Were it possible, on an assignment of a typical post 1995 lease by a tenant (“T1”) to its guarantor (“G1”):
1. T1 would be released from the tenant covenants of the tenancy, with effect from the assignment: section 5(2)(a) of the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) .
2. G1 would be released from the tenant covenants of the tenancy, with effect from the release of T1: section 24(2).
3. It would be the effect of section 24(2) that “as from the release of [T1]”, ie on the assignment to the assignee (“T2”) (formerly G1), G1 would be released from its liabilities as guarantor under the lease.
4. However, as from the assignment to T2 (formerly G1), T2 would become bound by the tenant covenants of the lease: section 3(2)(a).
So the assignment would release G1 from the tenant covenants of the tenancy but, at the same instant, would bind G1 (but now as T2) with the tenant covenants of the tenancy.
This would mean in practice there would be no release at all for G1 from its liabilities under tenant covenants. For the liabilities under the tenant covenants would simply be taken up again by the guarantor, but this time as an assignee (and not as a guarantor).
Moreover where the guarantor is also primarily liable in respect of the tenant covenants, the liability re-assumed by G1 as T2 might be the very same. The objective effect of the assignment would be that G1 re-assumed precisely the same liability in respect of the tenant covenants as a result of becoming T2 under the assignment.
In the case of EMI Group Ltd v O & H Q1 Ltd [2016], where these facts applied, the High Court said that “frustrated” the operation of section 24(2)(b) and meant the assignment was rendered void by section 25(1)(a), an anti-avoidance provision which was to be interpreted “generously”. The guarantor was therefore absolutely precluded from becoming the assignee, on an assignment by the tenant whose tenant covenants he was guaranteeing.
The consequences of section 25(1)(a) were that the assignment was void and would not take effect to vest the lease in the Claimant, as an assignee, and that the Claimant remained bound as Guarantor of the Original Tenant’s obligations under the lease and had not been released from its obligations under the Guarantee by the operation of the 1995 Act.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.
Original article: Tenant assigning to Guarantor void and no release.
