For the last six years, property people have been puzzling over what might sound like a technical question: can a lease be assigned to the current tenant's guarantor? The answer can be important on group reconstructions when assets are shifted from, say, an operating company to its holding company.
The debate dates back to the 2011 case of K/S Victoria Street v House of Fraser (Stores Management) Ltd. In that case, the Court of Appeal decided that when a lease is assigned, the assignor's guarantor cannot validly guarantee the obligations of the assignee.
During the House of Fraser case, senior judge Lord Neuberger suggested that assigning a lease to the current tenant's guarantor might also be invalid, "even where the tenant and guarantor wanted it". While this sounds odd, Lord Neuberger felt such an assignment would breach provisions in the Landlord and Tenant (Covenants) Act 1995 which are aimed at releasing a guarantor from all liability when a lease is assigned.
The EMI dispute
Moving on to 2016, Lord Neuberger's point was tested and confirmed in EMI Group Ltd v O&H Q1 Ltd. In this High Court case, HMV UK Ltd was the tenant of a lease, with EMI Group Ltd as its guarantor. After HMV went into administration, its administrators assigned the lease (with landlord's consent) to EMI.
EMI then went to court, relying on the House of Fraser decision to argue that the assignment was effective but that EMI was not liable to pay rent or observe any of the lease covenants. The landlord countered that Lord Neuberger was wrong; and therefore EMI should be fully liable as any other tenant would be.
The High Court rejected both arguments. Instead, the judge decided that the entire assignment was invalid, so the lease was still vested in HMV as tenant with EMI remaining fully liable as guarantor.
That outcome has been criticised in some quarters. The case was due to be heard by the Court of Appeal in May 2017. However, it has recently been reported that the parties have reached an out of court settlement. This means the appeal will not now go ahead, and the EMI Group decision therefore stands.
Landlords should normally refuse permission for a tenant to assign a lease to its current guarantor, assuming the lease was granted after 31 December 1995. Similarly, a purchaser of investment property should check that no post-1995 leases have been assigned from a tenant to its guarantor, as such an assignment is likely to be invalid.
Finally, this decision should be considered on any corporate restructuring so as not to fall foul of the traps discussed above.