A question of priorities

2 September, 2015

In A2 Dominion Homes Limited v Prince Evans the High Court had to consider the effect of a unilateral notice registered to protect an agreement for lease and the lease granted pursuant to it. The facts are straightforward. A2 instructed Prince Evans to act for it in taking a long lease over property to be granted by the freehold owner. The lease was to be granted at a premium of c£3.7m and was to be taken following the completion of building works. An agreement for lease was entered into and a deposit of £1.25m paid. The agreement for lease was protected by the registration of a unilateral notice against the freehold title. Thereafter, but before the lease was completed and registered, the freehold owner charged the building to its bank.

The question was what priority was afforded by the unilateral notice and specifically did it bind the bank, even though the lease was granted after the charge? The reason why the question of priority was important here is because under the terms of the charge no lease could be granted without lender consent. Lender consent was not obtained and therefore the interest of A2 and its substantial investment in the property was at risk if the lease did not bind the lender.

The court determined that the effect of the unilateral notice in this case was to confer priority to A2 in respect of the agreement for lease and also the lease granted pursuant to the agreement. To hold otherwise would lead to absurdity as there would be no point in registering the agreement at all and therefore no ability to protect the interest of the prospective lessee. In circumstances where registration of the agreement for lease would bind anyone who purchased the freehold to abiding by the terms of the agreement and granting the lease, the mortgagee should not be in a preferential position where it could deny the lease bound it.

This is a victory for common sense, but there is one cautionary note. What would the position be if the form of lease granted differed from the form in the agreement for lease? After all it is common for the form of the lease to be varied by agreement for any number of reasons between the date of the agreement and the grant of the lease. Could it in those circumstances be said that the lease granted was not granted pursuant to the agreement? The answer is that it could be. In A2 the question did not arise because it was recognised that the lease granted was strictly in accordance with the agreement and this formed part of the basis of the decision. However it might conceivably be said that where there are amendments to the form of lease then those might be sufficiently significant to negate the court’s analysis in A2 and deny priority to the lessee.