Legal Update: Lease Assignments to Guarantors are Void

The High Court has recently ruled in the case of EMI Group Limited v O&H Q1 Limited [16 March 2016] that the assignment of a “new” lease (i.e. a lease that is granted on or after 1 January 1996) cannot lawfully be assigned by the tenant to its guarantor.  This decision follows an obiter comment made by Lord Neuberger in the 2011 Court of Appeal case of K/S Victoria Street v House of Fraser (Stores Management) Ltd that the anti-avoidance provisions in the Landlord and Tenant (Covenants) Act 1995 - the purpose of which Act is to ensure the release of tenants and their guarantors from lease liabilities on assignment - would render any assignment of a lease between the tenant and its guarantor void, even if the tenant and guarantor mutually consented to the assignment.

The effect of this decision is that, notwithstanding the assignment, the assignor remains the tenant under the lease and the guarantor continues to guarantee the assignor’s obligations.

This decision is likely to cause some discomfort to investor landlords who might, as a result, wish to look back into their archives to see whether the tenants they have on their books are in fact the ‘tenant’ in legal terms. 

It is worth noting that assignments from tenants to guarantors have not been uncommon in the past decade where, as a result of the uncertain economic climate, corporate reorganisations or tenant insolvencies have led to guarantors taking over leases in their own name.

Moving forward the lesson to be learned, for the time being at least, is that landlords need to remain vigilant when faced with a tenant’s application for licence to assign their lease. 

The decision is also likely to cause practical challenges for corporate groups trying to reorganise their affairs via inter-group lease assignments.

Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.

For further information, please contact Philip Mundy on pmundy@glovers.co.uk