Perhaps the year’s most anticipated appeal will no longer proceed after the parties in the case of EMI Group Ltd v O&H Q1 Ltd reached a settlement.
Many in the profession had hoped the case would lead to the Court of Appeal overturning a much discussed ruling last year that a tenant cannot assign its tenancy to a guarantor.
The appeal had been scheduled to be heard in May 2017, but now the parties have reached a settlement on confidential terms.
In March last year, deputy judge Amanda Tipples QC gave her decision in the case, which centred on the correct interpretation of controversial provisions of the Landlord and Tenants (Covenants) Act 1995.
She was asked to rule on whether a tenant can assign tenancy to a person or body that has been its guarantor, and found that this could not happen “as it frustrates the purpose of the Act”.
The case related to retail premises in Worcester that were, for a period of time, used by record store HMV.
EMI Group is the guarantor of HMV, the “original tenant”, and had argued that the lease had been assigned to it by the original tenant, with the result that it is now the tenant.
Landlord O&H Q1 maintained that the assignment was void by reasons of sections 24(2) and 25 (1) of the 1995 Act.
Siding with the landlord, the deputy judge said: “The conclusion I have reached is that a tenant is precluded under the Act from assigning tenancy to its guarantor and any agreement which seeks to give effect to such an agreement is void by reason of section 25(1) as it frustrates the purpose of the Act.”
The decision has been widely discussed in the profession, with many hoping the position of guarantors will be addressed by the higher courts or, more likely, legislative reform.
Writing for EG on the Property Litigation Association’s proposals for reform, Bryan Johnston, partner at Dentons UKMEA LLP, said: “The fundamental problem with the Act (as interpreted) is that it is hostile to the concept of freedom of contract. There is commercial logic in a lease guarantor offering to guarantee the assignee or indeed offering to become the assignee. However, the Act contentiously offends this logic and prevents such action from taking place.
“What is striking is that the judiciary recognises this flaw, but has left it as a weeping sore.”
See also EMI v O&H part II: engaging the 1995 Act
EMI Group Ltd v O&H Q1 Ltd, Chancery, (Miss Amanda Tipple QC) 16 March 2016
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