Company structure
Here are two scenarios which are common for pub companies:
- A tenancy or lease is granted to the tenant (Dog and Duck Limited) and which is guaranteed by Fred and Mabel, the operators of the pub. Fred and Mabel were advised to take the tenancy in the name of a company for tax or other reasons. They now want to continue to trade the outlet and take an assignment of the tenancy or lease from Dog and Duck Limited. They do not want the current lease or tenancy to be surrendered because a new tenancy or lease will be costly, not least of all because of Stamp Duty Land Tax.
- As an alternative, Fred and Mabel would like the new tenancy or lease to be in the name of Dog and Duck No 2 Limited (which is a newly incorporated company, is different from Dog and Duck Limited). They volunteer that they will enter into a new guarantee of the obligations of Dog and Duck No 2 Limited in respect of the new tenancy or lease.
Which is the preferred option?
Under the current law:
- An assignment from the existing tenant (in this case Dog and Duck Limited) to an assignee (in this case Fred and Mabel, who are the current guarantors) is prohibited because of the provisions of The Landlord and Tenant Act. This follows a case in March 2016 (EMI Group Ltd v O&H Q1 Ltd).
- An assignment from the existing tenant (Dog and Duck Limited) to an assignee (in this case Dog and Duck No 2 Limited) but with Fred and Mabel as guarantors (subject to one exception) is prohibited because of the provisions of The Landlord and Tenant Act following a previous case in July 2011 (K/S Victoria Street v House of Fraser Ltd and others).
The one exception to this is that Fred and Mabel can enter into a guarantor’s authorised guarantee agreement (colloquially referred to by its acronym GAGA), but this is only possible where the existing tenant (Dog and Duck Limited) enters in to an authorised guarantee agreement (AGA) – and this may not always be possible.
So what does this mean?
Either of these cases could be situations where the tenant and the guarantor wanted the assignment and/or guarantee to take place and were freely offered. Bearing in mind the purpose of the Act is to protect tenants and guarantors, there seems no reason why a tenant and guarantor can decide not to avail themselves of the protections afforded by the 1995 Act.
Furthermore, the guidance of the Court of Appeal in K/S Victoria Street v House of Fraser Ltd (out of which all of this derives) is just that – guidance. In that case, the decision had already been made when the court issued its guidance, stating that this was because of apparent controversy and uncertainty in the law. Guidance from the Court of Appeal carries great weight but was not actually required in that case and was not central to it.
Hope is at hand….
Reports indicate that EMI Group Ltd v O&H Q1 Ltd is to be appealed and that the hearing is scheduled for May 2017. This appeal could have implications for the two scenarios outlined above and could lead to different answers being given. If you would like to keep up to date with this please look out for our updates or subscribe for our email notifications.
