Guy Fetherstonhaugh QC gives his own view on the decision in EMI and why a tenant should be able to assign its lease to its guarantor
So now we have a decision on the question: can a tenant of a lease to which the Landlord and Tenant (Covenants) Act 1995 (“the Act”) applies assign the lease to its guarantor? Yes, said both parties (albeit that the guarantor added, adventurously, that although the assignment was valid, none of the tenant’s covenants bound it). No, said the judge – and so everyone goes back to square one.
That is what was decided last month in EMI Group Ltd v O&H Q1 Ltd [2016] EWHC 529 (Ch); [2016] PLSCS 87. In brief: a post-Act lease is granted to HMV UK Ltd, with its parent, EMI Group plc, as guarantor; HMV goes into administration in 2013; EMI asks its landlord, O&H, to permit the lease to be assigned to it; the landlord agrees; a licence to assign is granted (under which EMI covenants with O&H to pay the rents and observe the covenants under the lease); and on the same day in November 2014, the lease is assigned.
This happy concord lasts only for 20 days, ending when EMI notifies the landlord that it is not liable to pay the rent, or indeed for any of the tenant’s covenants under the lease. When O&H (some might think reasonably) baulks at this shift in stance, EMI issues proceedings seeking a declaration that although the lease has vested in it by assignment, the tenant covenants in the lease are void and cannot be enforced against it. O&H in turn counterclaims for alternative declarations that the covenants can be enforced against EMI, but that, if they cannot, the assignment itself is void.
And so the stage was set for the trial of a point that has been of interest to the property world ever since some obiter remarks by Lord Neuberger MR in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2012] Ch 497; [2011] 2 EGLR 11 that assignments to guarantors could not work.
The key provisions
In the course of a thorough and analytical judgment, the deputy judge considered the purpose behind the Act, as expressed in the Law Commission report giving rise to it; the machinery of the Act itself; and the other judgments on it.
The Act is complex, but the four provisions bearing upon this issue may be shortly stated. First, section 5 provides that on an assignment of the whole of the premises demised to it, the tenant ceases to be liable under the lease as from the assignment. Secondly, upon such an assignment, the assignee becomes bound by the tenant covenants by virtue of section 3(2). Thirdly, where a tenant is so released, any other party who was bound by the tenant covenants (think guarantor) is also released by virtue of section 24(2), to the same extent. Fourthly, section 25 contains a comprehensive anti-avoidance provision.
These provisions (among others) were considered by the Court of Appeal in K/S Victoria Street. At issue in that case was the legitimacy of a proposed guarantee by the tenant’s existing guarantor on the assignment by the tenant to an associated company. The court held that such a guarantee would be outlawed by section 24(2) of the Act, because the guarantor would be “committing himself to re-assume his liabilities on a future assignment”. During the course of his consideration of the point, Lord Neuberger (giving the judgment of the court) said that the strict interpretation of the Act which the court was adopting “would also appear to mean that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it”.
This now notorious obiter dictum was seized on by both parties in this case, in aid of their opposing arguments.
The alternative view
Shortly before the hearing, Morgan J (himself the judge in two important recent cases under the Act) gave a talk to the Property Bar Association in which he addressed what he had earlier characterised as the “obiter and somewhat tentative” statement of Lord Neuberger in K/S Victoria Street.
By contrast, Morgan J appeared to find no difficulty with the proposition that an assignment by a tenant to its existing guarantor could validly be made. This did not breach section 25 in his view, for the reason (I paraphrase) that the liability of the guarantor did not continue through the assignment: it was instead imposed as a fresh liability by section 3 of the Act.
Although any statement by Lord Neuberger naturally commands huge respect, Morgan J’s reasoning strikes this author (but unhappily not the judge in the EMI case, who went on to hold that the whole assignment was void) as right. Let me make five short points concerning the reasoning.
First, the outcome accords with the central purpose of the Act, which was to ensure that parties to leases should be free of their obligations once they had parted with their interests, rather than to ensure that they could not voluntarily reassume their liabilities. Secondly, it avoids the problems that might otherwise occur once other parties are involved following assignment (and in this case it will be noted that EMI had sublet the premises on the same day as the assignment, although no consideration was given to this). Thirdly, it also avoids the considerable problems that arise where registration of the lease has taken place and rent has been paid. Fourthly, it may be said that this outcome calls into question the whole basis of the judgment in K/S Victoria Street. Well, yes indeed – but that is not an argument against the outcome in this case. Fifthly, the parties could have achieved a lawful result by dint of a surrender of the lease and a regrant to EMI.
A chance of reform?
With splendid timing, the Law Commission consultation paper last month Updating the Land Registration Act 2002, states, in para 12.45, “we are aware of widespread dissatisfaction with a number of aspects of the 1995 Act” and invites comments. Let yourselves be heard!
Guy Fetherstonhaugh QC is a barrister at Falcon Chambers
