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Jean-Yves Gilg

Editor, Solicitors Journal

Bad law and bad decisions

Bad law and bad decisions


Wayne Clark and Ciara Fairley discuss the criticisms aimed at the Landlord and Tenant (Covenants) Act 1995 and the judgment in EMI Group Ltd

Certain Acts of Parliament seem to invite bad decisions.
The Landlord and Tenant (Covenants) Act 1995 is one of them. The latest such decision
is EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch), which was handed down in March.

The facts of the case are simple. In 2014, a lease of retail premises was assigned by the original tenant to that tenant's guarantor under the lease. The lease was dated 26 September 1996 and the Act applied. The question for Judge Amanda Tipples QC was whether
the Act precluded such an assignment and, if so, whether the agreement purporting
to give effect to it was void.

The judge answered both questions in the affirmative.
She held that any agreement which sought to give effect to such an assignment was void
by virtue of the anti-avoidance provisions set out in section 25(1) of the Act - the reason being that 'it frustrates the purpose of the Act'. This was despite the fact that all three parties to the lease - landlord, tenant, and guarantor - had wanted the lease to be assigned to the guarantor, and had executed a licence to assign and deed of assignment in order to bring about that very result.

The idea that the Act might prevent a tenant assigning their lease to their guarantor was first flagged up by Lord Neuberger
in K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2012] Ch 497. He reasoned that section 24 of the Act was (or might be said to be) analogous to section 5: the
latter was intended to benefit tenants, whereas the former was intended to benefit guarantors, but the purpose of the Act in both cases was to effectuate
a release from future liability, which would be frustrated if
the party to be released was to remain on the hook following
an assignment (albeit in a different capacity).

So interpreted, a tenant should not be able to assign
their lease to their guarantor any more than a guarantor should be able to offer a repeat guarantee, regardless of whether or not
this is what both parties to the transaction wished to achieve.

Lord Neuberger did not need to decide this point, and did not do so. The judge in EMI Group Ltd did. Her reasons are essentially the same and rely upon an equally broad interpretation
of the purpose of the Act:
to preclude the voluntary assumption of new responsibilities, rather than simply ensuring parties are released from their existing obligations when they have parted with their interests in
the property.

This interpretation ignores what one might regard as relevant differences between
the tenant who is forced to remain liable throughout the remainder of the term even though they have assigned the lease - or even the guarantor who is forced to offer a repeat guarantee - and the guarantor who voluntarily offers to take on the lease and thereby assumes rights as well as responsibilities.

In the latter case it is not true that the guarantor remains
liable 'long after the parties had parted with their interests in
the property to which it related', the mischief at which the Law Commission's recommendations were aimed. This interpretation of the
Act gives rise to a number of questions which have no easy answers. What, for example, about the case in which the tenant is required to give
an authorised guarantee agreement? Can the guarantor take an assignment of the lease in that case, on the basis that it
is being released 'to the same extent as the tenant', or is that also prohibited?

Alternatively, can the tenant grant the guarantor a sub-lease on the basis that as the Act is concerned only with releasing the guarantor 'to the same extent' as the tenant, and as
the tenant is released in the capacity of a tenant, that would not appear to preclude the guarantor taking on a different liability in a different capacity as a sub-tenant? Or would this be considered to be an indirect
way of subverting the Act?
And is the position different if the guarantor takes a sub-lease while remaining a guarantor under the head-lease, given
that in those circumstances
they will not be released 'to the same extent as the tenant' on
a subsequent assignment of
the lease?

And what if the tenant assigns to an associated company before the lease is assigned to the guarantor? The guarantor was released 'to the same extent as the tenant' on the assignment
to the associated company but virtually immediately takes on
a liability which would not be permitted by way of a direct assignment.

A growing number of critics are now calling for the whole
Act to be scrapped. The Law Commission, at least, appears to be listening. In April of this year it published a consultation paper entitled 'Updating the Land Registration Act 2002', in which it acknowledged the existence of widespread dissatisfaction with the Act and invited comments.
It remains to be seen what
the Law Commission will recommend in the light of
any comments it receives.

Wayne Clark, pictured, and Ciara Fairley are barristers at Falcon Chambers @FalconChambers1