In the recent ruling of EMI Group Limited v O&H Q1 Limited (2016) EWCH 529 (Ch) the High Court held that the assignment of a “new” lease (a lease granted on or after 1 January 1996) cannot be lawfully assigned by a tenant to its guarantor.
This decision was made in light of the Landlord and Tenant (Covenants) Act 1995 (the “Act”) which was implemented to ensure that tenants and their guarantors are automatically released from their liabilities on assignment of a lease. However, Lord Neuberger’s obiter comment during his judgment in K/S Victoria Street v House of Fraser (Stores Management) Limited  suggested that the anti-avoidance provision may prevent a lease being assigned from a tenant to the tenant’s guarantor “even where the tenant and guarantor wanted it”.
In EMI Group Limited v O&H Q1 Limited (2016) EWCH 529 (Ch), the original tenant was HMV who went into administration. As a result, the guarantor, EMI, took an assignment of the lease, with the consent of the landlord (O&H). Soon after assignment, EMI attempted to argue (on account of Lord Neuberger’s comments) that although the assignment of the lease was valid, the tenant covenants could not be enforced against EMI.
The landlord (O&H) argued that this interpretation of the assignment would create a “Frankenstein’s monster” of a lease which was completely unfeasible. Additionally, they argued that EMI actually re-assumed liability, wearing a different hat, as the tenant. The High Court concluded that in this situation where an assignment by an original tenant is granted to its guarantor, if as suggested, the guarantor re-assumes liability for the tenant covenants as the new tenant, this would frustrate the whole purpose of the Act. As a result, that would render the assignment of a lease between an original tenant and its guarantor void, even, when all parties consented to the assignment.
The upshot is that the assignor continues to be the tenant under the lease and the guarantor is still bound to guarantee the assignor’s obligations. This judgment allows landlords to breathe a sigh of relief, as it demonstrates that EMI could not simply pick and choose which parts of the lease survived the assignment.
It is too early to be sure whether EMI will be appealing the decision; however, the High Court ruling poses a number of potential challenges going forward. In particular, it highlights to landlords the importance of remaining aware and cautious when tenants apply for a licence to assign their lease. Until it is challenged or appealed, this decision is bound to create confusion in terms of past transactions of this nature, which for many has been common practice, in particular between group companies and in the situation of tenant insolvency.
If you aren’t receiving our legal updates directly to your mailbox, please sign up now
Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.