Developers, a simple way to speed up your plot sales

03 / 10 / 2019

What is a leasehold merger?

A leasehold merger can occur where a tenant acquires the landlord’s interest in the property (known as the reversion) and both interests are held in the same capacity. On merger the lease is absorbed by the reversionary estate and terminated. A common example is where a tenant purchases the freehold estate from its landlord.

Part of what distinguishes a merger from a lease surrender is that a merger cannot occur by operation of law (section 185, Law of Property Act 1927). This means that a merger cannot happen automatically and instead requires the relevant parties to show clear evidence of an intention to merge their interests into one.

Whilst it is not a legal requirement, a tenant may choose to merge their title with the reversion as a result of the principle set in Rye v Rye [1962] A.C. 496, that a freeholder cannot grant a lease to itself. As Lord Denning rightly pointed out, on both a practical and logical level, one cannot enforce contractual obligations against oneself or indeed comply with them – paying rent and providing exclusive possession, for example, would quickly become problematic. Terminating the lease through a merger would remove these problems.

Why would you merge?

If you are a developer wishing to borrow money or planning an estate scheme with subsequent plot sales, merger can save time and costs by making title matters and documentation simpler for all parties.

If you are a tenant holding both the landlord’s reversion and a leasehold interest in a property, when you wish to dispose of the property further down the line, a prudent buyer will typically require merger of the titles as part of the due diligence process. ‘Tidying up’ the title to the property before completion will make management of the property and dealings with the property more straightforward and save the buyer the time and expense of the merger application.

What do you need to show?

In July 2019, the Land Registry clarified their requirements to register a leasehold merger with its reversion. For a lease to merge successfully, all three of the following must have occurred:

  1. The property is held in common ownership (i.e. the landlord and the tenant are now the same legal entity);
  2. The property is held in the same legal capacity (i.e. the lease cannot be held by a party as a tenant for its own benefit where the same party holds the reversion as an executor or administrator); and
  3. There is a clear intention to merge the two estates together.

How do you merge?

The simplest way to show a clear, express intention to merge is by submitting an application to the Land Registry.

An express intention can also be evidenced by a declaration within a transfer or other deed confirming the parties’ intention to merge the estates into common ownership.

In the absence of a Land Registry application, or declaration in a deed, the court may still merge the estates based on a ‘presumption’ of the parties’ intention. This rule is based in equity which means that the courts will not find that there has been an intention to merge where there is evidence to suggest that there is some kind of interest or benefit in keeping the titles separate. This will be a question of fact. It is important to note that the courts may even consider that failing to submit a merger application around the same time as acquiring the reversion is evidence against intention.

What happens to the benefits and burdens contained on the leasehold title?

Following a merger, any rights granted to the tenant under the lease will be carried across onto the updated title. Any easements or other benefits registered against the leasehold title will appear on the reversionary title following an application to merge. Land Registry may ask whether it is the intention for these interests to be moved across through a requisition.

Be aware that the transfer of rights will also include other beneficial interests that have been registered, including notices that burden the title. As such, it is important that when submitting the application to merge, it is accompanied by further applications to either cancel or remove the entries that you do not want to be transferred across. This will certainly be something to bear in mind when merging to ‘tidy up’ the title for a potential buyer.

You must also check whether the leasehold title is subject to a legal charge. Land Registry will automatically reject an application where there is an existing charge registered against the leasehold title. To avoid this, the legal charge should be discharged before submitting the application to merge the titles. Where there is a legal charge registered against the freehold reversion, as opposed to the subordinate interest, the rules are less clear, but it is important to always check the terms of any legal charge to establish whether the lender’s consent will be required for the Land Registry application.

Following merger it can make the covenants and obligations in any underlease confusing and difficult to apply in practice, especially if they refer to the lease which no longer exists. Statute provides that the owner of the merged reversion will become the direct landlord of the undertenant (section 139, Law of Property Act 1925).

Points to Remember

  • If the intention is to merge, try to ensure that the application is submitted promptly following the acquisition of the reversion in order to avoid a presumption against merger.
  • Consider which rights or benefits you wish to be transferred onto the reversionary title. If none, apply to remove these interests as part of the merger application.
  • Always check whether the property is subject to a charge. If so, discharge the charge before submitting the application or obtain the consent of the lender, if required.
  • Seek legal advice.