If tenant ‘A’ assigns (transfers) its lease to tenant ‘B’, it is generally well known that the guarantor for tenant ‘A’ cannot, in turn, act as the guarantor for tenant ‘B’. But can tenant ‘A’ assign the lease directly to its guarantor?

An underlying principle for ‘new’ leases (being those granted on or after 1 January 1996) is that, following an assignment of that lease, the outgoing tenant is released from future liability under the tenant covenants in that lease.

Similarly, any guarantor of the outgoing tenant is also released to the same extent [1]. This seems fair and sensible, right? After all, why should somebody continue to be liable under a lease after they have transferred the lease to somebody else? The Court of Appeal [2] held that for a guarantor of the outgoing tenant to act as a guarantor for the incoming tenant would frustrate this basic principle [3].

However, when two parties both agree that they wish to be parties to an assignment, and agree that the assignment is in each of their interests, how can the law prevent them? The most recent case on this subject has done just that [4].

The High Court reached the surprising conclusion that an assignment of a lease from a tenant to its guarantor is void on the basis that it frustrates the release from liability which a guarantor should obtain [3]. In that case, the assignment to the guarantor had completed in 2014 and a subsequent underlease had been granted. Notwithstanding that, the court held that the purported assignment was void and the lease remained vested in the original tenant with the guarantor’s obligations under the guarantee still in effect.

This decision may cause a little concern for landlords and tenants who have been party to such a deal, of which I am sure there are many. Many tenants and guarantors may have entered into such arrangements as part of corporate restructuring deals. Following the decision in the EMI Group case, these assignments may all be void.

We will have to wait and see if the case is appealed and if other courts follow the same approach as the High Court. However, as things currently stand, it seems that the unintended consequence of what appears (on the face of it) to be a sensible principle, may be effectively to preclude two parties from entering into commercial deals that they fully understand and wish to enter into.

This post was edited by Katie Baxter. For more information, email blogs@gateleyplc.com.

[1] (s24(2) Landlord and Tenant (Covenants) Act 1995 (LTCA 1995))

[2] K/S Victoria Street -v- House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904

[3] under s24(2) of the LTCA 1995 and would be void under s25 LTCA 1995 (the anti-avoidance provisions)

[4] EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch)

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.