section 19 order created rights which were purely personal. In this regard, the judge held that a section 19 order was very similar to a contract for the sale of land. The section 19 order provided that the landlord must convey the property to the qualifying tenants. In his view, a court order requiring a property to be transferred could be said to confer more of a proprietary right over the property than a contract for sale. A seller’s failure to comply with a contract for sale only gave rise to the possibility of the purchaser obtaining an order for specific performance, whereas the qualifying tenants already had such an order. Therefore, the judge concluded that an order under section 19 of the 1987 Act constituted an interest in land. Section 28 of the 2002 Act provides that competing equitable interests in land rank in the order they were created. Therefore, it followed that the section 19 order had priority over any equitable leases created subsequently. Therefore, your landlord cannot devalue the freehold by creating equitable interests after the section 19 order has been made, because the priority of the section 19 order is protected against equitable interests created after it. However, it is important to note that any section 19 order should be protected by registration of a notice at the Land Registry. Lauren Fraser is a senior associate at Charles Russell Speechlys LLP and Admas Habteslasie is a barrister at Landmark Chambers Image © Anne Nygård/Unsplash