Tenants v landlords – an update on assigning guarantors

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Tenants v landlords – an update on assigning guarantors

05 May 2016

Background
In the past, when a tenant entered into a lease its obligations were often guaranteed by a guarantor – usually a parent company or related company. This meant that should the tenant or the group as a whole to get into financial difficulty, one of the options available to the directors or administrators would be a reorganisation. This would see the tenant assign the lease to the guarantor and escape any liabilities to the landlord.

However, a recent ruling by the High Court means that this option is now no longer available.

Facts

In the case of EMI Group Ltd v O&H Q1 Ltd, the tenant was HMV and the Landlord O & H.

When HMV went into administration, its guarantor – the EMI Group – took an assignment of the lease, with the consent of the Landlord. The EMI Group then argued that although the lease was valid, the tenant’s covenants in the lease were unenforceable.

O & H countered this argument stating that either the covenants were enforceable, or the assignment was void and HMV remained the tenant with EMI bound as guarantor.

Decision

Judge Amanda Tipples QC found that allowing the tenant to assign the lease to its guarantor would frustrate the 1995 Landlord and Tenant (Covenants) Act. Her decision was that the assignment was void and HMV remained the tenant under the lease and EMI Group the guarantor.

Why this is important

This is important for both landlords and tenants for a number reasons:

• It makes it clear that a tenant cannot assign its lease to its guarantor and if it attempts to do so, this will be void and have no effect.
• For insolvent tenants who wish to escape from liabilities under a lease, it rules out a useful option for doing so.
• This may also pose difficulties for company groups who may wish to re-arrange their property portfolio within the group, if group companies had acted as guarantors to each other.
• For investor landlords it is important from a due diligence perspective to make sure that it is clear who the tenant is and who it can enforce its obligations against.

If you’d like to get in touch to discuss this new ruling, please contact us or call 0161 832 3434.

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