Skip to main content

New rules on assigning a lease to a guarantor

Share

For 20 years, tenants and guarantors of ‘new leases’ have been released from their liabilities when a lease is assigned.

However, a recent landmark case casts the legal situation in a fresh light. Property lawyer Simon England examines the implications.

The High Court decided in March that a tenant cannot not assign its lease to its guarantor – even if all parties agree – because this would mean the guarantor was not released from original liabilities required by the Landlord and Tenant Act.

Moreover, rather than finding that the guarantor was released, the court said that the entire assignment was void, meaning the tenant remains liable, as well as its guarantor.

Clarification still leaves concerns

The ruling, in the case of EMI Group Limited v O&H Q1 Limited, represents an answer to the unresolved question of whether a tenant could assign to its guarantor. However, concerns remain for landlords as well as tenants.

In many respects it would be helpful if tenants could assign their lease to their guarantors. As far as landlords are concerned, a guarantor might be in a stronger financial position. Meanwhile, tenants could take advantage of ‘intra-group’ assignment of leases to create flexibility in the way businesses manage property holdings.

Landlord keysLandlords have more reasons to be cheerful than tenants

This latest ruling is reassuring for landlords because if a tenant attempts to assign to its guarantor, the tenant cannot not avoid its legal obligation, and the landlord maintains the underpinning covenant relating to the guarantor.

Conversely, the situation is not good news for tenants because its means they cannot assign the lease to a guarantor, even if there is sound commercial logic behind such a move.

In a broader sense, all parties may have concerns about the implications of unpicking an existing transaction. For instance, the registered proprietor of the lease, or assignee, may not have the real benefit of the lease, or be liable under it. Also, investors buying property should carefully examine the history of any leases to ensure earlier assignments were valid.

What landlords and tenants need to know

The message to landlords is that applications for consent to assign should be turned down. The upshot for tenants looking to assign leases intra-group is that these arrangements are likely to be void and create issues regarding enforceability.

Just as importantly, everyone should keep in mind that this decision could still be appealed – and even if it is not, parliament may want to clarify the Act as a result of this landmark case.

For more information about the rules of assigning a lease, or any other commercial property matter, call Harrison Drury on 01772 258321. We have solicitors in Preston and all throughout Lancashire, including Lancaster, Kendal, Garstang and Clitheroe.


Questions & Answers

Leave a Comment

Leave a comment

Your email address will not be published. Required fields are marked *


x

Manage your privacy

How we handle your personal data

The General Data Protection Regulation (GDPR) gives you more control over how companies like ours use your personal information and makes it quicker and easier for you to check and update the information we hold about you.

As part of our service to you, we will continue to collect, use, store and share your data safely and securely. This doesn’t require any action on your part.

For more detailed information view our Privacy Hub