Buyers often assume that ownership of a property transfers immediately upon completion of the transaction. However, for transactions that must be registered at HM Land Registry, legal title does not automatically pass at completion but when the transaction is registered. This creates a period of legal uncertainty, commonly referred to as the 'registration gap'.
The registration gap has been a persistent feature of land transactions since the introduction of compulsory registration. In recent years, however, the registration gap has widened significantly and become increasingly problematic.
Lengthy delays at HM Land Registry, largely due to staff shortages and the effects of the COVID-19 pandemic, have created a growing backlog of applications.
As a result, for some types of applications, especially those involving newly created leases or complex titles, the registration process can now take around two years to complete.
Our Commercial Property solicitors explore the nature of the registration gap, the legal and practical risks it presents, and strategies for mitigating those risks.
Whilst we refer to 'buyer' in this article, the registration gap is equally an issue for tenants of new leases.
What is the registration gap?
The registration gap is the period between the completion of a property transaction and the point at which the transaction is registered at the Land Registry.
Although the buyer may take control of the property at completion, legal title only passes once the relevant transfer or new lease is registered at the Land Registry.
Until then, the seller remains the legal owner, and the buyer holds only an equitable interest in the property.
Once the buyer is registered, however, the legal estate is treated as having vested in them retrospectively from the date their application for registration was submitted.
Why does this matter?
In many cases, for a lot of buyers, the registration gap may not cause immediate practical difficulties. This is because, under the Land Registration Act 2002, a person entitled to be registered as the legal proprietor may exercise "owner's powers," such as disposing of the property or granting a legal charge.
However, complications can arise when the buyer needs to take actions not covered by these powers or where notices must be served on the legal owner. In such cases, the absence of legal title can be a significant obstacle, and registration delays may expose the buyer to serious legal and commercial risks.
What are some of the practical and legal implications?
Serving or receiving lease notices
Certain notices served under leases can only be served by or on the legal owner of the property. Since the legal title remains with the seller during the gap, the buyer may not be able to validly serve or receive these notices. This can cause problems for both landlords and tenants, particularly with break notices and notices to quit, which must be served by or on the legal owner.
Without legal title, a tenant-buyer cannot serve a break notice on their landlord. Similarly, without legal title, a landlord buyer would not be the correct person to receive a break notice served by a tenant, so may not be aware of it having been served.
Lease assignments
If a lease is registered, an assignment of that lease only takes legal effect upon registration. This means the seller (as outgoing tenant) may remain liable for costs or breaches of covenant under the lease during the registration gap.
Financing
Even though an owner can exercise "owner's powers" to grant a legal charge (i.e. a mortgage), if the owner does not have a registered title, some lenders may refuse to lend against the property. As a result, the registration gap can delay or complicate financing arrangements.
Intervening registrations and priority risks
During the registration gap, there is a risk that third parties may acquire and register interests in the property before the buyer's application is completed. While the buyer's equitable interest may take priority if protected by a valid priority search and a timely application, any delay can leave the buyer vulnerable to competing claims or interests granted by the seller. If the buyer is not in actual occupation, or if priority protection lapses, their interest could be overridden.
What can be done to manage the risks?
Prompt application submission
Applications to the HM Land Registry should be submitted immediately after completion to avoid any further delays.
Protect priority
HM Land Registry deals with applications to register transactions strictly in accordance with priority. Typically, this is based on which application is made first (not which transaction completes first).
A transaction's priority can be protected by way of a priority search (known as an OS1 or OS2). A priority search gives a 30 working day window, known as the priority period; if the application is made within that period, the buyer's place in the registration queue is protected.
If there is a risk that the application will not be submitted within the priority period, a fresh priority search can be carried out. This simply creates a new priority period; however, it does not extend the original one. Therefore, third-party applications submitted before the new priority search may have priority over the buyer's application.
Contractual clauses
Sale contracts should include clauses to manage the registration gap. These provisions can appoint the buyer as the seller's agent for all matters relating to the property during the gap. This enables the buyer to serve or receive notices, manage lease obligations, commence legal proceedings, and generally act in relation to the property before they are registered as the legal owner. Clauses can also require the seller to act as the buyer directs in relation to the property during the registration gap.
Such clauses will often include an indemnity from the buyer to protect the seller from liability arising from the buyer's actions during this period.
Such clauses provide clarity and help protect both parties.
Application to expedite
In certain cases, a request can be made to HM Land Registry to expedite the application. This is only accepted where delay would cause significant hardship, for example, where an onward sale or a refinance is dependent on the purchase being registered. Supporting documentation (such as a contract or lender's letter) must be provided, and the application must meet the Land Registry's urgency criteria.
Conclusion
The registration gap is often overlooked but is becoming a significant concern in property transactions.
With delays at HM Land Registry now stretching to two years in some cases, the gap is widening, and as it does, the legal and practical issues it creates are only likely to become more problematic.
It is crucial that buyers and tenants understand the risks that can arise during this period as early as possible to anticipate potential impacts on future plans.
Early awareness and proactive planning are key to managing these risks and minimising disruption to these plans.
Contact Our Commercial Property Team
If you are involved in a transaction or need advice on protecting your interests during the registration process, please contact our Commercial Property team.
0161 941 4000
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