A recent decision has confirmed that the anti-avoidance provisions in the Landlord and Tenant (Covenants) Act 1995 ("the Act") prohibit tenants from assigning their leases to their guarantors, because doing so would frustrate the purpose of the Act.
"It would also appear to mean that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it." Lord Neuberger; K/S Victoria Street v House of Fraser (Stores Management) Limited [2011]
This issue, which was considered but not decided upon in 2011 by Lord Neuberger, recently came before the High Court in the case of EMI Group Limited v O&H Q1 Limited [2016] EWCH 529 (Ch) and Lord Neuberger's suggested approach has been followed.
Facts
The case concerned a lease dated 26 September 1996 (known as a "new tenancy" under the Act) which was granted to HMV UK Limited ("the Tenant") and a Deed of Guarantee which was entered into by EMI Group Limited ("the Guarantor"). Following the Tenant entering into administration, consent to the assignment of the lease to the Guarantor was given by O&H Q1 Limited ("the Landlord") on 28 November 2014 and a Deed of Assignment was entered into on the same day.
The Guarantor subsequently claimed that, although the assignment of the lease to it was valid, the tenant's covenants in the lease could not be enforced against it and sought a declaration from the Court on this basis. The Landlord counter-claimed that the lease was vested in the Guarantor and that the tenant's covenants were enforceable against it or alternatively, that the assignment of the lease was void and had no effect so that the lease remained vested in the Tenant (in administration) with the Guarantor still bound by the Deed of Guarantee.
Decision
Judge Tipples QC decided that an assignment to a guarantor was prohibited by the Act and that any agreement which sought to assign a lease to a guarantor would be void by reason of Section 25(1) of the Act. The Tenant would therefore remain as the tenant under the original lease and the Guarantor would remain as the guarantor.
Her decision was based on the fact that on assignment, a guarantor would in effect re-assume the exact same liability in respect of the tenant covenants from which it had previously been released (as Section 24(2) provides that a guarantor must be released to the same extent as the tenant) and that there would therefore not be a moment in time when a guarantor was not bound by the tenant's covenants (which would therefore seek to frustrate the Act).
Conclusion
Landlords may now be much more particular when considering applications by their tenants for an assignment of their lease; they and their legal advisors will need to be alive to the possibility that an assignment, if proposed to be granted to a guarantor, will not be lawful and therefore consider the positions of each party very carefully.
The Law Commission is currently carrying out a further consultation on the issues raised by the Act and the Property Litigation Association (of which Keith Conway of Clyde & Co LLP is the current chairman) has provided to the Department for Communities and Local Government a draft amendment to the Act which seeks to cure the issue and other problems. We will keep you informed of progress in this regard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.