It has been reported that the parties in the case of EMI Group Ltd v O&H Q1 Ltd have reached a settlement.

The case, concerning the validity of an assignment of a lease from the tenant to a person who had guaranteed the tenant's obligations, was due to be heard by the Court of Appeal next month (May 2017). Landlord and tenant professionals had hoped that the Court of Appeal would reverse the High Court's decision or, at the very least, would clarify the ambit of the decision.

Background

Two cases in recent years have demonstrated the unexpected, and unintended, effect of the anti-avoidance provision in the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act).

In K/S Victoria Street v House of Fraser (Stores Management) Ltd, in 2011, the Court of Appeal held that a person (or company) that has guaranteed the tenant's obligations cannot also guarantee the obligations of the tenant's assignee. Under the anti-avoidance provision, anything that frustrates the release of the tenant or its guarantor from the lease covenants following an assignment of the lease is void. The Court of Appeal reasoned that allowing the guarantor to provide a second guarantee prevents that release, meaning that the second guarantee has to be void.

In the court's judgment in House of Fraser, Lord Neuberger suggested (in passing) that the anti-avoidance provision might prevent a lease being assigned from the tenant to the tenant's guarantor, 'even where tenant and guarantor wanted it'.

Then came EMI Group Ltd v O&H Q1 Ltd in March 2016. Here the High Court considered Lord Neuberger's suggestion and ruled that a tenant is not permitted to assign a lease to its guarantor. We wrote about this case in our article 'Court rules that a tenant cannot assign its lease to its guarantor'.

In this case it was an assignment from the tenant company in administration, HMV, to the guarantor, EMI. Even though all parties had agreed to the assignment at the time, EMI argued, following Lord Neuberger's suggestion in House of Fraser, that the assignment was valid, but that the tenant's covenants in the lease were not enforceable against it. The High Court held that it was not possible to distinguish the lease from the tenant's covenants in this way, and held that the entire assignment was void. The lease was therefore still vested in HMV, with EMI still liable as guarantor.

The reasoning in both decisions was that, under section 24 of the 1995 Act, a guarantor is released on an assignment of the lease to the same extent as the tenant. It would therefore be contrary to the anti-avoidance provision in section 25 of the 1995 Act if the guarantor could at one and the same time be released from liability and then have to resume liability, either as guarantor (as in House of Fraser) or as the assignee (as in EMI Group), on an assignment of the lease.

Criticism since EMI

Many in the profession were hopeful the Court of Appeal would use the opportunity to give certainty to an area where decisions based on the technical wording of the Act and, in particular, its anti-avoidance provision, have resulted in a legal position which is both unclear and uncommercial. For example, the current law, which is now not likely to change in the short term, limits the scope for lease assignments as part of a corporate restructuring or, as in this case, where a guarantor takes an assignment of the lease following the tenant's insolvency.

There also remains the uncertainty about past transactions where an assignment of this sort has taken place. Where a void transaction has been registered at the Land Registry, title will be inaccurate and any subsequent assignments may also be invalid. However, the keystone of the Land Registration Act 2002 is that the registered proprietor is deemed to be the owner of the property. As we said in our earlier article (mentioned above), we could be left with the extraordinary possibility that someone could be the tenant under the land registration system but not under landlord and tenant law.

There could also be issues for undertenants of such leases. And what about the uncertainty on renewals if the tenant under landlord and tenant law is different from the tenant in occupation? These are only some of the concerns arising out of the decision.

Comment

Of course, we are all used to litigation settling, and indeed it should be encouraged. However, it is particularly disappointing when a settlement prevents the Court of Appeal re-considering a decision that many in the profession feel was made without a full appreciation of its implications.

It now looks as if we are now left with the decisions in House of Fraser and EMI Group remaining good law, until there is a further opportunity for the Court of Appeal to examine this area of law. That is, unless the Law Commission recommends that a review of the 1995 Act should be included in the list of projects to be contained in its 13th programme of law reform. Shoosmiths included such a recommendation in our response to the Law Commission's consultation. We are expecting the Law Commission's final decision on the projects to be included in the 13th programme of law reform to be announced in July 2017, once it has been approved, as required, by the Lord Chancellor.