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Tenants cannot assign leases to guarantors

Since the Court of Appeal's decision in the K/S Victoria Street case in 2011, there has been uncertainty as to whether an assignment to a guarantor is void. Although that was not the point on which the court had to decide, Lord Neuberger commented that "It would also appear to me that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it."  In light of these comments, the majority of lawyers will have been advising clients that such an assignment should be avoided.

This week the High Court ruled on the point and confirmed that a tenant cannot validly assign a lease to its guarantor.

In EMI Group Ltd v O & H Q1 Ltd, the tenant (which had gone into administration) assigned its lease to its guarantor. The guarantor tried to run an argument that, although the assignment was valid, the tenant covenants could not be enforced against it because the assignment fell foul of the anti-avoidance provisions in the Landlord and Tenant (Act 1995).

The court gave this argument short shrift, stating that the submissions did not make any sense at all. The position was clear and simple. The purported assignment of the lease to the guarantor was void and of no effect.  The result was that the lease remained vested in the original tenant and the guarantor remained bound as guarantor of the original tenant's obligation under the lease by virtue of the guarantee.

Although this decision is not binding on other courts, it indicates that the courts are following the view put forward by Lord Neuberger in K/S Victoria Street, that a lease cannot be assigned to a guarantor.

Contributor: Alexandra Holsgrove Jones

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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