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High Court refuses to create Frankenstein’s lease – tenant cannot assign to guarantors

Landlords have no reason to fear Frankenstein’s monster, following the decision of the High Court in EMI Group Limited v O&H Q1 Limited.   The court was considering, once again, the anti-avoidance provisions in the Landlord and Tenant (Covenants) Act 1995.  Many will be familiar with the effect of the 1995 Act, which ensures that both tenants and their guarantors are released on assignment.

The claimant was the guarantor of a lease.  The tenant assigned the lease to the claimant, who sought to use the 1995 Act to its advantage.  The claimant argued that, whilst the legal interest in the tenancy had been assigned to it, the tenant covenants were void since the 1995 Act requires the guarantor to be released on assignment.   This rather creative argument would mean that the claimant would be the tenant under the lease but not be subject to the tenant’s covenants.  The landlord argued that such a proposition would create a “Frankenstein’s monster” of a tenancy and offended all of the principles of landlord and tenant law.   The High Court agreed that the claimant’s argument made no sense at all.  It was not a question of picking and choosing the aspects of the lease that survived the assignment.  As a tenant cannot assign to its guarantor, the whole assignment was struck down as void.

Landlords will be relieved to hear that the claimant’s argument in this case did not prevail.  However, anyone who hoped that the case would introduce greater flexibility on assignment after K/S Victoria Street v House of Fraser (Stores Management) Limited [2012], will be disappointed.   The Court of Appeal in that case considered that a guarantor could not guarantee a tenant’s assignee, even where it suited the assignor, the assignee and the guarantor to do so.    Nor could a guarantor take an assignment of the lease from the assignor directly.   This has created a somewhat unsatisfactory situation when a tenant seeks to assign its lease intra-group and use the same parent company guarantee.    The court in EMI adopted this interpretation which, even the Court of Appeal considered, gave the 1995 Act an “unattractively limiting and commercially unrealistic effect.”

Landlords should remain on their guard when presented with applications for consent to assign.  For tenants seeking to assign intra-group, the headache is here to stay… at least for now.