In a recent High Court case, EMI Group Limited v O & H Q1 Limited, a landlord and tenant dispute was raised and the court discussed the question ‘can a tenant assign their lease to a guarantor?’ The court determined that a tenant cannot assign their lease, granted on or after 1 January 1996, to its guarantor. This is because it would be contrary to the anti-avoidance measures of the Landlord and Tenant Covenants Act 1995 and as a result void the assignment.
The Landlord and Tenant Act 1995 was intended to prevent any renewal of liabilities, whether on the tenant or the guarantor, after a transfer (also known as an ‘assignment’) of the lease. As a result the outgoing tenant and its guarantor would be released from their liabilities under the lease rather than remaining liable for the rest of the term (the old ‘privity of contract’ rule). The only exception under the Act is that a landlord can insist on the outgoing tenant (and its guarantor) maintaining the obligations of the new tenant under an Authorised Guarantee Agreement (AGA). The AGA is only effective until the new tenant also transfers the lease.
What was the High Court’s decision?
The High Court ruled that transferring the lease to your guarantor ‘frustrates’ this principle as the guarantor is not freed from their liabilities under the lease. This is because the guarantor assumes the same liabilities as the incoming tenant. Any transfer to a guarantor will be void and treated as if the lease remains with the original parties.
What this means for landlords and tenants?
- Assignments to guarantors should be refused and a great deal of doubt exists as to the status of the parties where this has occurred.
- The decision limits the options available to group companies when looking to restructure.
- Intra company assignments need to be carefully reviewed as part of the ‘due diligence’.
- Landlords may need to review their portfolios in light of this decision to determine what effect it could have.
- Tenants could have inadvertently lost their right to renew a lease (security of tenure).
As you can see from this case, it’s vital for landlords and tenants to act cautiously. Although we might not have heard the end of this. An appeal has been scheduled to be heard by the Court of Appeal in May 2017. There is some support for an alternative interpretation of the Act permitting an assignment to a guarantor.