Today's news that EMI have settled their court case concerning the validity of assigning a lease to the tenant's guarantor has denied the commercial property world the opportunity for clarification on this important point.
When I wrote about the High Court decision in this case exactly a year ago (Sometimes the law really is an ass), I expected that an appeal would lead to a reliable authority on an uncertain legal point that has been troubling practitioners and commentators for some time, namely whether a tenant can ever assign its lease to its guarantor.
Of course, we should all be delighted that EMI and their landlord have reached an agreement without the need to expend vast sums of money and take up valuable court time pursuing the appeal. Hopefully they will even have managed to salvage an ongoing commercial relationship, although the terms of the deal agreed remain confidential.
But the funny thing about litigation involving a previously undecided legal point of public interest is that it affects more people than just the parties involved. Many of us will feel cheated that we will never get to hear what the Court of Appeal would have said. Waiting for an appeal hearing felt long enough, but now we will have to wait until another similar case reaches the courts.
In the meantime, we are left with the High Court decision that the assignment from the tenant to its guarantor was void. At least that is consistent with the previous case involving House of Fraser, where the Court of Appeal ruled that the tenant's guarantor could not also guarantee the assignee of the lease.
Whilst the High Court's decision has not been universally popular, the real problem is that it is only a first instance decision rather than the judgment of the higher courts. Even a Court of Appeal judgment saying the same thing would have given us greater confidence that this is indeed the law, rather than a potentially rogue decision capable of being overturned when a future case reaches the higher courts.
So, we are left with some deceptively simple rules:
- A tenant can never assign a lease to its guarantor
- The same guarantor can never guarantee consecutive tenants
All of which is perfectly consistent with the aims of the Landlord and Tenant (Covenants) Act 1995, which was enacted to release outgoing tenants and their guarantors upon lease assignment (subject only to the possibility of an authorised guarantee agreement being entered into) and avoid landlords finding ways to keep outgoing tenants and their guarantors on the hook.
But all of which is thoroughly unworkable in the real world, where for perfectly valid commercial reasons a group may want to assign leases between subsidiaries while maintaining the same parent company guarantee, or (as was the position in the EMI case) to assign the lease to a solvent guarantor following the collapse of the tenant company.
This article originally featured on Place North West.