In a recent case coming out of the administration of high street retailer HMV, the High Court has held that a tenant may not assign its lease to its guarantor. The decision, if followed, will reduce the options for organisations carrying out intra-group reorganisations of their property portfolios, making it critical that a lease is granted to the “right” tenant company at the outset.
The case clarifies an important area of landlord and tenant law, confirming obiter comments by Lord Neuberger in an earlier case before the Supreme Court that has given rise to much debate.
Most lease guarantees allow landlords to call on the guarantor to take a new lease if the original lease is forfeited or disclaimed. This is a strong weapon for landlords and remains so. It is not affected by the EMI decision. From the guarantor’s perspective, since it can no longer offer to take an assignment of the existing lease, the landlord is highly likely to require the guarantor to accept a new lease, with its attendant stamp duty land tax liability.
In practice, however, it may mean that landlords in future insist the parent company takes the lease, rather than letting to the operating company with a parent guarantor.
The case also means that tenants’ options for intra-group assignments on a restructuring are ever more limited (building on K/S Victoria, which restricted repeat guarantees). In some cases, tenants may be forced to underlet, or even negotiate a surrender, with attendant cost consequences. It is ironic that the underlying purpose of the Landlord and Tenant (Covenants) Act 1995, which is to allow a tenant to be released from its covenants once it assigns the lease, may in some cases render it in practice impossible for the tenant to assign and obtain that release.
Both landlords and tenants should review past transactions to see if any purported assignments to guarantors have occurred, as these are now known to be void.
The case is relevant only to “new” leases (most leases granted since 1 January 1996). Although understanding the full ramifications may be difficult, the three key issues to consider are:
- Has security of tenure been lost? Where a business is carried on by a company that is part of the same corporate group as the tenant, this is treated as the tenant carrying on a business. So a void lease assignment between group companies may not mean security of tenure is lost, but this should be investigated.
- Have any section 17 notices requiring payment of arrears been served? These could be challenged if they were not served on the correct party and the landlord may be out of time for serving a new notice.
- What will happen in relation to registered leases? In Swift 1st Ltd v Chief Land Registrar  EWCA Civ 330, the Court of Appeal considered the question of ownership following a void transfer and held that registration of title carries with it both legal and beneficial ownership. A person dealing with the registered owner is entitled to assume that the owner has unfettered powers of disposal if there is no register entry stating that the owner’s powers are limited. Can the register be rectified if the “assignee” under a void assignment has become the registered proprietor at the Land Registry? Will a Land Registry indemnity be available for losses caused by relying on the incorrect owner details?