Court rules that a tenant cannot assign its lease to its guarantor
Author: Peter Williams
Applies to: England and Wales
The High Court has held that the anti-avoidance provision in the Landlord and Tenant (Covenants) Act 1995 prevents a tenant assigning its lease to its guarantor. Any attempt to do so will be void.
EMI Group Ltd v O&H Q1 Ltd is the latest case to be decided under the Landlord and Tenant (Covenants) Act 1995 ("the Act"). The purpose of the Act was to ensure that tenants, and their guarantors, are released from their liability under a lease on assignment, but the Act's extremely wide anti-avoidance provision has resulted in both litigation and uncertainty over the last few years.
The starting point for the latest case is K/S Victoria Street v House of Fraser (Stores Management) Ltd (2011) ("House of Fraser"). In that case, the Court of Appeal held that a person (or company) that has guaranteed the tenant's obligations cannot also guarantee the obligations of the tenant's assignee. Under the anti-avoidance provision, anything that frustrates the release of the tenant or its guarantor from the lease covenants is void. The Court of Appeal reasoned that allowing the guarantor to give a second guarantee prevents that release, meaning that the second guarantee has to be void.
In the court's judgment in House of Fraser, Lord Neuberger mused that the anti-avoidance provision might prevent a lease being assigned from the tenant to the tenant's guarantor (T1 to G), "even where tenant and guarantor wanted it".
In the latest case the tenant was HMV and EMI Group was the guarantor. O&H was the landlord. HMV went into administration, and EMI Group took an assignment of the lease with the landlord's consent. It then claimed it was not liable on account of Lord Neuberger's comments.
The result has come as a shock. To everyone's surprise, the court upheld Lord Neuberger's suggestion, so that a lease cannot be assigned from a tenant to the tenant's guarantor. Any attempt to do so - as in this case - is void. The judge said, echoing Lord Neuberger in House of Fraser, "the fact such a conclusion is unattractively limiting and commercially unrealistic is neither here nor there."
The conclusion is not what EMI had hoped. The court said that the assignment was void, so that EMI was still liable as guarantor.
What happens next?
There are several reasons why this decision feels wrong - not least the confusion it creates in relation to past transactions. It is too early to know whether EMI will be appealing the decision.
For the future, no landlord will wish to permit the assignment of a lease from a tenant to the tenant's guarantor - but then it is unlikely that a well advised tenant would now wish to take this step anyway.
Of greater concern is trying to work out the implications where an assignment of this sort has taken place in the past. They are not uncommon, tending to occur either as part of a corporate reorganisation or where - as in this case - the guarantor has taken an assignment of the lease following the tenant's insolvency.
Unfortunately, the best that can be said is that the implications are far from clear, for three reasons:
- In such cases it is the guarantor that is actually in occupation of the property, and paying the rent. Could a new tenancy have come into being between the landlord and the guarantor? It seems unlikely, but will depend upon the specific facts.
- What is the position where the guarantor has already assigned the lease to a third party, or granted an underlease of the property?
- How does this decision fit into the land registration system? Leases for terms of more than seven years need be registered at the Land Registry (including, it seems, the lease in this case, although this aspect is not mentioned in the judgment). The Land Registration Act 2002 provides that the registered proprietor is deemed to be the owner of the property. We seem to be left with the extraordinary possibility that someone could be the tenant under the land registration system but not under landlord and tenant law.
And all arising out of one musing by Lord Neuberger.