Category Archives: Landlord & Tenant (Covenants) Act 1995

Tenant assigning to Guarantor void and no release

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.

Former or current lease guarantor can give guarantee on transfer back to former tenant

In UK Leasing Brighton Ltd & Ors v Topland Neptune Ltd & Anor [2015] a lease was granted to T1. T1’s lease obligations were guaranteed by G.

The lease was a new tenancy under the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”).

T1 transferred the lease to T2 in breach of a covenant. As a result T2 became liable under the tenant covenants in the lease.

Since the transfer was in breach of covenant, T1 as the original lessee and G as the guarantor were not released under the 1995 Act from their liabilities in respect of the tenant covenants in the lease.

The parties were united in their wish to revest the lease in T1 with G again guaranteeing the tenant’s obligations under the lease.

The 1995 Act seemed to lay various obstacles to this.

There was a concern that if T2 re-assigned the lease to T1 a fresh guarantee by G would be void under the 1995 Act.

The tenants suggested T2 assigned the lease to an associated company (“Newco”). Then (a day or so later), Newco assigned the lease to T1 and G entered into a fresh guarantee of T1’s obligations as tenant under the lease. However, the landlord imposed a pre-condition that Newco T1 and G first commit to the landlord that thereafter the term would be assigned by Newco to T1 and that G would enter into a fresh guarantee.

But the court ruled that such an agreement would itself be invalidated by the 1995 Act. The suggested agreement would frustrate the operation of section 24(2) of the 1995 Act.

The operation of the relevant provisions of the 1995 Act had been considered in the decision of the Court of Appeal in K/S Victoria Street v House of Fraser [2012] (“Victoria Street”). From Victoria Street the High Court Judge extrapolated the following propositions:

1. Whilst section 25(1) of the 1995 Act invalidated any agreement which involved a guarantor of the assignor guaranteeing the assignor’s assignee, if the assignor gave the landlord an authorised guarantee (“AGA”), in respect of the assignee, the guarantor of the assignor (whilst the assignor was the tenant) could also give a guarantee in relation to the assignor’s liability under that AGA.

2. If a tenant assigned with landlord’s consent and the tenant and the tenant’s guarantor were thereupon released, there is nothing to stop that guarantor becoming a guarantor again on a later assignment whether the subsequent assignee is a new party or is an earlier tenant whose liabilities were previously guaranteed by that guarantor. The Court of Appeal felt able to reach this conclusion because:

2.1 section 24(2) of the 1995 Act said the Guarantor was thereby released “to the same extent as the tenant is released from that tenant covenant” and because, strictly speaking and viewed somewhat in isolation, the operation of those words was not frustrated for the purposes of section 25 of the 1995 Act, even if the price of the assignment being consented to was G freshly guaranteeing T1; and

2.2 It produced a “sensible commercial result in the circumstances.”

Accordingly, it was open to the parties to proceed with a direct assignment by T2 to T1 with T1’s obligations being guaranteed by G.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Tenants couldn’t just blue pencil what did not suit them

Section 25(1)(a) of the Landlord & Tenant (Covenants) Act (“the 1995 Act”) invalidates any agreement relating to a tenancy which would have the effect “to exclude, modify or otherwise frustrate the operation of the provisions of the Act” (“section 25(1)(a) consequences”).

The operation of the 1995 Act is, of course, to release former tenants and guarantors from future tenant and guarantor liabilities under most post 31 December 1995 leases when the relevant lease is lawfully assigned i.e. normally with the landlord’s prior written consent.

Section 25(2) of the 1995 Act says that s.25(1) can apply to a covenant in a lease against assignments insofar as it regulates the giving of consent for the assignment.

The Court of Appeal case of Tindall Cobham 1 Ltd & Ors v Adda Hotels & Ors [2014] concerned various Hilton Hotel leases.

Clause 3.14 of the hotel leases contained two covenants against assignment of the whole of the property.

The first was clause 3.14.3 which was general and enabled the landlords to take advantage of s.19(1A) of the Landlord and Tenant Act 1927 by:

– withholding consent in any one of four circumstances specified in clause 3.14.4 and

– by imposing any one or more of the conditions set out in clause 3.14.5 as a condition of giving consent.

The effect of those provisions was to entitle the landlords:

1. to limit any assignments to a company of sufficient financial standing and business competence; and,

2. to the benefit of a substantial new guarantee and/or an Authorised Guarantee Agreement by the outgoing tenant.

In contrast, Clause 3.14.6, was limited in its application to an assignment to an Group Company of the tenant.

Where that was proposed the landlord had limited itself to the right to impose only two possible conditions:

1. the obligation to give notice to the landlord of the completed assignment (“condition (a)”) and

2. the requirement in clause 3.14.6 (b) that the tenant “should procure that the guarantor and any other guarantor of the tenant” should enter into a deed of covenant in the terms of the Sixth Schedule (“condition (b)“).

If those conditions (if and whenever imposed) were complied with the landlords had to give consent to the assignment (“the consent override” applied).

This regime for Group Companies was very different to clause 3.14.3 where the landlord could theoretically refuse consent even if the proposed assignment otherwise complied with the circumstances and conditions mentioned in clauses 3.14.4 and 3.14.5, so long as the landlord would be acting reasonably in so doing.

The landlord did not have this option under clause 3.14.6. Clause 3.14.6 was designed to provide a more simple and streamlined process for the tenants to obtain consent for an assignment to other companies in the Group on the basis that the parent company would continue to guarantee their obligations under the lease.

If consent could not be obtained under clause 3.14.6 then, if the landlords chose to rely upon all of the circumstances set out in clause 3.14.4, it could not be obtained under clause 3.14.3 because a Group Company like the present assignees would not satisfy any of the criteria in clause 3.14.4. That would be unfortunate for the tenant because any future assignments were likely to be to a Group Company.

The lead appeal judge said the reference to “the Guarantor and any other guarantor of the Tenant” in clause 3.14.6 denoted the persons who were the guarantors of the tenant’s obligations under the lease at the time of the assignment.

The condition imposed on the tenant was no more than that it should procure a new guarantee from those persons.

The lead appeal judge said the condition in clause 3.14.6 which required the tenant to procure a continuing guarantee from an existing guarantor did have the effect identified in s.25(1)(a) of the 1995 Act i.e. “the section 25(1)(a) consequences”.

Section 25(1) is concerned to invalidate agreements which would have “the section 25(1)(a) consequences“. It was not limited to safeguarding the actual exercise of the tenant’s/guarantors’ rights which such agreements contain. That’s to say it was NOT only engaged if the tenant tried to assign its lease to a Group Company.

The words “void to the extent that” indicated that Parliament did not intend to invalidate more of the relevant agreement than was necessary to safeguard the objectives of the 1995 Act in the context of the particular assignment under consideration. And, those words did not preclude the Court from taking a balanced approach to invalidation which neutralised the agreement’s offending parts but did not leave the agreement emasculated and unworkable.

If it was necessary only to remove condition (b) of the proviso as the tenant contended this would treat “conditions (a) and (b)” as independent and self-sufficient rather than as parts of a composite, interdependent proviso under which “the consent override” would apply, and the landlords must consent to the assignment, only if both the conditions are fulfilled.

The Court of Appeal said that the proviso of “condition (b)” was clearly the most important condition from the landlords’ point of view both logically and as a matter of drafting. Its removal called also for the removal of the concluding two lines of the proviso i.e. “the consent override” which could apply ONLY if BOTHconditions (a) and (b)” were complied with.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.