UK: More Trouble With Assignments And Guarantees - Parties Must Face The Music

Last Updated: 8 July 2016
Article by Edward Cooper
Most Read Contributor in UK, January 2017

EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch)

The High Court has confirmed that a completely voluntary assignment of a lease from a tenant to its existing guarantor will be void under statute. Such an assignment will be unenforceable and the parties will be returned to the positions they were in prior to the assignment. The decision in this case follows similar results in previous cases, often in scenarios where all parties concerned had strong commercial reasons to ensure that the transaction succeeded. Although the statutory limitations on such transactions were intended to prevent injustice, these cases provide increasing evidence that the freedom of parties to contract for legitimate commercial purposes has been severely curtailed.

The facts

This case concerned a lease of retail premises dated 26 September 1996, granted to the well-known entertainment store HMV ("HMV") for a term expiring in February 2021. On the day the lease was completed, the claimant ("EMI") agreed to guarantee HMV's performance of its covenants in the lease. However, HMV fell into administration in January 2013.

In November 2014, the defendant, as landlord of the premises (the "Landlord") consented to the assignment of the lease from HMV to EMI. This arrangement appeared to benefit all concerned. HMV was no longer able to comply with the terms of the lease, EMI was already on the hook pursuant to the guarantee, and the Landlord wanted a secure tenant.

Following the assignment of the lease to EMI, EMI's solicitors wrote to the Landlord to contend that, although the assignment had been valid, the covenants in the lease were unenforceable against EMI. The Landlord's solicitors disputed this, claiming that the lease was enforceable against EMI. In the alternative, the Landlord argued that if it was wrong, the whole assignment must be void, resulting in the restoration of EMI as HMV's guarantor.

The Law

Having been completed after 1 January 1996, the lease was a "new tenancy" to which the Landlord and Tenant (Covenants) Act 1995 (the "Act") applied. One of the principal purposes of the Act was to ensure an original tenant of a lease could be released from liability, following an assignment of its interest. To ensure that the Act would be effective, anti-avoidance provisions were included, to hold void any agreement if it would restrict the operation of the Act. The provisions therefore apply to a party that is bound by a tenant's covenants, even if it is not the tenant itself, such as a tenant's guarantor.

The Court of Appeal recently reviewed the effect of the anti-avoidance provisions in the Act in the K/S Victoria Street case. This case concerned an agreement to assign a lease from one tenant to another, where the original tenant's guarantor would remain the guarantor of the new tenant. Since the value of the new tenant's covenant was weak, the importance of the guarantee was paramount for the landlord. However, as the original guarantor would remain liable for the tenant's covenants after the assignment, it was held that the guarantee would be unenforceable under the Act.

The legal issues

EMI submitted that the K/S Victoria Street decision had direct application to the present facts. In both cases, the original tenant's guarantor would remain liable for the performance of the covenants in the lease before and after the assignment, and the law should draw no distinction between the liability of a tenant and that of a guarantor.

EMI also contended that the result of the unlawful assignment was that it was released from the tenant's covenants in the lease. The lease would continue and the landlord could forfeit it if EMI did not pay rent, but there would be no means to sue EMI in respect of the tenant's covenants.

In response, the Landlord argued that the effect of striking down an assignment, rather than a guarantee, had difficult implications that were not intended when the Act was passed. Furthermore, if EMI's case was correct, the parties would be left with a lease that could not be enforced by a Landlord, and which could not be recognised as a tenancy. As Counsel for the Landlord put it, the result would be a "Frankenstein's monster" of a tenancy.

The decision

Following the reasoning laid out in K/S Victoria Street, the Court held that the assignment of the lease from HMV to its guarantor, EMI, was void. In practical terms, although EMI was released as the guarantor of HMV, it had assumed liability for the tenant's obligations at the very same time. This would frustrate the purpose of the Act and the transaction therefore fell foul of the Act's anti-avoidance mechanisms.

Although the Court preferred EMI's arguments concerning the anti-avoidance mechanism, this was a Pyrrhic victory, as the Court could not accept EMI's submissions concerning the effect of this. The Court held that the obvious conclusion was that the assignment was void. This had the effect of returning the parties to the original position before the assignment, leaving EMI liable for the lease covenants pursuant to its guarantee.

Our comments

In view of the previous case law concerning the Act, the result of this case is perhaps unsurprising. However, the case highlights the fact that the Act has become a serious impediment to parties seeking to conduct lease transactions where the value to the landlord is held in a guarantee of the tenant's covenant. A simple intra-group transfer of a lease from one company to another will cause problems and now we know that an assignment to an existing guarantor will also be struck down. Summing up, the Judge noted "As is clear from K/S Victoria Street, the fact that such a conclusion is unattractively limiting and commercially unrealistic is neither here nor there." Following this line of decisions, The Property Litigation Association is now consulting on proposals to reform the law and many practitioners will hope that the campaign succeeds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.