Assigning a lease to their guarantor

In a recent High Court case it was held that a tenant is prohibited from assigning a new lease to their guarantor under the Landlord and Tenant (Covenants) Act 1995.

The Case

In EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch), the focus was whether the tenant HMV UK (Ltd) ("HMV") had legitimately assigned the lease to their guarantor EMI Group Ltd ("EMI") once they had entered administration. The Landlord O & H Q1 Ltd ("OH") approved the licence to assign the lease, within which EMI covenanted to perform and observe the tenant's covenants. Following the assignment EMI wrote to OH claiming that whilst the assignment was valid they were not bound by the tenants covenants contained by reason of the Landlord and Tenant (Covenants) Act 1995 ("LTCA"). EMI sought a declaration from the court to affirm that the tenant's covenants were unenforceable against them and should be cancelled.

OH submitted a counterclaim maintaining that the covenants were binding and enforceable against EMI. They submitted alternatively should it be found that the assignment from HMV to EMI was invalid, then HMV would continue to be bound by the lease as tenant and therefore EMI would remain bound as guarantor.

The court held that the assignment was void under the provisions of section 25(1) of the LTCA because it frustrated the operation of the act. The reason being that:

• HMV were released from the tenant covenants by assigning the lease to EMI (s5(2) LTCA); and
• as a consequence EMI were simultaneously released as guarantor from the tenants covenants on the release of HMV (s24(2)(b) LTCA); however
• EMI as the incoming tenant were however bound by the tenant's covenants under section 3(2)(a) LTCA.

In summary EMI and HMV were not released from their liabilities on assignment as is intended by the LTCA. The assignment was therefore held to be void as it frustrates the purpose of the LTCA. It was held that the lease remained vested in HMV, with EMI acting as guarantor. 

Analysis

The High Court's judgement is of particular importance when acting as a guarantor to a fellow group company and moving assets between the group. It is important that any new lease (i.e. those entered into on or after 1 January 1996) is not assigned to its guarantor as the assignment will be invalid. This is an important consideration when selecting an appropriate guarantor for future leases. Group companies should also check retrospectively whether any new leases have been assigned to their guarantor.