Assigning a lease is a common way for a tenant to end their occupation of a property. Conditions for an assignment are usually included in the lease, in theory leaving little to negotiate between the parties. The parties themselves have not previously been a hot topic for discussion; however the case of EMI Group Ltd (EMI) v O & H Q1 Ltd has confirmed, the appeal having recently settled out of court, that a Tenant cannot assign a lease granted after 1 January 1996 to its guarantor.
The case was decided in the High Court in March 2016. The landlord appealed the decision and a hearing was due to take place this month; it has been a great disappointment for many that the parties have reached a settlement. A second review of the facts was considered crucial in the hope that the decision would be overturned, or at the very least that the courts would provide some guidance on how the decision should work commercially.
HMV UK Ltd (HMV) wished to assign their lease, with landlord’s consent, to EMI. EMI happened to be the guarantor of that lease.
Following a normal assignment, a guarantor would be released from its obligations under the lease along with the tenant. The incoming tenant and guarantor then take on those responsibilities.
In this case, if the lease had been assigned to EMI, EMI would have been taking on the responsibility of the same lease covenants from which they had just been released; they would have gone from being the original guarantor to the current tenant.
Why does this matter?
The court specified that if HMV had assigned the lease to EMI, this would have contradicted the whole purpose of the law as it stands, which is to ensure that the tenant and its guarantor are released on an assignment. EMI would have retained all responsibility for the tenant covenants. As a result, the court decided that an assignment cannot be made by a tenant to its guarantor of the same lease.
Now what? Careful decisions as a landlord
A landlord could choose to specifically prohibit assignment to a guarantor within the lease. All parties would then be aware of the restriction. However, you may find that a tenant does not want to include this, especially in a longer lease, for fear that the decision is later overturned. Considering the controversial nature of the case this may well be likely, but if we were to draft documents on the basis that the law might change, we would never get anywhere!
An assignment can always be refused on reasonable grounds in any event; assigning to a guarantor would seemingly fall into this category. It is not necessary to expressly restrict assignment to a guarantor. Landlords simply need to be aware of it and refuse consent if assignment to a guarantor is requested by the tenant.
Practical terms for tenants
Tenants must ensure that they do not make an assignment to their guarantor even where the landlord is not aware of the EMI case and happy to provide consent. If the assignment were to complete, the tenant may not be deemed released from liability under the lease at all and still be held responsible for any breach of the tenant covenants by the guarantor as the ‘new tenant’.
Lessons for Lawyers
Special care should be taken throughout any due diligence process to establish whether there has been a historic assignment to a guarantor. If a current tenant defaults and the lease had been previously assigned to a guarantor, it may be that the lease is actually still vested in a former tenant who is still liable as a result. Depending on who your client is, this could be good or bad news!
  EWHC 529 (Ch)
 The Landlord and Tenant (Covenants) Act 1995 and in particular s 25(1)(a), an anti-avoidance provision.