Can a tenant assign its lease to its guarantor?
The Landlord and Tenant (Covenants) Act 1995 provides that on an assignment of a lease created after 1 January 1996, tenants and their guarantors are released from liability. The statute also contains a comprehensive anti-avoidance provision in the form of section 25, which renders agreements that frustrate the Act void.
K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] PLSCS 198 confirmed that landlords can require outgoing tenants’ guarantors to guarantee the liabilities of an outgoing tenant under an authorised guarantee agreement (but not the liabilities of an incoming assignee). However, in the course of his judgment, Lord Neuberger of Abbotsbury MR, as he then was, suggested in passing that the provisions in the 1995 Act would “appear to mean that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it”.
The property industry has been hoping for a reprieve ever since and will be disappointed by the decision in EMI Group Ltd v O&H Q1 Ltd [2016] EWHC 529 (Ch); [2016] PLSCS 87. The parties asked the court to consider two issues. First, does the 1995 Act prevent the guarantor of an assignor from becoming the assignor’s assignee? And, secondly, if the statute precludes this, how does this affect assignments that have already occurred?
The Landlord and Tenant (Covenants) Act 1995 provides that on an assignment of a lease created after 1 January 1996, tenants and their guarantors are released from liability. The statute also contains a comprehensive anti-avoidance provision in the form of section 25, which renders agreements that frustrate the Act void.
K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] PLSCS 198 confirmed that landlords can require outgoing tenants’ guarantors to guarantee the liabilities of an outgoing tenant under an authorised guarantee agreement (but not the liabilities of an incoming assignee). However, in the course of his judgment, Lord Neuberger of Abbotsbury MR, as he then was, suggested in passing that the provisions in the 1995 Act would “appear to mean that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it”.
The property industry has been hoping for a reprieve ever since and will be disappointed by the decision in EMI Group Ltd v O&H Q1 Ltd [2016] EWHC 529 (Ch); [2016] PLSCS 87. The parties asked the court to consider two issues. First, does the 1995 Act prevent the guarantor of an assignor from becoming the assignor’s assignee? And, secondly, if the statute precludes this, how does this affect assignments that have already occurred?
EMI was the guarantor of an original tenant. Its stance was that it had taken an assignment of the lease from the tenant (which was in administration and had since been dissolved). It argued that it was, as a result, the proprietor of the leasehold interest, but that it was not liable on the tenant’s covenants in the lease, courtesy of section 25. However, it was prepared to accept that the forfeiture provisions in the lease remained operative and that the landlord would be entitled to forfeit if the rent was not paid.
The landlord argued that assignments to guarantors are not precluded by the 1995 Act. Furthermore, the guarantor’s interpretation would frustrate the operation of section 3 of the Act (which deals with the transmission of covenants on an assignment of a lease). Alternatively, if the guarantor was correct, the assignment to a guarantor was a nullity.
The judge noted that the policy that underpins the legislation is that a person should not remain liable under a tenancy after the tenant with whose liability he is associated has been released. The assignment released the guarantor from liability under the lease but, at the same time, sought to bind the guarantor with liability under the tenant covenants of the tenancy. This would frustrate the operation of the 1995 Act. Therefore, a guarantor cannot take an assignment from the tenant whose tenant covenants he has guaranteed.
The fact that such a conclusion was unattractively limiting and commercially unrealistic was neither here nor there. However, the judge did accept that the assignment was void and had not vested the lease in the guarantor. As a result, the lease had remained vested in the original tenant and was now vested in the Crown as bona vacantia. This meant that the guarantor remained liable under its guarantee, and could be obliged to accept a new lease in accordance with the terms of the guarantee.
Allyson Colby is a property law consultant
