Granting a lease to oneself

26th May 2017

English law does not permit a landowner to grant a lease to him or herself. A lease is a tenancy agreement based upon an agreement between two people and contains covenants made by one person with the other. The logic behind this restriction is that a person cannot agree with himself or enforce something against himself because otherwise absurd situations would arise such as having to give yourself consent or having to give yourself a notice to quit.

A simple rule to remember is that the parties on each side of the transaction must be different. A person cannot be both landlord and tenant at the same time. However, this prohibition can potentially be problematic for the freehold owner of a multi-purpose building where it has been converted into, for example, a shop and a residential flat. The owner of the building may want to raise further finance to help grow his or her business by mortgaging the flat; but lenders would normally want to see a lease in place for the flat before a loan could be granted. In this situation it is not difficult to see why a person may want to grant a lease to themselves so that they can keep control of their own property. Fortunately, there are practical solutions that by-pass this prohibition and these are explained below:

A person (‘A’) forms a company (the ‘Company’) and then grants a lease to the Company.

  • This situation works because the parties on either side of the transaction are different. The landlord in this case is still A but the tenant is the Company. The benefit of this arrangement is that ultimately A (as sole owner of the tenant Company) still has complete control of his property. A formed the Company and has complete control over it by reason of being the sole shareholder and director.

A person (‘A’) grants a lease to A and a second party (‘B’)

  • Again, the parties on each side of the transaction are different where you have A as the Landlord and A and B as the tenant. The only difference between this arrangement and the one above is that another individual was bought into the lease to act as tenant together with A. From A’s perspective, B would ideally be someone he or she can trust such as a family member or a close friend. It would be sensible for A and B to put in place a written arrangement about how the property is to be managed and how the income and capital are divided between them.

A person (‘A’) grants a lease to a second party (‘B’) who then assigns the lease back to A

  • The idea behind this arrangement is that A is ultimately the decision-maker relating to his or her property. A lease between different parties was granted when the lease was originally granted from A to B. B then assigns the lease back to A which is perfectly legal. As with the arrangement above, B should ideally be someone that A can trust because B needs to agree to grant the lease back to A in the first place. In any event there should be a written agreement in place between A and B which obliges B to assign the lease back to A.

To summarise, a person can never grant him or herself a lease of land of which they are already the owner. The landlord and tenant must be two different parties but as we have explained above, there are practical solutions to get around this prohibition if needed. If a person wants to retain complete control of his or her property it is advisable to speak to a property lawyer to explore the different options available and to consider the various advantages and disadvantages.

If you wish to discuss any of the issues raised in this article please contact Jenny Harbord, Director and Head of Property, on 01872 226994 or
jenny@murrellassociates.co.uk or Jason Lee, author of the article.

The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at March 2017. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, March 2017.

 

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