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Freedom to contract but what about freedom to assign?
10 May 2017

The general concept that one is free to contract with whomever they choose is somewhat at odds with the Landlord and Tenant (Covenants) Act 1995 (“the Act”) and two relevant cases, K/S Victoria Street v House of Fraser (Stores Management) Ltd (“House of Fraser case”) and now EMI Group Ltd v O&H Q1 Ltd (“EMI case”).

As such, many in the legal profession awaited the Court of Appeal decision in the EMI case to provide some much needed clarity on this issue.

House of Fraser case

It was held in the House of Fraser case that a guarantor could not also guarantee the obligations of the assignee of a lease. It was decided that this would contradict the release of the tenant or its guarantor from the original lease covenants pursuant to the Act. As a result a second guarantee would be void.

EMI case

This case concerned a tenant company which was in administration. It was agreed with the landlord that they could assign their lease to their guarantor.

Whilst all parties agreed, the guarantor then sought to argue that the tenant’s lease covenants were not enforceable against it.

High Court decision

The High Court held that the assignment was void as it was not possible to separate taking the lease from the tenant covenants and followed the decision in the House of Fraser case. As a result, the lease remained vested in the tenant and the guarantor remained liable.

Court of Appeal decision

The case was due to go before the Court of Appeal in May 2017. However, the parties have recently settled the matter.

What about clarity?

The legal profession were hopeful that the Court of Appeal decision in the EMI case would either reverse the High Court decision or at least provide some clarity on this issue which often remains unworkable in a commercial setting, particularly if a tenant company wants to assign their lease to a solvent guarantor after administration.

As such, and at least for the time being, the House of Fraser and EMI cases remain good law and assignments such as those which are the subject of the cases, will be void.

This presents a potentially difficult problem for assignments (such as those referred to) that have already occurred as the legal position remains far from certain.  

For more information about the issues raised in this article or to find out about how the Property Disputes team can help you please contact Laura Ford on 0118 952 7226 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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