Are You Able To Avoid a Void Assignment?

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Do you know the effects from the assignment (transfer) of the lease granted after 1 The month of january 1996 towards the guarantor of the existing tenant? This was considered within the recent Chancery Division situation of EMI Group Limited v O & HQ1 Limited [2016] EWHC 529(Ch), in which the Court figured that a project of the lease with a tenant to the guarantor is void, notwithstanding the commercial aim of the parties. Within this Alert, we think about the issues as a result of the EMI situation and also the key implications from it and a few related decisions for guarantors, tenants, landlords and lenders to individuals parties.

The Backdrop

The Owner and Tenant (Covenants) Act 1995 (“the Act”) provides that for leases granted after 1 The month of january 1996, whenever a tenant legitimately assigns that lease, both it and it is guarantor (or no) is going to be released from future liabilities towards the landlord underneath the tenant covenants within the lease. Any tries to agree otherwise won’t work, as comprehensive anti-avoidance provisions in Section 25 usually are meant to be sure that the Act isn’t directly or not directly frustrated.

The only method the Act permits a landlord to help keep a tenant ‘on the hook’ after a project is perfect for the owner to impose a disorder that the assigning tenant should enter an authorised guarantee agreement (referred to as an “AGA”), to be sure the covenants from the assignee. This guarantee falls away once the assignee is not responsible for the tenant covenants within the lease, for instance, where there’s a subsequent assignment (with landlord’s consent, if this sounds like needed). The Act’s impractical and restrictive anti-avoidance provisions prevent parties from getting into what could otherwise seem to be assignments, particularly intra-group assignments, which may suit both sides commercially, and also have caused numerous difficult issues, resulting in a number of recent cases such as the EMI situation.

The Details from the EMI Situation

A lease was granted to HMV United kingdom Limited (“Tenant”) using its parent, EMI Group Plc, because the guarantor (“Guarantor”). The Tenant entered administration in 2013, and also the Guarantor requested the owner, O & HQ1 Limited (“Landlord”), for accept to assign the lease into it. The Owner agreed and also the lease was allotted to the Guarantor who granted an underlease for an connected company. Soon after a job, the Guarantor advised the owner that even though the assignment was valid, due to its interpretation from the Act, it wasn’t prone to pay rent in order to adhere to the tenant covenants within the lease. The Owner could not agree using the Guarantor’s change of position and both sides put on a legal court.

The Legal Analysis

The main question before Amanda Tipples QC, relaxing in our prime Court, was if the Act avoided the Tenant from assigning towards the Guarantor, and how much an agreement which seeks to provide effect to that particular is void due to the anti-avoidance provisions in Section 25(1) from the Act.

A Legal Court determined that the tenant is avoided from assigning a lease to the guarantor which this kind of assignment is void, based on the inter-relationship from the provisions in the process concerning the discharge of the guarantor and also the outgoing tenant and also the assumption of liability through the assignee. The Court’s view was these all occur concurrently, so there might be no discharge of the guarantor before it grew to become the assignee and then the anti-avoidance provisions from the Act operated to invalidate a job. Because the assignment would be a nullity, the lease remains vested within the Tenant and also the Guarantor continued to be liable under its original guarantee.

The Implications

The EMI situation and also the number of cases that preceded it have significant ramifications for guarantors, tenants, landlords (and even lenders to them) so we have summarised the important thing points below:

Guarantors

A current tenant’s guarantor:

cannot take a project in the tenant whose covenants it’s guaranteed (EMI Group Limited v O & HQ1 Limited [2016] EWHC 529(Ch)) and

cannot ensure the covenants of the incoming tenant (Good Harvest Partnership v Centaur Services Limited [2010] EWHC 33(Ch)) but

can offer a sub-guarantee to some tenant’s guarantee covenants within an AGA (K/S Victoria Street v House of Fraser (Stores Management) Limited [2012] Ch.497) and/or

can offer an assurance to some second, or subsequent, assignee once it’s been completely released according of their original guarantee around the first assignment (United kingdom Leasing Brighton Limited v Topland Neptune Limited and Zinc Cobham Limited v Adda Hotels (an limitless company) [2015] EWHC 53(Ch)).

Landlords

A landlord:

cannot incorporate a requirement inside a lease the tenant’s guarantor should guarantee an assignee like a pre-condition to accept to assign in order to an intra-group assignment (Good Harvest Partnership v Centaur Services Limited [2010] EWHC 33(Ch))

should now refuse a credit card applicatoin to assign to some tenant’s guarantor, making obvious the reason why for such refusal

should review previous assignments carefully to check on whether any have fallen foul from the anti-avoidance provisions from the Act and, if that’s the case, consider how to heal the problem, possibly through the tenant that joined in to the void assignment assigning to a different group company

if your ‘tenant’ is occupying carrying out a void assignment, also needs to consider whether an implied tenancy might have come to light and just what the relation to this are – they are certainly not identical to the the lease and

should, should there be arrears of rent and there’s been a void assignment, check carefully whether any former tenants remain responsible for the arrears and, if that’s the case, consider whether or not they make the perfect covenant for recovery.

Tenants

Tenants should think about:

has there been a void transaction in almost any chain of assignments? If that’s the case, a tenant should either continue with the ‘implied tenancy’ and spend the money for rent, or approach the owner to determine whether terms could be agreed for that grant of the valid tenancy

when the lease is susceptible to electric power charge, a tenant must inform lenders and discuss the way in which forward

or no premium was compensated towards the assignor, the tenant should think about whether this is often retrieved for that void assignment

former tenants who thought they were released can always be liable if there’s been a void assignment

any underleases granted following a void assignment can also be void and the like issues must be resolved. There’s added complexity where organizations are participating and

carefully whether any suggested assignments, for example in to the joint names of itself and the other, may also fall foul from the strict anti-avoidance the Act (there’s, however, no existing decision about this point).

Conclusion

The effects from the EMI situation are commercially unattractive and neglect to give effect towards the commercial aim of the parties nevertheless, the judge’s view within the EMI situation was this was “neither here nor there”. This can be a classic situation of putting the legal cart prior to the commercial horse along with other people from the judiciary are understood to carry different views about the use of the Act.

Legislative reform is urgently needed on these problems, and even, the home Litigation Association, based on industry and professional physiques, views this is the only route and also the Law Commission has asked comments for more consideration.

Until either the choice is overturned, or even the law is amended, both sides, specifically in corporate reorganisations, will have to think carefully how to offer the preferred commercial result but without falling foul from the Act.

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