EMI Group Ltd v The Prudential Assurance Company Ltd

A guarantee connected with an authorised guarantee agreement is not contrary to the Landlord and Tenant (Covenants) Act 1995 merely because the guarantor’s obligation is expressed by reference to the period during which the principal remains bound. The court must construe the guarantee naturally and in its contractual context. Where an agreement is invalid only to the extent that it frustrates the Act, offending words may be severed if the remaining obligation remains workable and is not emasculated. A guarantor is released to the same extent as the tenant, but the statutory conditions governing an authorised guarantee agreement do not separately govern the guarantor’s guarantee of that agreement. Contractual provisions may preserve the guarantor’s liability despite the tenant’s dissolution.

EMI guaranteed the liabilities of HMV under a lease. HMV later assigned the lease to Forever21 under a licence containing an authorised guarantee agreement, with EMI also guaranteeing HMV’s obligations under that agreement. After HMV was dissolved and Forever21 entered administration, Prudential, the landlord, claimed rent and service charges from EMI.

EMI sought declarations that the wider guarantee and the guarantee of the authorised guarantee agreement were void under the Landlord and Tenant (Covenants) Act 1995, or that its liability had ended on HMV’s dissolution. Prudential counterclaimed for a declaration that the guarantee was valid and for judgment for the sums due. The central issue was whether EMI remained liable under the contractual guarantee.

1. The claim was dismissed on both principal grounds. The court declared that the guarantee of the authorised guarantee agreement was valid and gave judgment for Prudential, subject to submissions on the amount outstanding.

2. The definition of “Principal” in Schedule 1 referred to one person: HMV, or the person who was to become tenant on the contemplated assignment. It did not create an embedded repeat guarantee of subsequent assignees. The natural construction was preferred in the light of the lease as a whole and its alienation provisions.

3. The validity principle did not alter the ordinary construction of the lease, but it supported the realistic construction which preserved validity. If the words “or is to become” had instead created an impermissible wider guarantee, they could have been severed under section 25 because the remaining guarantee of HMV’s liabilities and its authorised guarantee agreement would remain workable and would not be emasculated.

4. “While” in the guarantee clauses referred to the single period during which the relevant tenant was bound by the tenant covenants. It did not contemplate a future reassignment which would revive liability. In any event, sections 16(4) and 25 invalidated only the offending extent, so the authorised guarantee agreement remained effective at least until the assignment to Forever21.

5. Under section 24(2), EMI was released to the same extent as HMV. The reasoning in K/S Victoria Street v House of Fraser (Stores Management) Ltd showed that a guarantor could guarantee the assignor’s authorised guarantee agreement because the guarantor’s release corresponded with the tenant’s release. The requirements in section 16 governing the authorised guarantee agreement did not apply separately to the guarantee of that agreement.

6. The dissolution of HMV did not discharge EMI. Paragraph 2.4 of Schedule 1 expressly preserved the guarantor’s liability, and the lease’s provisions concerning a trigger event did not form a complete code or displace that provision.