Assignment from a tenant to its guarantors

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EMI Group Ltd v O&H Ltd is a very recent case decided under the Landlord & Tenant (Covenants) Act 1995 (“the Act”) by the wonderful (so I think) Lord Neuberger.

The basic purpose of the the Act was to ensure that tenants, and their guarantors, are released from their liability under a lease on assignment.

The background for this decision is the case of K/S Victoria Street v House of Fraser (Stores Management) Ltd (2011). In that case, the Court of Appeal held that, in relation to post 1995 Act tenancies, a direct guarantee of an immediate assignee’s liabilities given, on assignment, by the assigning tenant’s guarantor is rendered void by section 25 of the Act because it operates to frustrate the guarantor’s release from liability on assignment under section 24(2) LTCA 1995.

Referring back to the case of EMI Group Ltd v O&H Ltd, in the course of his judgment, Lord Neuberger ‘mused’ that the anti-avoidance provision might prevent a lease being assigned from the tenant to the tenant’s guarantor “even where tenant and guarantor wanted it”.

In this case, HMV was the tenant and EMI group was the guarantor. O&H was the landlord. HMV went into administration, and EMI Group took an assignment of the lease with the landlord’s consent. EMI Group then claimed it was not liable on account of Lord Neuberger’s comments.

The Court upheld Lord Neuberger’s suggestion, that a lease cannot be assigned from a tenant to the tenant’s guarantor and any attempt to do so is void. It is a staggering decision and one which the Judge said, echoing Lord Neuberger in House of Fraser, “the fact such a conclusion is unattractively limiting and commercially unrealistic is neither here nor there”.

The repercussions are wide reaching. When the Act was first created, nobody anticipated that a tenant could not, without the landlord’s consent, perform the relatively simple task of assigning its lease to its guarantor. Some guarantors have the benefit of ‘call option’ clauses so that, if the tenant defaults in performance of its covenants, and the guarantor is called upon to remedy the default of the tenant, the guarantor can call for an assignment of the lease. The decision in EMI Group Ltd would now mean this cannot be done.

The decision feels wrong and does not sit well. It raises plenty of issues in relation to past transactions and creates problems for future assignments. So, what will happen where an assignment has already taken place? What are the implications? Lots of things to consider and a case, I am sure, that will be appealed as it just leaves so many questions unanswered. Perhaps there are days where Lord Neuberger isn’t so wonderful after all?

Watch this space.