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Now you see it; now it’s gone

29 Apr 13 Conditional agreements in leases are not binding to future leaseholders, the High Court has determined. Kasia Burdzy reports.

Imagine the following scenario, you have entered into an agreement for a lease in relation to a freehold that you own and obtaining a satisfactory planning permission is a condition precedent to a lease being granted. After a while you decide that you want to sell the property. Will you expose yourself to an action for breach of the agreement for lease or will the purchaser be bound by its terms? The recent High Court decision in Ringwood Properties Group Ltd and others v Valero Energy Ltd and another [2013] EWHC 98 suggests that you will be liable, and clever drafting will be required to bind the successor. This article looks at the decision and analyses the potential consequences it will have on drafting contracts.

A petrol station owner, Texaco, entered into numerous conditional agreements with a developer, Ringwood, with a view to build flats and offices above and around the stations on receipt of planning permission. On completion of all developments Ringwood was to acquire an interest in the land. A few months down the line Texaco transferred its interest to S before any planning permission was obtained.

Ringwood argued that by selling the properties Texaco was in repudiatory breach of the agreements. Ringwood said that the breach occurred because Texaco made it impossible for them to perform its obligations under the agreements.

Texaco relied on Section 3 of the Landlord and Tenant (Covenants) Act 1995. Section 3 annexes the benefit and burden of all landlord and tenant obligations to the land and it provides that the benefit and burden of the obligations should pass on assignment. The court rejected this argument stating that conditional agreements are no different to option agreements and they do not bind successors in title. The rationale for this is that they do not create interests in land and the obligations under them are not landlord and tenant obligations within the Act.

Further Texaco could not automatically pass the burden onto the buyer because the clauses in the agreements were not sufficient to render the obligations in the agreement enforceable against the successors in title. In order to compel the buyer to perform there would have to be a clear obligation in unequivocal terms. Texaco was therefore in breach.

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The lesson from this case is plain. Any type of agreement for lease needs to contain clear and effective terms pertaining to what happens if the development land is sold before the agreements are unconditional.

If you are in this position, in order to avoid being liable for repudiatory breach of contract you should check the agreement for lease before you transfer the land as it is not unusual for it to contain a restriction that will prevent you from selling the property until you comply with its obligations.

You will be bound by the terms of the agreement for lease, including obligations which you cannot pass by assignment. Therefore it is worth making sure that you use other arrangements to pass your obligations. For example you may obtain a deed of covenant from a purchaser in which they agree to perform the relevant obligations. When drafting agreements for lease you need to carefully consider and account for the above situation to avoid future disputes.

Kasia Burdzy is a paralegal at Thomas Eggar LLP

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