Landlord and tenant – Assignment – Guarantee – Intra-group transfers – Landlord and Tenant (Covenants) Act 1995 – Tenants of commercial premises assigning leases to associated companies in breach of covenant in lease without consent of landlords – Parties seeking declaratory relief as to legality of reassignment – Declaratory relief granted in favour landlords
The court was concerned with two actions between various landlords, tenants and guarantors. Certain issues in the first action had been considered by the court of Appeal: see Tindall Cobham 1 Ltd v Adda Hotels [2014] EWCA Civ 1215; [2014] 1 EGLR 50. Further issues in that action came before the court and the same issues were raised in a second action concerning different parties. Since the facts in both cases were essentially the same for all material purposes, both cases were heard together.
The relevant facts were that a lease was granted to T1, with G guaranteeing its obligations under the lease. The lease was a new tenancy within the Landlord and Tenant (Covenants) Act 1995. T1 assigned the term of the lease to T2 in breach of a covenant in the lease. The assignment was effective to vest the term of the lease in T2 and T2 became liable under the tenant covenants in the lease. Since the assignment as in breach of covenant, T1 as the original lessee and G as the guarantor were not released under the 1995 Act from their liabilities in relation to the tenant covenants in the lease.
All the parties wished to bring about a result whereby the term of the lease was again vested in T1 and the tenant’s obligations under the lease were again guaranteed by G. The landlords favoured to direct course of T2 reassigning the term of the lease to T1 and G giving a fresh guarantee. However, there were said to be problems in achieving that result created by the 1995 Act.
Declaratory relief granted in favour of landlords.
(1) The 1995 Act applied to the facts of these cases. Even though an assignment of the term of the lease by T1 to T2 constituted a breach by T1 of the terms of the lease, the assignment was effective to transfer the term of the lease to T2. Under section 3(2)(a), T2 became bound by the tenant covenants in the lease. Being in breach of covenant, the assignment was an “excluded assignment” within section 11 of the 1995 Act. Accordingly, under section 11(2)(a), T1 was not released from the tenant covenants pursuant to section 5(2)(a). Because T1 was not released, G could not assert that it was released under section 24(2) in relation to the tenant covenants in the lease.
(2) A term of the lease, or of an agreement relating to the lease, which stipulated in advance that a tenant’s guarantor had to re-assume the liability of a guarantor in relation to the assignee, as a term of an assignment by the tenant, would frustrate the operation of section 24(2) which would otherwise serve to release the guarantor and was therefore void under section 25(1)(a). Section 25(1) invalidated any agreement which involved a guarantor of the assignor guaranteeing the assignor’s assignee which gave the 1995 Act an unattractively limiting and commercially unrealistic effect but was nonetheless the law. There was no distinction between a guarantee freely offered by the guarantor and a guarantee insisted upon by the landlord. There was no distinction as to the effect of the 1995 Act on an agreement to give a guarantee and a guarantee actually given. If the assignor gave an authorised guarantee agreement in relation to the assignee, the guarantor of the assignor, whilst it was the tenant, could also give a guarantee in relation to the assignor’s liability under that agreement. If a tenant assigned and the tenant and the tenant’s guarantor were thereupon released, there was nothing to stop that guarantor becoming a guarantor again on a subsequent assignment. That applied not only where the subsequent assignee was a new party but also where the subsequent assignee was an earlier tenant whose liabilities were guaranteed by that guarantor: K/S Victoria Street v House of Fraser [2012] Ch 497 applied; Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] 1 EGLR 29 considered.
(3) In the present case, the way in which the 1995 Act would operate in relation to the steps proposed by the landlords was, prima facie, that T2 would be released from the tenant covenants: section 5(2)(a); T1 would be released from the tenant covenants entered into at the time the lease was granted to T1: section 11(2)(b); G would be released from the earlier guarantee which it gave: section 24(2); On the re-assignment to T1, T1 again became bound by the tenant covenants: section 3(2)(a). Even if the court were persuaded to read down the operation of section 11(2)(b) so that T1 was not released on the re-assignment from T2 to T1, the fact remained that T2, which was bound by the tenant covenants following the assignment to it, was released from the tenant covenants on the re-assignment to T1. Therefore, section 24(2)(a) was satisfied by reason of that fact. The consequence of section 24(2)(a) being satisfied was that “another person”, in this case G, was also released.
When the lease was assigned by T2 to T1, T1 was released from its original obligations by reason of section 11(2)(b) but became bound by the tenant covenants under section 3(2)(a). If G was released from its original obligations under its original guarantee but entered into a fresh guarantee in relation to the tenant covenants, then G was released to the same extent as T1 was released. Section 24(2) took effect in accordance with its terms and was not frustrated for the purposes of section 25. Accordingly, it was open to the parties to proceed with a direct assignment by T2 to T1 with T1’s obligations being guaranteed by G.
Kirk Reynolds QC and Julian Greenhill (instructed by Berwin Leighton Paisner LLP) appeared for the claimants in the first action; John McGhee QC (instructed by Paul Hastings (Europe) LLP) appeared for the defendants in the first action and the claimants in the second action; Timothy Fancourt QC (instructed by Osborne Clarke) appeared for the defendants in the second action.
Eileen O’Grady, barrister
