Last week the High Court handed down another decision on the legality of guarantees on assignment. It has been confirmed that an assignment by a tenant (T1) to its guarantor (G1) so that G1 becomes T2 is a void transaction. The effect of the decision means that the lease remains vested in T1 with the guarantor liable under its guarantee covenants.
Ever since the Court of Appeal’s decision in K/S Victoria Street v House of Fraser (Stores Management) Ltd there has been a lot of debate in the property world about valid assignments and valid guarantees.
K/S Victoria held that the guarantor of T1 could not stand as the guarantor of T2. The reasoning being that upon assignment the guarantor is to be released to the same extent as T1. G1 cannot be released to the same extent as T1 if it has a liability as guarantor of T2. A comment made in the judgment relating to the assignment of a lease by a T1 to a G1 caused uncertainty as to whether this would be permitted.
Last week in the case of EMI Group Ltd O&H Q1 Ltd the Court held that an assignment to the tenant’s guarantor would be void for the same reason.
Whilst the decision provides the clarity needed on this point, the practical effect is that for group companies looking to move assets around intra-group it just got even harder.