30 March 2016

The High Court in EMI Group Limited v O & H Q1 Limited has followed obiter (non-binding) comments in the Court of Appeal’s decision in K/S Victoria Street v House of Fraser (Stores Management) Limited [2011] and decided that a tenant cannot assign a “new tenancy” to its guarantor. The Victoria Street judgment suggested that such an assignment did not work, because it would be the equivalent of asking the outgoing tenant's guarantor to guarantee the assignee directly, which is prohibited by the Landlord and Tenant (Covenants) Act 1995.

The facts in EMI were that HMV UK Ltd (HMV) was granted a new tenancy in September 1996 and by a simultaneous deed of guarantee EMI Group Ltd (EMI) guaranteed HMV's obligations under the lease. In January 2013, HMV went into administration. In November 2014, the landlord, O & H Q1 Ltd (OH), granted HMV licence to assign the lease to EMI. In the licence EMI covenanted with OH that after the assignment it would perform and observe the lease covenants for the remainder of the term. HMV then assigned the lease to EMI by deed. Also on that day an underlease was granted by EMI to a new company, HMV Retail Ltd, who took occupation of the premises.

EMI sought a declaration, in reliance on Lord Neuberger's obiter comment in the judgment in K/S Victoria Street, that the assignment vested the lease in it but that by operation of law the tenant covenants in the lease were void and could not be enforced against it.

OH counterclaimed that notwithstanding that the lease was vested in EMI the tenant covenants were enforceable, or alternatively, that the purported assignment was void so that the lease remained vested in HMV with EMI bound as guarantor.

The judge applied the K/S Victoria Street reasoning and decided that a tenant cannot assign to its guarantor. So made the alternative declaration counter-claimed: that the assignment is void for breaching the anti-avoidance provisions of the Act and is ignored. Thus the assignor remains the tenant and the guarantor continues to guarantee the tenant’s obligations. The impact of this decision on the undertenant was not dealt with by the judge –- presumably as it was not covered by the terms of the matters set down for trial - but the consequence of such a decision for parties to transactions following a void assignment is of obvious concern.

This case reinforces the need to check that a lease which is a new tenancy has not at any stage been assigned to a person or company which previously guaranteed the assigning tenant. Whilst landlords were already wary – following the K/S Victoria Street case - of consenting to any corporate restructuring which involved a guarantor becoming tenant, this will now be outlawed and the options for corporate restructuring restricted. It may also lead indirectly to landlords solicitors drafting more stringent restrictions on intra-group assignment of leases.

Key contact

Colin Ligman

Colin Ligman Partner

  • Real Estate
  • Banking and Finance
  • Corporate Restructuring and Insolvency

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