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Can a lease guarantee survive a lease assignment?

30 January 2015

The High Court has confirmed that an unlawful assignment by an original tenant (T1) (whose obligations had been guaranteed by a surety (G)) to a new tenant (T2) could be assigned back to T1 without the guarantee being nullified by the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act).

This judgement [1] given on 16 January 2015 turns, as is often the case, on quite a specific set of facts, but it does provide further useful guidance on what is permitted under the 1995 Act and what, by contrast, risks being declared unlawful, with the potential to devalue the landlord’s interest.

The facts (two very similar cases were heard together) were as follows: T1 (whose obligations G had guaranteed) had, assigned the lease to T2 in breach of its covenants in the lease. The fact that the assignment was unlawful meant that T1 and G were not released from their obligations at the point at which the lease was assigned to T2. All parties wanted to ‘undo the breach’ by transferring the lease back to T1, with G as guarantor for T1.

As you would expect in view of the considerable body of case law since the Good Harvest line of cases [2] (which held that a guarantee given by an outgoing tenant’s guarantor of an assignee’s liability under a lease was void by virtue of the 1995 Act), the landlord did not want to risk losing G’s guarantee.

The judge permitted the lease to be assigned back from T2 to T1 and held that G could validly guarantee T1’s obligations under the lease when T1 became the tenant for a second time, by way of a fresh guarantee.

The parties had suggested they could achieve the same outcome by having T2 transfer the lease to a newco who would in turn transfer it onwards to T1 supported by a new guarantee from G. This was held by the judge to be unlawful as it would be regarded as an arrangement to contravene the 1995 Act.

As mentioned, these cases were quite fact specific but the decision is a useful indication of the way in which the Courts have been prepared to use common sense to mitigate the potential uncommercial effects of the anti-avoidance provisions of the 1995 Act.

As a result of this case landlords should perhaps rest easier knowing that the Courts may be prepared to construe similar provisions in a more commercial way than might have previously been feared following the Good Harvest and K/S Victoria Street decisions.

[1] Two cases heard together: UK Leasing Brighton Ltd v Topland Neptune Ltd and Zinc Cobham 1 Ltd v Adda Hotels [2015] EWCA 53 (Ch)

[2] Good Harvest Partnership LLP v Centaur Services Limited [2010] EWHC 330 (Ch)

K/S Victoria Street v House of Fraser (Stores Management) Limited [2011] EWCA Civ 904

This article was written by Sarah Morley.

For more information please contact Sarah on +44 (0)20 7427 6417 or sarah.morley@crsblaw.com.