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Restrictions on assigning leases

The High Court has recently confirmed that a tenant cannot assign to its guarantor.

Assignment of commercial leases is governed by the Landlord and Tenants Covenants Act 1995. The purpose of the 1995 Act is to provide for a complete release for the Tenant and Guarantor on an assignment. Many property professionals felt that if the tenant wanted to assign the lease and the Guarantor wanted to take an assignment, why shouldn’t they be allowed to do so? Indeed, on many occasions, such an assignment has taken place, particularly where the Tenant and Guarantor are part of the same group of companies.

In the case of K/S Victoria Street v House of Fraser [2011] All ER (D) 262 (Jul) the Tenant wanted to assign their lease to a third party and the Guarantor wanted to provide a guarantee for the assignee also. The Court held that that went against the provisions of the 1995 Act, as it prevented the Guarantor from receiving a complete release on assignment. There were obiter dictum comments made by the Judge that the decision may mean that a Guarantor could not take an assignment, but those comments were not binding. It has been the subject of much debate in property law circles since the comments were made and the decision of EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch) provides an answer.

The situation in EMI was as follows. HMV were the Tenant of commercial premises and EMI were the Guarantor under the lease. Under the terms of the guarantee, EMI agreed to satisfy the tenant covenants, should the Tenant fail to do so. HMV went into administration and a licence to assign was granted by the landlord allowing the lease to be assigned to EMI. The lease was subsequently assigned to EMI who then granted an underlease to a third party. The question before the Court was whether that assignment was void, following the obiter comments in K/S Victoria Street, as it was an assignment to a guarantor. If it were void, the original Tenant would remain the tenant and EMI would remain liable as Guarantor under the lease.

The High Court held that the 1995 Act does not allow a Guarantor to take an assignment of the lease. To do so puts the Guarantor in the position whereby it is never released from its covenants, they are simply transferred from covenants it is required to comply with if the tenants fails to do so, to covenants it is required to comply with directly. That, the Court said, went against the whole thrust of the 1995 Act and as such, the assignment from Tenant to Guarantor was void.

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