In the July 2008 edition of property update, we considered the case of Landlord Protect Ltd v St Anselm Development Company Ltd. The facts are covered in full in July's article, but in brief, the case concerned an application to assign an "old" lease (within the meaning of the Landlord and Tenant (Covenants) Act 1995). The landlord required a guarantor for the assignee. The assignee agreed, on the condition that the guarantee would be released on a subsequent assignment of the lease. The landlord would only agree to this on condition that a reasonable alternative security was provided by the incoming assignee under the subsequent assignment. The High Court ruled that the landlord's condition was reasonable. However, that decision has now been overturned by the Court of Appeal.

In Mount Eden Land Ltd v Straudley Investments Ltd (1996), the Court of Appeal established that it will not normally be reasonable for a landlord to seek to impose a condition when giving consent which is designed to increase or enhance the rights that the landlord enjoys under the lease.

The court found that the rights created by the lease in Landlord Protect Ltd v St Anselm Development Company Ltd were:

a. as against the original tenant, to have the rents paid and the tenant covenants performed throughout the term (under privity of contract); and

b. as against an assignee, to have the rents paid and the tenant covenants performed while the term was vested in that assignee (by virtue of privity of estate).

In such cases, the court ruled, it is therefore not normally reasonable for the landlord to require an assignee's guarantor to remain liable after the assignee has itself ceased to be the tenant. Such a requirement enhances the rights the landlord enjoys under the lease.

When an old lease is assigned it is, in fact, usual for the assignee to covenant to comply with the lease until the term ends, irrespective of whether the assignee ceases to be the tenant before then. However, in the court's judgment that did not affect the question of whether the landlord's requirement that the guarantee should also extend beyond an assignment by the assignee was reasonable or not.

The court held that the landlord's position was unreasonable because it would always be entitled to refuse to consent to a further assignment if the proposed assignee was not of sufficient substance, or was unable or unwilling to provide adequate security for the performance of the tenant's covenants. The landlord's protection is the right to refuse consent to an assignment, not the right to refuse to accept the discharge of the outgoing tenant's guarantor.

The guarantor should not have to rely on the landlord acting sensibly and refusing to consent to an assignment to an insubstantial assignee. The condition requested by the landlord would also expose the guarantor to a dispute as to whether the landlord had a reasonable alternative security. The landlord's requirement was therefore unreasonable.

It was not strictly necessary for the court to consider the High Court's interpretation of "reasonable alternative security" as being something that could be satisfied by the covenant strength of the assignee itself, as opposed to something separate and additional. However, one of the judges expressed his view that, objectively construed, it did require something in addition to the assignee's personal liability (for example, a guarantee or rent deposit).

Things to consider

This decision effectively puts guarantors of assignees under old leases on an equal footing with guarantors under new leases. In relation to new leases, the Landlord and Tenant (Covenants) Act 1995 provides that a guarantor of an outgoing tenant will be released from liability on an assignment by that tenant. (It remains unclear to what extent the guarantor can lawfully guarantee any Authorised Guarantee Agreement given by the outgoing tenant).

A rather more worrying outcome of this decision is the possibility that it leaves the door open for a potential assignee under an old tenancy to argue that a requirement, imposed as a condition of a landlord's consent to assign, that the assignee give a direct covenant to the landlord for the duration of the term would constitute an enhancement of the landlord's rights under the lease (and would therefore be unlawful). Some old leases may contain an express stipulation as part of the alienation clause that an assignee enters into a direct covenant with the landlord to comply with the lease covenants for the remainder of the term. However, since such a condition would pre-date the 1995 Act, its enforceability would depend on how it was framed. It is not clear whether, had the lease in this case contained this sort of clause, the court would still have concluded that, by requiring the guarantee to extend beyond the period of the assignee's ownership, the landlord was enhancing its rights under the lease.

While this case does not outlaw the practice of requiring direct covenants from assignees for the remainder of the term as a condition of granting consent to assignment of old leases, it does leave an unwelcome question mark over whether it is effective, particularly where the lease does not expressly require this. Old leases are diminishing in number, but they do still exist, and applications for consent to assign will still be made under them.

In the current climate, landlords need all the protection they can lawfully obtain against tenant default. A landlord whose tenant is in financial difficulties may prefer to consent to an assignment, even if the covenant strength of the incoming tenant is not all that the landlord would ordinarily insist on. In those circumstances the ability to pursue the former tenant's guarantor would be a way of bolstering the weak covenant of the assignee. The guarantor would be afforded some degree of protection by the 1995 Act, which confers on the guarantor the right to call for an overriding lease if it is required to make a payment under the guarantee after such an assignment. The decision in this case will therefore be met with disappointment by landlords.