A recent decision has confirmed that the anti-avoidance
provisions in the Landlord and Tenant (Covenants) Act 1995
("the Act") prohibit tenants from assigning their leases
to their guarantors, because doing so would frustrate the purpose
of the Act.
"It would also appear to mean that the lease could not be
assigned to the guarantor, even where both tenant and guarantor
wanted it." Lord Neuberger; K/S Victoria Street v House of
Fraser (Stores Management) Limited 
This issue, which was considered but not decided upon in 2011 by
Lord Neuberger, recently came before the High Court in the case of
EMI Group Limited v O&H Q1 Limited  EWCH 529
(Ch) and Lord Neuberger's suggested approach has been
The case concerned a lease dated 26 September 1996 (known as a
"new tenancy" under the Act) which was granted to HMV UK
Limited ("the Tenant") and a Deed of Guarantee which was
entered into by EMI Group Limited ("the Guarantor").
Following the Tenant entering into administration, consent to the
assignment of the lease to the Guarantor was given by O&H Q1
Limited ("the Landlord") on 28 November 2014 and a Deed
of Assignment was entered into on the same day.
The Guarantor subsequently claimed that, although the assignment
of the lease to it was valid, the tenant's covenants in the
lease could not be enforced against it and sought a declaration
from the Court on this basis. The Landlord counter-claimed that the
lease was vested in the Guarantor and that the tenant's
covenants were enforceable against it or alternatively, that the
assignment of the lease was void and had no effect so that the
lease remained vested in the Tenant (in administration) with the
Guarantor still bound by the Deed of Guarantee.
Judge Tipples QC decided that an assignment to a guarantor was
prohibited by the Act and that any agreement which sought to assign
a lease to a guarantor would be void by reason of Section 25(1) of
the Act. The Tenant would therefore remain as the tenant under the
original lease and the Guarantor would remain as the guarantor.
Her decision was based on the fact that on assignment, a
guarantor would in effect re-assume the exact same liability in
respect of the tenant covenants from which it had previously been
released (as Section 24(2) provides that a guarantor must be
released to the same extent as the tenant) and that there would
therefore not be a moment in time when a guarantor was not bound by
the tenant's covenants (which would therefore seek to frustrate
Landlords may now be much more particular when considering
applications by their tenants for an assignment of their lease;
they and their legal advisors will need to be alive to the
possibility that an assignment, if proposed to be granted to a
guarantor, will not be lawful and therefore consider the positions
of each party very carefully.
The Law Commission is currently carrying out a further
consultation on the issues raised by the Act and the Property
Litigation Association (of which Keith Conway of Clyde & Co LLP
is the current chairman) has provided to the Department for
Communities and Local Government a draft amendment to the Act which
seeks to cure the issue and other problems. We will keep you
informed of progress in this regard.
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