EMI Group Ltd v The Prudential Assurance Company Ltd

This judgment determines whether EMI, as guarantor, is liable under a guarantor's authorised guarantee agreement (GAGA) and the broader guarantor provisions in the lease of 360/366 Oxford Street. The court analysed the Landlord and Tenant (Covenants) Act 1995, in particular sections 16, 24(2) and the anti-avoidance provision in section 25, and construed the relevant lease provisions (notably the definition of "Principal" and the word "while").

The court held that the natural construction of the definition of "Principal" was that it referred to the tenant (HMV) and not to successive future assignees; the word "while" was properly read as referring to the single period during which that Principal is bound; and, applying the validation and severance principles, any offending words could be omitted so as to leave a workable guarantee limited to HMV's obligations and its AGA. The court rejected the submission that EMI was released by dissolution of HMV, and concluded that the GAGA and guarantor provisions were valid and enforceable to the extent consistent with the 1995 Act.

Background and parties: The Lease dated 19 June 2000 was granted to HMV UK Limited and later assigned to Forever21. EMI acted as guarantor under the Lease. Following HMV's administration and dissolution and subsequent default by Forever21, Prudential claimed unpaid rent and service charge from EMI under a notice served under section 17 of the 1995 Act.

Nature of the claim: EMI brought a Part 8 claim seeking declarations that the GAGA and wider guarantee in the Lease were void by virtue of section 25 of the Landlord and Tenant (Covenants) Act 1995; alternatively that EMI was released on HMV's dissolution; alternatively that the benefit of the guarantee did not pass to Prudential. Prudential obtained permission to counterclaim for a declaration that the GAGA is valid and for judgment for sums due.

Issues framed:

• whether the Lease's guarantee provisions offended section 25 of the 1995 Act (and related provisions in section 16 and section 24(2));
• the proper construction of key Lease terms, notably the definition of "Principal" in Schedule 1 and the meaning of "while" in the guarantor covenants and the AGA;
• whether the doctrine of severance/validation allowed offending words to be omitted so as to leave a valid guarantee; and
• whether EMI was released from liability by the dissolution of HMV.

Reasoning and holdings: The court considered the ordinary and natural meaning of the Lease as a whole and relevant authorities on construction, severance and the 1995 Act. It concluded that "Principal" naturally referred to the tenant (HMV) and that "is or is to become the Tenant" was intended to cover the situation where an AGA might be entered shortly before the assignment; it did not create a continuing obligation to guarantee successive assignees. The word "while" was construed as referring to the single period when the Principal is bound rather than as re‑igniting liability on hypothetical reassignments. The court accepted that section 25 invalidates only to the extent necessary and that offending words could be severed or read down so as to leave a valid guarantee limited to what the 1995 Act permits. The dissolution argument was rejected because the Lease expressly provided (paragraph 2.4 of Schedule 1) that the guarantor's liability was not affected by dissolution. The court therefore declared the GAGA valid and allowed Prudential's counterclaim, awarding judgment for sums due and reserving calculation of the exact amount.

This first-instance claim is dismissed insofar as EMI sought declarations that the GAGA and the wider guarantee are void and that EMI was released on HMV's dissolution. The court held that the GAGA imposed by the Lease is valid. The rationale was that the Lease, properly construed, did not require EMI to guarantee successive assignees; the word "while" was read as referring to the single period when the Principal is bound; offending words could be severed or read down consistent with the 1995 Act; and the express lease provision preserved the guarantor's liability upon dissolution. Prudential's counterclaim for a declaration of validity and for payment was therefore successful and judgment was to be entered for sums due, with submissions to follow on the exact amount.