The case of K/S Victoria Street v House of Fraser (Stores Management) Ltd in 2011 clarified several important points under the Landlord and Tenant (Covenants) Act 1995 relating to the release of covenants and the responsibilities of tenant and guarantor on assignment of a lease.
In giving the judgement for K/S Victoria Street Lord Neuberger commented obiter that the anti-avoidance provisions of the 1995 Act may prevent an assignment from a tenant to its guarantor, even if both parties wished it.
This point has now been tested: in EMI Group Limited v O & H Q1 Limited (2016) the High Court confirmed last month that an assignment from a tenant to its guarantor is void as if it had never happened. The liability for tenant’s covenants under the lease remains with the assigning tenant, the responsibility will never have been passed to the guarantor.
In the EMI case HMV had intended to assign its lease to EMI, its guarantor, following HMV’s insolvency. This is not an uncommon situation. Where the guarantor is a group company and offers greater covenant strength struggling tenants may well consider assigning their lease to their guarantor. It is unlikely that this case will be appealed and landlords must heed the outcome and take steps to ascertain if their portfolio may be affected. Practitioners must also be alert to the point when undertaking investment due diligence.