It seems safe to assume that no-one has ever sat down with the intention of drafting a bad law. By which I mean a law that does not achieve its purpose, or has some unintended consequence.
Yet the statute books have included many such laws over the years. Some have been consigned to history, whilst others remain a problem today. I could cite many examples, but one continuing thorn in the side of the property world relates to the assignment by tenants of commercial leases.
Before I discuss the current position however, it is worth briefly remembering how things used to be. I can still recall the first time I advised a client on the effect of what we lawyers refer to as ‘privity of contract’. It was 2001 and I was instructed by a local businessman. He had taken a lease about 10 years earlier, but as his business evolved he no longer had a need for the premises, and assigned the lease to another tenant. The lease had been assigned twice more by the time I was instructed, which was not long after the final tenant’s business failed.
As I explained to my client, although he had long since ceased any practical involvement with the premises, as the original tenant he remained liable to the landlord on the covenants in the lease. Which meant that he was liable to pay the not insignificant rent arrears accrued by the final tenant. My client could pursue the tenant he assigned the lease to (who had covenanted with my client to meet the lease obligations) for the arrears, if he could find him and if he was still solvent.
His assignee could in turn pursue the third tenant. If that all went to plan, the third tenant would be the one to lose out, having only the final tenant to pursue, and who of course had no money to make payment. This was how it had been for very many years. The original tenant would always remain on the hook, giving the landlord a degree of comfort. Further, a landlord would typically require, on each assignment, that the new tenant enter a direct obligation with him/her to observe the lease covenants.
The practical effect was that a landlord could, if the lease covenants were breached, look to any and all of the current or previous tenants to make good. Landlords were, as a result, very well protected. Tenants in contrast were unable draw a line under their liabilities until the lease ended.
It was this apparent unfairness to tenants which Parliament sought to address with the Landlord and Tenant (Covenants) Act 1995 (“the Act”). The intention was simple enough. For leases granted after the Act came into force (1 January 1996), the old law of privity of contract would be abolished. An assigning tenant, and his guarantor (if any), would be automatically released from future liability.
That was subject to one important caveat - that the landlord could, if it was reasonable, require the tenant to remain liable for his assignee’s breaches, by entering into an Authorised Guarantee Agreement (“AGA”). That would only last, however, for as long as the assignee was the tenant. Once the lease was lawfully assigned on again, the original tenant’s liability would end. This seemed a much fairer balance between landlords and tenants.
This was not a welcome change for landlords. Therefore, to ensure that tenants were properly protected, Parliament did something it rarely does in the commercial world – it included anti-avoidance provisions, preventing parties from agreeing that the new rules would not apply to their lease.
The effect of the Act then was that (AGAs aside) tenants and guarantors would be released on assignment whether or not they wanted to be. At first glance that seems a strange comment. Why would tenants/guarantors not want to be released from their liabilities? In practice though, such circumstances are not uncommon.
Imagine, for example, that a lease is held by one company in a group, and guaranteed by its parent company. It wishes to assign its lease to another company in its group. The landlord reasonably requires (perhaps under an express term in the lease) the assignee’s covenants to be guaranteed.
However, the only company which could fill this role is the current guarantor. Surprising though it may seem, the current guarantor cannot agree to guarantee the new tenant’s liabilities. It is prevented by the Act’s anti-avoidance provisions (Good Harvest Partnership LLP v Centaur Services Ltd (2010)).
Similarly, it may be that the tenant is simply a holding company, and all liability is in practice met by the guarantor. It might make more sense, rather than keeping the tenant company going, to assign the lease to the guarantor instead. It has just been confirmed (as was suspected following Good Harvest and other cases) that assignment to a guarantor is not permitted by the Act (EMI Group Ltd v O & H Q1 Ltd (2016)).
On the face of it, transactions of this type between sophisticated commercial parties do not appear to need the protection that Parliament had in mind when passing the Act. It could be said then, that the Act unduly fetters parties’ commercial freedom. Nonetheless, the position is (subject to a potential appeal in the EMI case) that they are not permitted. Calling the Act a ‘bad law’ is perhaps unduly harsh. Compared with the position pre-1996, tenants are generally much better off. There are also potential work arounds to the problems discussed (though not without their downsides).
It is nonetheless unfortunate that these problems have been encountered. Intervention by Parliament, or a re-interpretation of the Act by a higher court, could be beneficial to landlords and tenants.