New property TOGC case involving conditional agreement for lease

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Summary: In The Royal College of Paediatricians the FTT held that the sale of a property subject to an agreement for lease was a TOGC even though completion of that agreement was conditional upon exchange of contracts for the sale.

In The Royal College of Paediatricians the FTT held that the sale of a property subject to an agreement for lease was a TOGC even though completion of that agreement was conditional upon exchange of contracts for the sale.

Backdrop

Coleridge was the transferor under the claimed TOGC.  The College was the transferee.

Coleridge owned a let building on Theobalds Road in London's West End. It had the tenants surrender their leases so that it could refurbish the property. Following the refurbishment it put the property on the market to be let to new tenants (the tribunal helpfully confirmed that that Coleridge was carrying on a property letting business at that point).

The College occupied two nearby buildings, part of which were sublet to BAPM. The College wanted to relocate and was told that Coleridge would consider selling Theobalds Road.

The contracts

Coleridge agreed to sell Theobalds Road to the College. BAPM wanted to relocate with the College and remain its tenant so Coleridge and BAPM entered into an agreement for a lease of a room in the property. The agreement was conditional upon Coleridge exchanging contracts to sell the property to the College. Contracts for the sale were duly exchanged and completed and the College granted the lease to BAPM.

HMRC's arguments

HMRC argued the sale was not a TOGC because Coleridge was not carrying on a property-letting business that could be transferred to the College. According to HMRC, BAPM was in reality not part of Coleridge's business and never could be because of the conditionality of the agreement for lease.

Tribunal's decision

The tribunal disagreed. It found that Coleridge did have a business activity and that it intended to grant a lease to BAPM, attract third party tenants and hire out rooms.

The conditionality of the agreement for lease did not matter because the agreement became unconditional on exchange of contracts for the sale i.e. before the property was transferred to the College at completion.  If the College had failed to complete then BAPM could still have required Coleridge to grant the lease.

The tribunal, therefore, could not distinguish this case from Dartford Borough Council, another case in which the transferor entered into an agreement for lease, but did not grant the lease, prior to a sale. The sale in Dartford was treated as a TOGC.

Comment

The decision looks the right one. However, if you are advising on a similar situation bear in mind that this case seemed to turn on the terms of the condition in the agreement for lease. Had it been conditional on the sale to the College actually being completed then it may not have been a TOGC.

A key part of the reasoning in Dartford was that a tenant under an agreement for lease has an equitable interest in the property and can seek specific performance of the agreement. In this case BAPM acquired that interest before the property was transferred to the College. However, if the agreement for lease had been conditional upon actual completion of the sale then BAPM would never have acquired its equitable interest whilst Coleridge was the owner. HMRC's argument that BAPM was never part of Coleridge's business would have been much stronger.

Even if the agreement for lease had been conditional upon actual completion of the sale, what about Coleridge's attempts to market the property to other tenants? Given that the College wanted to occupy the building itself, it is questionable whether Coleridge continued to carry on that aspect of its business after it exchanged contracts to sell the property to the College.

Please select the link to read the full judgement.

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