It is now clear that leases cannot be assigned to the tenant’s guarantor but serious issues arise out of the recent High Court case of EMI Group Limited v O&H Q1 Limited which specified that any lease assignment by a tenant to its guarantor is void. This means that the assignment is not effective, the lease is still held by the previous tenant and the intended assignee remains the guarantor of that previous tenant (and does not become the new tenant of the lease). In addition, be aware that the court’s decision applies retrospectively. This post summarises action landlords and tenants may want to take now and assesses the issues arising.
What should landlords now do?
- On a new lease, require the valuable covenant to be the tenant company (perhaps jointly with the occupying entity)
- Make sure new leases prohibit intra-group assignments to retain the guarantee for as long as possible
- Make it a pre-condition to an assignment that any guarantor of the outgoing tenant guarantees the obligations in the AGA and a new guarantor guarantees the assignee where required. Repeat guarantees do not work either
- Review portfolios to establish whether any leases post January 1996 have been assigned by a tenant to a guarantor and start to consider what action needs to be taken. Rectifying past assignments which are now considered void may be complex and could take time
- Make sure there is full due diligence on any new investment acquisitions so that all lease assignments are assessed for validity and there is not just a review of the most recent AGA.
- Do not give permission to a tenant who wishes to assign the lease to itself and another party or wants to assign between partners. It remains an uncertain whether assignments like these would be valid too.
What is the position for tenants?
- Scrutinise the lease wording carefully when planning a disposal and consider whether utilising any underletting rights may be more practical
- Expect a refusal from the landlord to any request to assign to the current guarantor
- Understand that new leases are likely to restrict freedom to transfer between group companies
- For key leases consider whether there has been a previously void assignment that will create doubt over the status of the tenant’s right to occupy.
Other implications of the EMI case?
The decision in the EMI case applies to any assignment of a lease granted since January 1996 – this therefore raises commercial and practical issues that may need to be addressed where previous assignments are now considered to be void. In particular, landlords, tenants and their lenders are left with a number of unanswered questions in relation to any void assignments –
- What is the position if the previous tenant has gone into liquidation or has been removed from the register of companies? Leases impose strict deadlines for the landlord to require a guarantor to enter into a new lease or pay rent – and these deadlines may have expired already. If that is the case, there are means of getting some companies restored onto Companies House registers but landlords with a claim are going to face complex procedures to do this if it is not voluntary. Another point to consider is that the lease may now be Crown-owned (which happens if the lease was not surrendered or assigned on the winding-up of the company) and the Crown in turn has the ability to disclaim such leases. The landlord will therefore need to review all its options and remedies (if any).
- What is the status of underleases or any other interests such as a charge created by the assignee following the void assignment? And worse, what if the lease has been assigned following the void assignment? Whilst we wait for these points to be tested in court, it is likely that these later transactions will also be treated as void. A significant amount of work will be required to ‘unscramble’ the effect of the void assignment and to deal with the consequential losses in any specific case.
- What is the actual status of the proposed assignee/guarantor if it has been in occupation and paying rent direct to the landlord? Could it be argued that the rent has been paid as guarantor as the tenant had defaulted? Might there have been a new, implied periodic tenancy? The position is uncertain and each case will turn on its facts.
- What if a previous tenant has assigned to itself and a third party – is this valid? It still remains unclear whether this will be treated as a valid assignment.
Many points will therefore need to be reviewed and considered further as the outcome of the EMI case sinks in and the consequences of the decision are tested in the courts. In the meantime we wait to see whether the EMI case will be appealed. After the Good Harvest case of 2010 and the K/S Victoria Street v House of Fraser case in 2012 we have faced considerable difficulties giving clients certain advice about aspects of the law in this area but now it is entirely clear that assignments to current guarantors are void and we have to deal with the consequences.