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Tenants still can’t assign to their guarantors

07 July 2017

There are often very good reasons why a lease would be assigned to a guarantor (e.g. corporate restructuring or the tenant’s insolvency). However, a case in 2016 - EMI Group Ltd v O & H Q1 Ltd - decided that such an assignment would be void at law, even if all parties agreed to it.

There was an appeal against that decision but now the case has settled, so the opportunity for us to see what the Court of Appeal thought of the point has been lost.

The Facts

HMV UK Ltd was granted a 25 year lease in 1996. In 2014, the landlord consented to the assignment of the lease by HMV (who then went into administration) to the guarantor, EMI Group Ltd. The assignment was completed shortly afterwards...

EMI argued that the decision in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] meant that although the assignment was valid, the tenant’s covenants in the lease did not bind EMI.

The Background

It all stems from the Landlord and Tenant (Covenants) Act 1995. That Act provides that, generally, when a tenant assigns its lease, it’s released from future liability, although it can be required to give a guarantee for its assignee. The point applies to leases granted on or after 1 January 1996.

Further, when a tenant is released, any guarantor of the tenant is also released to the same extent.

There are stringent anti-avoidance provisions.

In the K/S Victoria Street case, the Court of Appeal decided that a guarantor of a tenant could not also guarantee the assignee. And they offered a side suggestion that it seemed that the anti-avoidance provision would also bar an assignment by a tenant to its guarantor.

The Decision in EMI

The High Court followed the suggestion by the Court of Appeal in K/S Victoria Street, and held that an assignment of a lease, which is within the 1995 Act, by a tenant to its guarantor is void.

It held that the purpose of the 1995 Act is to ensure that a tenant and its guarantor are released from the tenant covenants in the lease on assignment. Assigning a lease to a guarantor would frustrate this because as soon as the guarantor’s liabilities are released (when the tenant assigns), the guarantor is bound again as the incoming tenant. Therefore, there is a continuation of the guarantor’s liability under the lease beyond the point of statutory release.

Reaction to the EMI decision

It has caused considerable concern. Arguments have been put forward as to why it is wrong.

But it is the law – unless and until a higher court decides otherwise.

The Impact of the decision

 The decision did go some way in clarifying some of the uncertainty arising from the suggestion in the K/S Vistoria Street case. However, it has left us with a rather unclear and uncommercial position:

  • What is the position with a lease that had already been assigned to a guarantor prior to the EMI decision? Does a tenant, who may have thought it had disposed of a lease many years ago, now find that it has been the tenant all the time?
  • If the assignment is void, the lease remains vested in the tenant and the guarantor remains liable for the tenant’s liabilities under the lease as guarantor. However, what if the assignment has already been registered at the Land Registry? The Court of Appeal has previously considered (Swift 1st Ltd v Chief Land Registrar [2015]) the situation where there had been registration of a void transfer and held that registration of title carried legal and beneficial ownership. Will the register be rectified if the assignment is void but the guarantor has been registered as the registered proprietor (what if no-one applies for that rectification?)? What will happen where a further assignment has taken place and the guarantor is no longer the registered proprietor – is the innocent buyer deprived of its title to the lease?
  • Who should the landlord invoice for rent? If the guarantor has been in the property and has been paying the rent could it be argued that an implied lease to the guarantor has arisen? 
  • What if the guarantor/assignee has granted a sublease at a time when, according to the EMI case, it had no right to do so?
  • The release of a tenant under the 1995 Act when it assigns only applies if it does so with any necessary landlord’s consent. What if it assigns without consent? That means the tenant is not released, the Act is not frustrated and the assignment is valid.
  • If a corporate tenant is to be guaranteed by an associated company (e.g. a parent company), careful consideration needs to be given to which company provides the guarantee. If it is possible that the lease may need to be assigned to a group company in the future, parties will need to consider whether it would be better for a different group company to guarantee the lease at the outset (if the company structure permits).
  • It may not be in the guarantor’s best interests to take a new lease directly from the landlord (as opposed to an assignment from the tenant) as there could be stamp duty land tax payable on the grant.

However, it seems safe to assume, that that we may not have wait too much longer until some of these issues do reach the court and the implications of the High Court decision can debated further.

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