We have posted previously about the case of EMI Group Ltd v O&H Q1 Ltd, in which the court was asked to decide whether a tenant can assign its tenancy to its guarantor. In this case, EMI Group were the guarantor of original tenant HMV, and were arguing that the lease had been validly assigned to it by HMV.
Somewhat controversially in the EMI case, the deputy judge decided that such an assignment could not happen, as it would frustrate the purpose of the Landlord and Tenant (Covenants) Act 1995 which, fundamentally, was to release the tenant and its guarantor on an authorised assignment of the lease (“the Act”).
The problem is that this interpretation of the Act goes against the concept of freedom of contract. Why should a tenant be denied the ability to assign a lease to a company that has guaranteed its obligations, if in all other respects it is an acceptable assignee to the Landlord?
The decision has been hotly debated and most in the legal profession hoped that the position would be clarified on appeal or by legislative reform. It would seem however that, for now, we are left with a very unsatisfactory and unresolved position. Until this is addressed, the advice is that tenants remain unable to validly assign their lease to a guarantor. All of the uncertainties we highlighted previously remain and if such an assignment has already happened, unscrambling the legal position is difficult. Investment sales and new assignments of leases are being held up where an assignment to a guarantor has previously been permitted.