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Case law: Tenant's assignment of lease to guarantor was void

Tenants wishing to assign their leases should avoid assignments to their guarantors as these will be treated as void, even where the tenant and guarantor are companies in the same group.

Legal Alert

This update was published in Legal Alert - June 2016

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Legally, on assignment of leases entered into since 1996, the tenant's liabilities under the lease are released. If a guarantor has guaranteed those liabilities, then the guarantor is also released on assignment. Any agreement that excludes, modifies or frustrates this law – for example, requiring the guarantor to re-assume or renew the tenant's obligations - is void.

The aim is to prevent former tenants and guarantors from remaining liable for obligations in a lease of a property after they have ceased to have any interest in that property.

There has, however, been uncertainty whether this law applies in the situation where a tenant wants to assign its lease to the guarantor (for example, because the tenant has gone into administration), and whether the guarantor will be subject to the same liabilities as it was before when it becomes the new tenant.

A business tenant occupied premises under a lease, and its obligations under the lease were guaranteed by a guarantor. The tenant went into administration and the landlord granted the tenant a licence to assign the lease to the guarantor. The licence included an agreement (a 'covenant') requiring the guarantor to perform and observe the old tenant's obligations for the remainder of its term. The guarantor then became the new tenant.

However, the guarantor (the new tenant) claimed that though the licence to assign was valid, the landlord could not enforce the old tenant's obligations against it.

The High Court said that the effect of the law was that tenants are precluded by law from assigning their lease to their guarantor. An agreement that purports to do so is void. Therefore, the lease did not vest in the guarantor and the original tenancy and guarantee remained in place.

While bringing clarity, this ruling is likely to frustrate legitimate commercial transactions, such as assignments of leases from one company in a group to another, in circumstances where the other company had been acting as guarantor under the lease.

Operative date

  • Now

Recommendations

  • Tenants wishing to assign their leases should avoid assignments to their guarantors as these will be treated as void, even where the tenant and guarantor are companies within the same group

Case ref: EMI Group Limited v O & H Q1 Limited [2016] EWHC 529

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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