Landlord and tenant – Assignment – Guarantee – Landlord and Tenant (Covenants) Act 1995 – Claimant guarantor of original tenant seeking declaration that tenant’s covenants void on assignment of lease – Whether 1995 Act precluding guarantor of assignor from becoming assignor’s assignee – Whether assignment being void pursuant to section 25(1) of 1995 Act – Claim dismissed
By a lease in 1996, the landlord granted a tenancy, for a term expiring in February 2021, of retail premises known as 88/89 High Street and unit 31, Chapel Walk, Crowngate Centre, Worcester. The lease was a standard form lease of retail premises and was a “new tenancy” to which the Landlord and Tenant (Covenants) Act 1995 applied. A deed of guarantee was entered into whereby the claimant, as guarantor, in consideration of the landlord granting the lease to the tenant, unconditionally and irrevocably, covenanted with and guaranteed to the landlord that the tenant would pay and discharge the secured obligations under the lease until it was released from liability by section 5 of the 1995 Act. The landlord later assigned its interest in the lease to the defendant.
The tenant went into administration and the lease was assigned to the claimant. On the same day, an underlease was granted by the claimant to a new company for a term expiring in January 2017. The claimant informed the defendant that, although the assignment of the lease and the grant of the underlease were valid, the tenant’s covenants in the lease could not be enforced against the claimant. It issued a claim seeking a declaration that as the lease had, as a matter of law, vested in the claimant by assignment and by operation of law, the tenant covenants thereunder were void and could not be enforced against the claimant.
The court was asked to determine: (i) whether the 1995 Act precluded the guarantor of an assignor from becoming the assignor’s assignee; and (ii) if that arrangement was precluded by the Act, to what extent the agreements which purported to give effect to it were avoided by section 25(1) of the Act.
The claimant contended that, although the legal interest in the tenancy was now vested in it as the assignee of the lease, the tenant’s covenants were void by reason of section 24(2) and 25(1) of the 1995 Act. The defendant argued that the arrangement between the tenant and its guarantor was not precluded by the Act but, if it was, the assignment of the tenancy by the original tenant to its guarantor was rendered void by the Act.
The claim was dismissed.
(1) A tenant was precluded under the 1995 Act from assigning the tenancy to its guarantor and any agreement which sought to give effect to such an arrangement was void by reason of section 25(1) as it frustrated the purpose of the Act. The whole thrust of the 1995 Act was that there should be no re-assumption or renewal of liabilities, whether on the tenant or the guarantor. That was the effect of section 5(2)(a) in the case of tenants and section 24(2)(a) in the case of a guarantor. Accordingly, if a tenant and the tenant’s guarantor were each liable for the same, or essentially the same, liabilities as a result of the tenant’s covenants, the guarantor could not, as a result of assignment by the tenant to it of the tenancy, re-assume those very same liabilities as the tenant. In practical terms, there was no release for the guarantor in respect of its liabilities under tenant covenants. The objective effect of the assignment was that the guarantor re-assumed precisely the same liability in respect of the tenant covenants which frustrated the operation of section 24(2)(b) and the assignment was rendered void by section 25(1)(a), an anti-avoidance provision which was to be interpreted generously. The guarantor was therefore absolutely precluded from becoming the assignee, on an assignment by the tenant whose tenant covenants he was guaranteeing: K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] 2 EGLR 11 applied. UK Leasing Brighton Ltd v Topland Neptune Ltd [2015] EGLR 20 considered.
(2) There was nothing in the 1995 Act which provided for there to be sequential steps in relation to the release of the guarantor from his liabilities under the tenant covenants and the re-assumption of those same liabilities on him as the assignee. Rather, sections 5(2), 3(2) and 24(2) provided that those events should all happen at the same moment in time, which was “as from” the assignment. There was, therefore, no moment in time when a person who was the guarantor, and then became the assignee, was actually released from, or otherwise freed from, his liabilities in respect of the tenant covenants. Whether as guarantor or as assignee, the liabilities in respect of tenant covenants continued unchanged. Therefore, there was nothing in section 3(2)(a) which altered the conclusion that a guarantor was precluded from becoming the assignee on an assignment by the tenant whose tenant covenants he was guaranteeing. The fact that such a conclusion was unattractively limiting and commercially unrealistic was neither here nor there.
(3) In deciding to what extent the assignment, or the licence to assign, was avoided by section 25(1), the court was required to take a balanced approach to invalidation which, whilst neutralising the offending parts of the contract, did not leave it emasculated and unworkable. The court was also entitled to look at the structure of the agreement in an objective and common sense way: Tindall Cobham 1 Ltd v Adda Hotels (an unlimited company) [2014] 3 EGLR 36; [2014] EGILR 50 considered.
The obvious consequence of section 25(1)(a) in the present circumstances was that the assignment was void. The assignment, an agreement relating to a tenancy, purported to make the claimant, as the assignee, liable in respect of the very same covenants from which it had just been released as guarantor. That had the effect of frustrating section 24(2) and, in order to safeguard the objectives of the 1995 Act, the assignment had itself to be void. Consequently, the assignment did not take effect to vest the lease in the claimant, as an assignee, and the lease remained vested in the original tenant so that the claimant remained bound as guarantor of original tenant’s obligations under the lease by virtue of the guarantee and had not been released from its obligations under the guarantee by the operation of the 1995 Act.
Jonathan Seitler QC (instructed by GSC
Solicitors LLP) appeared for the appellant; Kirk Reynolds QC (instructed by Clarke Willmott LLP) appeared for the defendant.
Eileen O’Grady, barrister
Read a transcript of EMI Group Ltd v O & H Q1 Ltd here
