Assignments by tenants to their guarantors are ruled as void


Author: Amanda Hado-Bodfield


Relevance

A recent High Court decision is commercially relevant and important to those dealing with tenant insolvency and also for all due diligence of investment transactions where an assignment of a lease from the tenant (T) to its guarantor (G) is purported to have taken place.

T holds a lease of commercial premises at market rent.  T’s covenants are guaranteed to the landlord by G. T goes into administration and T wishes to assign the lease to G, to discharge its continuing liabilities under the guarantee.  A recent High Court decision has, for the first time, ruled that the assignment of a lease by T to G was void under the Landlord and Tenant (Covenants) Act 1995 (Act).

Facts of the case: EMI Group Limited v O & H Q1 Limited [2016] EWHC529 (Ch) 16 March 2016

T had completed an assignment of its lease to G with the consent of the landlord.

The technical reasoning behind the decision is that under section 25(1) of the Act 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 stipulates that when T assigns, G’s liability should terminate no later than the liability of T (unless continued under an authorised guarantee agreement (AGA)). The assignment of T’s liability to G would be void because it frustrated the operation of the Act in that G remained liable after T was released.

The landlord’s consent was irrelevant here and the High Court held the assignment to be void.

Impact

The judge ruled that the status of the lease, where the assignment from T to G had already taken place, was 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.

On commercial grounds an appeal is unlikely, given that the conclusion is that either G remains liable as guarantor, as the whole assignment is void, or the assignment is valid and G remains liable as tenant. In practical terms the landlord has the option to give notice to G to take up a new lease under the guarantee.

For more insight and advice generally on commercial property matters please do contact us.

Amanda Hado-Bodfield, Senior Associate, Fladgate LLP (ahado-bodfield@fladgate.com)

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