Tenant’s lease assignment to guarantor was void, court rules

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Summary: A court has, for the first time, decided that the assignment of a lease by a tenant to its guarantor was void under the Landlord and Tenant (Covenants) Act 1995 (“the Act”). Roger Cohen reports.

Background

Take a lease of commercial premises let at market rent to a tenant, T.  T’s covenants are guaranteed to the landlord by a guarantor, G. T falls on hard times and goes into administration. T and its administrators wish to assign the lease to G, as the first stage in a strategy to escape continuing liabilities under the guarantee.

The question

The technical question is whether, under the Act, T can assign the lease to G or would the assignment be void?  A judge has, for the first time, held that this type of assignment would be void.

The case

In the case concerned, T had assigned its lease to G with the consent of the landlord.  The fact that the landlord had given its consent made no difference to the outcome.

The reason for the issue is that any agreement relating to a tenancy is void to the extent that it would “exclude, modify or otherwise frustrate” the operation of any provision of the Act.  The Act requires that when T assigns, the liability of G should terminate no later than the liability of T (unless continued by an authorised guarantee agreement). 5 years ago, the Court of Appeal suggested that the Act operated so that T could not assign to G. The assignment would be void because it frustrated the operation of the Act in that G remained liable after T was released.

The decision

Now we have a decision. T, guaranteed by G, cannot assign to G. What is the status of the lease if that assignment is completed? T argued that the lease was assigned to G, but G’s covenants were void. The judge rejected that. She held that the lease remained in the ownership of T and G remained bound as guarantor of T’s obligations. G had not been released from its obligations under the guarantee by the operation of the Act. This means that the landlord could give notice to G to take up a new lease under the guarantee.

Next steps

This decision has been given by the High Court.  Will there be an appeal? I doubt it. Either G remains liable because the whole transaction is void or the assignment is valid and G remains liable as tenant. In the meantime, this decision will be of importance not only to those dealing with tenant insolvency but also those dealing with due diligence of investment opportunities.

Source:  EMI Group Limited -v- O & H Q1 Limited [2016] EWHC529 (Ch) 16 March 2016

Lease; Landlord; Tenant; Insolvency; Administrators; Guarantor

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