EMI Group Ltd v O & H Q1 Ltd

Under the Landlord and Tenant (Covenants) Act 1995, a tenant’s guarantor cannot become the assignee of the tenancy on an assignment by that tenant where the result would be the guarantor’s immediate re-assumption of the same, or substantially the same, liabilities. Sections 5(2), 24(2) and 3(2) operate at the same time. Their combined effect cannot be treated as sequential so as to avoid the guarantor’s statutory release. The assignment therefore frustrates section 24(2) and is void under section 25(1)(a). The court should not preserve an artificial and unworkable lease by severing the tenant covenants. The proper consequence is that the purported assignment is void and the guarantor remains bound under the original guarantee.

The claimant was guarantor of a retail lease granted to HMV UK Ltd. After the tenant entered administration, the lease was assigned to the claimant, its guarantor, under a licence to assign. The claimant sought a declaration that the lease had vested in it but that the tenant covenants were unenforceable against it under the Landlord and Tenant (Covenants) Act 1995. The landlord sought declarations that the covenants remained enforceable or, alternatively, that the assignment was void.

The court determined whether the Act permitted the tenant’s guarantor to become the assignee and, if not, whether the assignment or related agreements were avoided by section 25(1).

1. Issue and result. The claim was dismissed. The purported assignment of the lease to the claimant was void and of no effect. The lease remained vested in the original tenant, and the claimant remained bound as guarantor under the guarantee.
2. Statutory interaction. On an assignment by the tenant, section 5(2)(a) releases the tenant from the tenant covenants. Section 24(2) releases another person bound by those covenants, including the guarantor, to the same extent. At the same time, section 3(2)(a) binds the assignee to the tenant covenants.
3. Those provisions could not be treated as sequential events producing a genuine intervening release. If the guarantor immediately became liable for the same obligations as assignee, the statutory release would have no practical effect. That objective consequence frustrated section 24(2) and fell within the comprehensive anti-avoidance protection of section 25(1)(a).
4. The conclusion followed the reasoning and interpretation adopted in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2012] Ch 497, including the observation that a lease could not be assigned to the guarantor even where both parties wished it. The commercial unattractiveness of the result did not justify a different construction.
5. The claimant’s proposed alternative, under which the lease vested in it but the tenant covenants were void or suspended while forfeiture rights survived, was legally incoherent and would produce an unbalanced, emasculated and unworkable tenancy. Applying the balanced approach to invalidation in Tindall Cobham 1 Ltd v Adda Hotels [2014] EWCA Civ 1215, the assignment itself, rather than selected lease covenants, had to be treated as void.