UK Leasing Brighton Ltd & Ors v Topland Neptune Ltd & Anor

Under the Landlord and Tenant (Covenants) Act 1995, a tenant may reassign a lease to an earlier tenant. The earlier tenant becomes bound again by the tenant covenants under section 3, even though section 11 may also release it from its original obligations. A guarantor released under section 24 may give a fresh guarantee on that reassignment where the guarantee operates to the same extent as the tenant’s release and does not frustrate the Act. A proposed sequence involving an intermediate assignee is permissible in principle, but a prior binding commitment by the guarantor to re-guarantee the tenant’s obligations would frustrate section 24 and be void under section 25.

Two related actions concerned leases granted to original tenants whose obligations were guaranteed. The leases were assigned in breach of covenant to replacement tenants. The parties sought declarations concerning two proposed methods of restoring the leases to the original tenants with fresh guarantees: a direct reassignment, and an assignment through an associated intermediate company.

The central issues were whether the proposed reassignment and fresh guarantee would be effective under the Landlord and Tenant (Covenants) Act 1995, and whether a prior agreement requiring the parties to complete the intermediate-assignment route would be void as frustrating the Act.

1. The court granted declaratory relief in relation to the direct reassignment route.
2. On a direct reassignment by T2 to T1, T2 would be released under section 5(2)(a). T1 would be released from its original obligations under section 11(2)(b), but would simultaneously become bound by the tenant covenants under section 3(2)(a). The two provisions operated together.
3. Because a tenant bound by the tenant covenants was released on the reassignment, the guarantor would be released from its earlier guarantee under section 24(2). Applying by analogy the qualification recognised in K/S Victoria Street v House of Fraser [2012] Ch 497, the guarantor could then give a fresh guarantee of the tenant covenants. That guarantee would operate to the same extent as the tenant’s release and would not frustrate section 24 for the purposes of section 25.
4. The suggested intermediate route was effective in principle. After the assignment to Newco, the guarantor would be released. On the subsequent assignment to T1, the guarantor could give a fresh guarantee. However, a binding commitment made before the first assignment, requiring the guarantor to give that fresh guarantee, would frustrate section 24 and be void under section 25.
5. The court rejected the submission that the direct reassignment was impossible because liability would be re-imposed on T1. The relevant statement in K/S Victoria Street v House of Fraser [2012] Ch 497 concerning an assignment to a guarantor was obiter, tentative and not directly applicable.
6. The court would not treat the intermediate route as a sham. The parties intended each transaction to have legal effect, and choosing a structure producing a particular legal result did not itself make the transaction ineffective.