Creating an authorisation procedure by statutory instrument is a straightforward solution, writes Bruce Dear
The UK is a pre-eminent destination for global occupiers. They usually take their leases in guarantor-backed SPVs. They also need to respond to emerging risk and regulation with regular intra-group re-organisations.
This requires the right to move leases freely between group entities, while reassuring landlords of continuing covenant strength. The Landlord and Tenant (Covenants) Act 1995 (the Act) undermines that right and is a substantial commercial drag on such re-organisations.
This is regrettable. The Act was intended to benefit tenants, not shackle their commercial objectives. The Act long since ended the mischief of original tenant liability. Now international occupiers complain the Act complicates re-organisations that other jurisdictions make easy.
For example: (i) existing guarantors (however willing) cannot give (or agree to give) repeat guarantees to immediate intra-group assignees; (ii) tenants cannot assign leases to perfectly willing guarantors; and (iii) even now, it is not completely certain that outgoing guarantors can guarantee AGAs (though the Court of Appeal gave strongly persuasive guidance confirming it). Such basic barriers (particularly to commercially necessary intra-group assignments) should not exist in a leasing market worth billions a year to the UK.
Legal tensions
I believe that there is a simple solution to these problems. However, first a brief survey of the legal tensions that created them.
In all “new” leases, tenants are released from their covenants on assignment (section 5(2)(a)). This release is subject only to their ability to give statutorily blessed guarantees (the AGAs of this saga) (section 16). Tenant guarantors are released “to the same extent as the tenant is released from [its] tenant covenants” (section 24(2)).
These release rights are reinforced by the Act’s famously fierce anti-avoidance provision (section 25) which voids “any agreement relating to a tenancy” to the extent that it takes effect to “exclude, modify or otherwise frustrate the operation of any provision of this Act”.
At first, the courts interpreted section 25 very widely and suggested it struck down all agreements involving the assigning tenant’s guarantor guaranteeing its incoming assignee. (“Interpretation A”). With valuations threatened and the leasing market spooked, Lord Neuberger tried to restore commercial clarity in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] 2 EGLR 11.
In K/S Victoria, the court had a choice between Interpretation A and a more commercial view of section 25 (“Interpretation B”). Interpretation B argued that a guarantee of an incoming assignee by the existing tenant’s guarantor should be struck down only if “it was entered into at the insistence of the landlord.”
Unsurprisingly, the court found Interpretation B “in many ways more attractive [to] commercial sense” because it protects “the assignor and its guarantor, but [doesn’t work] to their disadvantage”. But Interpretation B had problems, including:
■ potential disputes about whether a guarantor had genuinely freely offered to guarantee the incoming assignee. When the guarantor’s intention came to proof (perhaps on a distant future purchase of the property of which the lease formed part) good evidence might be irrecoverable; and
■ “it would not be enough to [simply] look at the documents of title to see whether section 25 applie[d]”. It would instead be necessary to search through the “nuances [of] the negotiations” to show the guarantor had willingly offered the guarantee in question.
Considering these problems, the court rejected Interpretation B and broadly chose the clarity of Interpretation A. This decision (together with the later ruling in EMI Group Ltd v
O&H Q1 Ltd [2016] EWHC 529 (Ch); [2016] EGLR 26, which decided a tenant cannot
validly assign to its guarantor) created the current law (and problems) around intra-group assignments.
Lord Neuberger believed coupling Interpretation A with his obiter confirmation that a guarantor could validly guarantee an AGA removed some of its “unsatisfactory commercial consequences”. However, Interpretation A still has (as Lord Neuberger said earlier in his judgment) “unattractively limiting and unrealistic effect[s]”. They should be dealt with.
Here’s the solution
There is a straightforward solution. It has been used before where statutes have proved too commercially restrictive. It could be introduced by delegated legislation and would
take up very little
parliamentary time.
An authorisation procedure, created by statutory instrument, would end the AGA saga. Guarantors, tenants and incoming assignees could use it to prove that they had freely:
■ offered the existing guarantor as guarantor of the incoming assignee (or of a later assignee in the chain, to put that point completely beyond doubt as well);
■ elected to take an assignment of the lease, despite being an existing guarantor; or
■ (because it has only been decided obiter) accepted an obligation to guarantee the outgoing tenant under an AGA.
This new procedure should be aimed very carefully at these non-commercial features of the Act. It must not re-ignite the injustice of original tenant liability, whether by authorising leases to be fully opted out of the Act or by allowing them to contain contracts for repeat guarantees.
The authorisation process need not be like the Byzantine ping-pong of 1954 Act opting out (which, in my view, needlessly wastes thousands of hours every year). Instead, it could be done by a simple clause in the relevant document (such as the licence to assign, deed of assignment or transfer).
The guarantor, tenant and assignee would state that (having received full legal advice) they had decided freely to complete the relevant transaction (which would otherwise be void under the Act). The clause could even be countersigned by their solicitor to confirm the advice had been given.
This modest reform would bring all the commercial advantages of Interpretation B into law. It would also substantially remove any risk of the relevant intra-group dealing being challenged in court: the simple authorisation would be in the title documents for all to see.
Most importantly, this reform would return sensible freedom of contract and clarity to the leasing market (particularly on intra-group dealings).
Just imagine a blissful world where no one had to write an article about the AGA saga ever again.
Bruce Dear is head of London real estate at Eversheds Sutherland (International) LLP
