A recent High Court case has now provided judicial authority on whether a tenant can assign its post-Landlord and Tenant (Covenants) Act 1995 lease to a guarantor.
A situation which frequently arises in the hospitality industry is where a an operator sets up a limited company for trading purposes, whilst acting personally as a guarantor on the lease of a pub. Should the trading company then become insolvent, the operator may wish to take an assignment of the lease. The decision in the recent case, EMI Group Limited v O & H Q1 Limited, confirms that an assignment in these circumstances is not valid.
Background
In relation to post-LTCA 1995 leases, The Court of Appeal in another case (K/S Victoria Street v House of Fraser (Stores Management) Limited) made a significant decision. It held that a direct guarantee, on assignment, by an assigning tenant’s guarantor of an immediate assignee’s liabilities, is rendered void – since it operates to frustrate that guarantor’s release on assignment.
In this case Lord Neuberger suggested (albeit his comment was non-binding) that an assignment of a lease to an assigning tenant’s guarantor might itself be void. His comments have caused some doubt in the minds of commentators whether he had intended to rule that such assignments would be rendered void.
As a reminder of the relevant law, as from assignment:
- the assignee becomes bound by the tenant covenants
- the tenant is released from the tenant covenants
- the guarantor is released from the tenant covenants.
Decision
This grey area has to some extent been resolved by the decision of the High Court in the most recent case, EMI, which has followed Lord Neuberger’s comments and held that a tenant may not assign its lease to its guarantor and any agreement designed to put this transaction into effect is void.
Practical points
It was generally perceived to be helpful for guarantors (in the context of SDLT, for instance) to be able to take an assignment of a lease – rather than waiting for an insolvent tenant to go into liquidation and for the landlord to exercise the standard put-option clause in the guarantee, requiring the guarantor to take a new lease. However, that is not now possible following EMI. Any such assignment will be of no effect and the lease will remain vested in the tenant.
On a practical level, guarantors’ call options (where the guarantor can call for an assignment of the lease after it has remedied the tenant’s performance) will no longer be effective. It is also likely that any underleases granted out of the leasehold interest following the assignment will fall away.
Although the decision in EMI is not binding on other courts (it could also be successfully appealed), it appears that the courts will follow the approach suggested by Lord Neuberger.
Action
Landlords should therefore review whether any leases in the portfolios are affected. From the tenant’s perspective, the decision certainly limits a tenant’s options during any restructuring and is likely to lead to more stringent restrictions on intra-company assignments of leases.
Contact
If you would like to discuss assignment of leases in more detail, please contact Adam Boyd.
