The litigation in UK Leasing Brighton Ltd v Topland Neptune Ltd [2015] EWHC 53 (Ch); [2015] PLSCS 15 was the direct result of the proceedings in Tindall Cobham 1 Ltd v Adda Hotels [2014] EWCA Civ 1215; [2014] PLSCS 249. Both cases concern the effect of provisions in the Landlord and Tenant (Covenants) Act 1995 and were triggered by assignments of leases between companies in the same group.
The outgoing tenants claimed that the assignments had terminated their liabilities, and those of their parent company guarantor, because the 1995 Act releases tenants (section 5) and guarantors (section 24) from liability to landlords when a lease is lawfully assigned to a third party. However, when the case came before the Court of Appeal last year, the tenants were forced to accept that they should have asked their landlord for permission to assign the leases. The assignments were unlawful because they had not done so and, as a result, they and their guarantors remained liable to the landlord (section 11).
Both sides agreed that the unlawful assignments should be undone. However, they needed to overcome anti-avoidance provisions in section 25 to restore the leases to the original tenants with the benefit of parent company guarantees.
Alternative solutions
The landlord suggested reassignments accompanied by fresh parent company guarantees (since previous guarantees would be released by the reassignments), but the tenants argued that the new guarantees would be invalid. They claimed that the proposal would contravene section 25 by frustrating the release of the guarantor and reimposing liability on it at the very point in the cycle when section 24 provides for guarantors to be released.
The tenants argued that the leases should first be assigned to new companies. This would release the parent company from its guarantees. Shortly after this was done, the leases could be assigned back to the original tenants, and the parent company would then be free to enter into new and effective guarantees.
However, in the absence of binding agreements with all parties, the landlord could not be certain that the tenants and their guarantor would complete all the stages of this process. It was also concerned that any mechanism that would bind the guarantor to give fresh guarantees would also be invalid, since this might frustrate the release of the guarantor.
A legal maze
The thinking in K/S Victoria Street v House of Fraser [2011] EWCA Civ 904 was pivotal. In that case, the Court of Appeal upheld Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] 1 EGLR 29, but indicated, without deciding the point, that an outgoing tenant’s guarantor can guarantee the outgoing tenant’s liabilities under an authorised guarantee agreement, even though it cannot guarantee the liabilities of an incoming assignee.
Lord Neuberger, in his capacity as the Master of the Rolls, as he then was, also indicated that agreements that stipulate in advance that a tenant’s guarantor must re-assume its liability as guarantor on a future assignment will be void (as will any guarantee given pursuant to such an agreement). However, if a tenant assigns and the tenant and its guarantor are released, there is nothing to prevent the guarantor re-assuming liability as a guarantor on a subsequent assignment.
This was helpful, but Lord Neuberger caused consternation by suggesting that an assignment to a guarantor would be invalid because this would frustrate its release by immediately re-imposing liability on it as an assignee. Was this right and, if so, can a tenant assign a lease into joint names and remain a tenant itself, or will this contravene section 25 because it would re-impose liability on the tenant when section 5 provides for its release?
Navigating the maze
The judge agreed that the tenants’ scheme would fall foul of section 25, because the guarantor would have to commit itself to future guarantees before the landlord would consent to assignments that would release the guarantor from liability under its existing guarantees. This would frustrate the operation of section 24.
However, the judge did uphold the landlord’s scheme. He described Lord Neuberger’s suggestion that assignments to guarantors are invalid as “obiter and somewhat tentative”, but indicated that, had this been relevant, he would have required further argument before being persuaded to disregard it. However, he refused to apply similar reasoning to prevent the leases from being reassigned to the previous tenants, even though they were still liable to the landlord as a result of section 11.
The judge circumnavigated the tenants’ argument that the provision of fresh guarantees would frustrate the release of their existing guarantees by referring to K/S Victoria. An outgoing tenant’s guarantor can guarantee an outgoing tenant’s liabilities under an authorised guarantee agreement, because the guarantor is being released “to the same extent” as the outgoing tenant, as is required by section 24. The same reasoning could be applied here. The guarantor could provide fresh guarantees because the reassignments would release the guarantor “to the same extent” as the tenants were being released. Therefore, section 24 would be operating in accordance with its terms, as opposed to being frustrated.
Comment
The decision helps the parties out of a hole, but highlights the complexity, inconsistencies and uncommercial effect of the law in this area. What a pity that the calls for reform prompted by the decisions in Good Harvest and K/S Victoria have yet to find favour with the legislature.
