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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch) (16 March 2016) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2016/529.html Cite as: [2016] WLR(D) 150, [2016] EWHC 529 (Ch), [2016] 3 WLR 269, [2016] Ch 586, [2016] L &TR 14 |
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OF
JUSTICE
CHANCERY DIVISION
![]() ![]() Rolls Building, Fetter Lane, London, EC4A 1NL |
||
B e f o
r e :
____________________
![]() ![]() ![]() ![]() |
Claimant |
|
- and – |
||
![]() ![]() |
Defendant |
____________________
Mr K Reynolds QC (instructed by Clarke Willmott LLP) for the Defendant
Hearing date: 1 December 2015
____________________
VERSION
OF
JUDGMENT
Crown Copyright ©
Miss Amanda Tipples QC:
Introduction
"to make provision for persons bound by covenantsof
a tenancy to be released from such covenants
on
the assignment
of
the tenancy, and to make
other
provision with respect to rights and liabilities arising under such covenants …".
(1) whether the Act precludes the guarantor of
an assignor from becoming the assignor's assignee (
or,
using the terminology used in some
of
the cases, whether the guarantor (G1)
of
the tenant (T1) is precluded from becoming the assignee
of
the tenancy (T2)); and
(2) if this arrangement is precluded by the Act, to what extent are the agreements which purport to give effect to it avoided by section 25(1) of
the Act.
Relevant facts
"that until the Tenant is released from liability by section 5of
the Landlord and Tenant (Covenants) Act 1995 the Tenant will pay and discharge the Secured
Obligations
[defined to mean the
obligation
to pay all sums from time to time due
or
expressed to be due to the Landlord from the Tenant under the Lease and to perform all
other
![]()
obligations
which from time to time are
or
are expressed to be
obligations
![]()
of
the Tenant under the Lease] when the same fall due
or
are expressed to fall due under the Lease for payment and discharge."
"The guarantee and covenant contained in clause 2.1 shall impose upon the Guarantor the same liability as if the Guarantor were itself the principal debtor in respectof
the Secured
Obligations
and such liability shall continue notwithstanding (and shall not be discharged in whole
or
in part
or
![]()
otherwise
affected by): (a) any forbearance by the Landlord to enforce against the Tenant its covenants in the Lease; (b) the giving
of
time
or
![]()
other
concessions
or
the taking
or
holding
of
![]()
or
![]()
varying
realising releasing
or
not enforcing any
other
security for the liabilities
of
the Tenant; … and for the purposes
of
this clause 2 the Tenant shall be deemed to be liable to continue to pay and discharge the Secured
Obligations
notwithstanding any
of
the above matters and any money expressed to be payable by the Tenant which may not be recoverable from the Tenant for any such reason shall be recoverable by the Landlord from the Guarantor as principal debtor."
"it was the Claimant itself (which was then bound as Guarantor under the Deedof
Guarantee) which suggested to the Defendant that there should be an assignment
of
the Lease to the Claimant with the expressed intent that the
obligations
![]()
of
the Claimant as Guarantor should, by
virtue
![]()
of
the assignment itself, be replaced by the tenant
obligations
under the Lease, at the same time as the
Original
Tenant was released from the tenant
obligations
by
operation
![]()
of
the Act."
I mention this piece of
evidence because at
one
point the Claimant submitted that the Defendant landlord "brought the present situation all
on
itself" as it could have refused consent to the assignment
on
the basis that the assignment would be to a party, the Claimant, who would not be bound by the tenant covenants. This contention seems somewhat unfair in the light
of
Ms Martin's evidence and, to the extent it is
of
any relevance, I do not accept it.
"at all times after the completionof
the Assignment throughout the residue
of
the Term
or
until it is released from its covenants pursuant to the 1995 Act to pay the rents and all
other
sums payable under the Lease and to
observe
and perform all the covenants and conditions
on
the lessee's part contained in the Lease."
(1) (as sought by the Claimant) the Lease has as a matter of
law
vested
in the Claimant by assignment, and by
operation
of
law the tenant covenants therein are
void
and cannot be enforced against the Claimant;
or
(2) (as sought by the Defendant) notwithstanding that the Lease has been vested
in the Claimant, the tenant covenants therein are
valid
and can be enforced against the Claimant;
or
(3) (as sought by the Defendant in the alternative) the purported assignment of
the Lease to the Claimant is
void
and
of
no effect, with the result that the Lease remains
vested
in the
Original
Tenant, and that the Claimant remains bound as Guarantor
of
the
Original
Tenant's
obligations
under the Lease by
virtue
of
[the Guarantee] and has not been released from its
obligations
under the Deed
of
Guarantee by the
operation
of
[the Act]."
The Act
(a) Section 5
"5. Tenant released from covenantson
assignment
of
tenancy.
(1) This section applies where a tenant assigns premises demised to him under a tenancy.
(2) If the tenant assigns the wholeof
the premises demised to him, he –
(1) is released from the tenant covenantsof
the tenancy, and
(2) ceases to be entitled to the benefitof
the landlord covenants
of
the tenancy,
as from the assignment."
"The mischief at which the [Law] Commission's recommendations were aimed was the continuationof
a liability long after the parties had parted with the interests in the property to which it related."
"16. They are intended to benefit tenants,or
landlords, as the case may be. That is their purpose. That is how they are meant to
operate.
These sections introduce a means, which cannot be
ousted,
whereby in certain circumstances, without the agreement
of
the
other
party, a tenant
or
landlord can be released from a liability he has assumed. The
object
![]()
of
legislation was that
on
lawful assignment
of
a tenancy
or
reversion, irrespective
of
the terms
of
the tenancy, the tenant
or
landlord should have an exit route from his future liabilities. This route should be available in accordance with the statutory provisions.
17. Thus the mischief at which the statute was aimed was the absence in practiceof
any such exit route…"
(b) Section 24(2)
"(2) Where –
(a) byvirtue
![]()
of
this Act a tenant is released from a tenant covenant
of
a tenancy, and
(b) immediately before the release another person is bound by a covenantof
the tenancy imposing any liability
or
penalty in the event
of
a failure to comply with that tenant covenant,
then, as from the releaseof
the tenant, that
other
person is released from the covenant mentioned in paragraph (b) to the same extent as the tenant is released from that tenant covenant."
"the whole thrustof
section 24(2), indeed
of
the 1995 Act itself, is that a person should not remain liable under a tenancy after the tenant with whose liability he is associated has been released from his liability."
"Guarantors
4.53 The positionof
those who enter into leases as guarantors must be considered. The liability
of
a true guarantor is dependent upon the liability
of
the principal debtor. When the latter ceases to be liable, there is no
obligation
for the former to guarantee. Accordingly, if the result
of
![]()
our
proposals would be to release a party to a lease, be he landlord
or
tenant, that would automatically end the responsibility
of
that party's guarantor.
4.54 Mostof
the people now named in leases as guarantors for the tenant actually assume liabilities which make them principal debtors, with
obligations
independent
of
those
of
the party whose covenants they are said to guarantee. They have rights
of
reimbursement against their principals, but they will not, as a matter
of
law, be released from their
obligations
merely because the principal is released. To permit such guarantors,
or
more strictly indemnifiers, to remain liable when the tenant has been wholly released under
our
proposals, would undermine the thrust and purpose
of
those recommendations. We therefore go further. Whenever the liability
of
a tenant would be wholly cancelled under
our
recommendations, we recommend that liabilities which had been undertaken in parallel and are essentially to the same effect would also be terminated.
4.55 When a tenant is partially released from hisobligations
under
our
proposals, we recommend that a third party who has entered into a parallel
obligation
supporting the tenant's liability be released to the same extent. This effect will be automatic, without the third party having to take any action." (emphasis added)
(c) Section 25
"25. Agreementvoid
if it restricts
operation
![]()
of
the Act.
(1) Any agreement relating to a tenancy, isvoid
to the extent that –
(1) it would apart from this section have effect to exclude, modifyor
![]()
otherwise
frustrate the
operation
![]()
of
any provision
of
this Act,
or
(2) it provides for –
(i) the terminationor
surrender
of
the tenancy,
or
(ii) the impositionon
the tenant
of
any penalty, disability
or
liability,
in the eventof
the
operation
![]()
of
any provision
of
this Act,
or
(3) it provides for anyof
the matters referred to in paragraph (b)(i)
or
(ii) and does so (whether expressly
or
![]()
otherwise)
in connection with,
or
in consequence
of,
the
operation
![]()
of
any provision
of
this Act.
…
(3) In accordance with section 16(1) nothing in this section applies to any agreement to the extent that it is an authorised guarantee agreement; but (without prejudice to the generalityof
subsection (1) above) an agreement is
void
to the extent that it is
one
falling within section 16(4)(a)
or
(b).
(4) This section applies to an agreement relating to a tenancy whetheror
not the agreement is –
(a) contained in the instrument creating the tenancy;or
(b) made before the creationof
the tenancy."
"The argument proceeds as follows.On
the assignment
of
the lease by Management to Stores in accordance with clause 3.5(ii), Management will be released from all further liability under the lease, by
virtue
![]()
of
section 5(1), so section 24(2)(a) is satisfied; and, as HoF is "another person" who is "bound by [the] covenant[s]
of
the [lease]", section 24(2)(b) also applies. Accordingly, it is the effect and intention
of
section 24(2)(b) that, as from the release
of
[Management]", ie
on
the assignment to Stores, HoF should be released from its liabilities as guarantor under the lease. Any provision such as clause 3.5(iii), which stipulates in advance that HoF must re-assume precisely that liability as a term
of
the assignment, would therefore "frustrate" the
operation
![]()
of
section 24(2)(b), and its therefore rendered
void
by section 25(1)(a)."
"21. … If a landlord could (a) when granting a tenancy, impose anobligation
![]()
on
the tenant's guarantor to guarantee the liability
of
the assignee in the event
of
an assignment, and (b)
on
an assignment by a tenant, enforce that
obligation,
it would, as a matter
of
![]()
ordinary
language, "frustrate" the
operation
![]()
of
section 24(2). If it were
otherwise,
it would mean, for instance, that a landlord, when granting a tenancy, could require a guarantor
of
the tenant's liabilities,
on
every assignment
of
the tenancy, to guarantee the liability
of
each successive assignee. Such an
obligation
("a renewal
obligation")
would plainly be wholly contrary to the purpose
of
section 24(2), as it would enable a well-advised landlord to ensure that any guarantor was in precisely the position in which it would have been before the 1995 Act came into force."
"22. If a renewalobligation
were enforceable, in many cases, for instance where the prospective
occupier
![]()
of
commercial property was a member
of
a
group
![]()
of
companies, a landlord could also effectively avoid the effect
of
section 5(2) by requiring a subsidiary company in the
group
to take the tenancy, with the parent company acting as guarantor
on
terms which included a renewal
obligation.
Indeed, it could go further than this: as a matter
of
logic, if such a liability could lawfully be imposed
on
and enforced against a guarantor
of
the
original
tenant, it is hard to see why it could not be imposed
on
the
original
tenant itself.
23. Given the plain purposeof
the 1995 Act, and the widely expressed terms
of
section 25(1)(a) and 25(4), any contractual arrangement contained in the tenancy (
or
in a prior agreement), which imposes an
obligation,
![]()
on
an existing
or
prospective guarantor
of
the tenant's liabilities, to guarantee the liabilities
of
a future assignee should be
void.
That conclusion is supported by what was said in the Avonridge case [2005] 1 WLR 2956, paras 14 and 18, by Lord Nicholls
of
Birkenhead. He described section 25 as a "comprehensive anti-avoidance provision", which was "to be interpreted generously, so as to ensure the
operation
![]()
of
the Act is not frustrated, either directly
or
indirectly".
24. For the avoidanceof
doubt, this conclusion would also apply to a contractual arrangement contained in a later document, for instance a renewal
obligation
imposed
on
a guarantor
of
an assignee's liabilities in an assignment
or
a licence to assign. Subsection (4) makes it clear that section 25 applies to agreements "whether
or
not" they are made in,
or
prior to, a tenancy. Accordingly, if, as we consider, a renewal
obligation
imposed
on
a guarantor
of
the
original
tenant is
void,
it must follow that the imposition
of
a renewal
obligation
![]()
on
the guarantor
of
an assignee would also be
void."
![]()
"27. … we do not accept that section 24(2) has the limited purpose for which [counsel forVictoria]
contended. Its language does not suggest such a limited purpose, and the whole thrust
of
section 24(2), indeed
of
the 1995 Act itself, is that a person should not remain liable under a tenancy after the tenant with whose liability he is associated has been released from his liability. Further, paras 4.53 and 4.54
of
the Law Commission report (Law Com No 174), which were relied
on
by [counsel for
Victoria],
do not support the notion that the section has such a limited purpose. The former paragraph states that when the lessee's liability ceases "that would automatically end the responsibility
of
[his] guarantor". Para 4.54 says that if a guarantor remains liable after the lessee is released, it "would undermine the thrust and purpose
of
[the Commission's] recommendations"."
"… it seems to us that it would be wrong to accede to the argument, both as a matterof
principle and as a matter
of
practice. It would be wrong in principle because section 25(1)(a) applies to any provision which would "have effect to … frustrate the
operation
![]()
of",
inter alia, section 24(2). In
other
words, it is the
objective
effect
of
a particular provision, and not the subjective reasons for its existence, which determine its
validity
for the purpose
of
section 25(1). It would be wrong in practice to adopt the approach inherent in the submission, because it would introduce an element
of
uncertainty, and the
opportunity
for disputes
of
fact, into an area where it is important to have predictability".
"For the reasons already discussed, an agreement which requires a guarantor to provide a further guarantee in the future falls foulof
section 25(1), because it involves a guarantor, at a time that he is,
or
is agreeing to become, the tenant's guarantor, committing himself to re-assume his liabilities
on
a future assignment, when the plain purpose
of
section 24(2) is to ensure that he is released from his liabilities with affect from the assignment." (emphasis added)
"36. Where a lease contains a tenant's covenant against assignment in the normal form, namely that it requires the landlord's consent, which is not to be unreasonably withheld, the landlord mayoften
reasonably refuse consent to a particular assignment unless a suitable guarantor
of
the assignee is provided. If interpretation (i) is correct, the assignor could not
offer
his
own
guarantor, because a guarantor
of
the present tenant is, in effect, absolutely precluded from providing a subsequent guarantee
of
that tenant's assignee. Interpretation (i) would thus appear to give the 1995 Act an unattractively limiting and commercially unrealistic effect.
37. As Newey J accepted, interpretation (i) would mean that, even where it suited the assignor, the assignee and the guarantor that the assignee should have the same guarantor as the assignor (because, for instance, the assignor and the assignee had the same parent company,or
shared a common bank, which was the guarantor), they could not
offer
that guarantor. It would also appear to mean that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it. Lord Nicholls said in the Avonridge case [2005] 1 WLR 3956, para 16, that section 5 was "intended to benefit tenants …That is [its] purpose. That is how [it is] meant to
operate".
So, too, section 24(2) is meant to benefit guarantors. It can therefore be argued that, where the assignor and the guarantor who want the guarantor to guarantee an assignee,
or
who want the lease to be assigned to the guarantor, such a renewal,
or
such an assignment, would not "frustrate the
operation
![]()
of
any provision
of
[the 1995 Act]".
38. All this provides some support for the contention that a guaranteeof
the assignee by the assignor's guarantor may not fall foul
of
section 25(1) if it is freely
offered
by the assignor and guarantor.
On
the
other
hand, there is much to be said for interpretation (i). It leads to a clear and simple position. It avoids argument, after, possibly long after, the subsequent guarantee has been given, as to whether it really had been insisted
on
by the landlord
or
freely
offered
by the assignor. Such problems could be particularly acute where the landlord's interest had been assigned after the subsequent guarantee had been
obtained,
and the current landlord therefore may have no knowledge
of
the circumstances in which it had been
obtained."
"39. Interpretation (ii) is, in many ways, more attractive in termsof
commercial sense, as it is consistent with the idea that section 25 is to be treated as an anti-avoidance provision which (in a case involving an assignment
of
the tenancy rather than the reversion) protects the assignor and its guarantor, but does not work to their disadvantage…
41. However, as already mentioned above [para 29], section 25(1) appears to be concerned with "the effect"of
a particular agreement, which suggests that what it aims to invalidate is the
objective
effect
of
an agreement, rather than its subjective purpose. It does appear that interpretation (ii) runs rather counter to that approach, as it looks to the subjective reason for the guarantor guaranteeing the assignee, rather than its
objective
effect."
"(5) there was no distinction between a guarantee freelyoffered
by the guarantor and a guarantee insisted upon by the landlord: [40] – [43];
(6) there was no distinction as to the effectof
the 1995 Act
on
an agreement to give the guarantee and a guarantee actually given: [43];
(7) the [very
important qualification, which relates to AGAs under section 16], was that if the assignor gave an AGA in relation to the assignee, the guarantor
of
the assignor (whilst it was the tenant) could also give a guarantee in relation to the assignor's liability under that AGA: [46] – [48].
(8) if a tenant assigns and the tenant and the tenant's guarantor are thereupon released, there is nothing to stop that guarantor becoming a guarantor againon
a subsequent assignment: [51];
(9) the proposition in (8) above applies notonly
where the subsequent assignee is a new party but also where the subsequent assignee is an earlier tenant whose liabilities were guaranteed by that guarantor; [51]."
"It would also appear to mean that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it."
(d) Section 3
"3. Transmissionof
benefit and burden covenants.
(1) The benefit and burdenof
all landlord and tenant covenants
of
a tenancy –
(a) shall be annexed and incident to the whole, and to each and every part,of
the premises demised by the tenancy and
of
the reversion in them, and
(b) shall in accordance with this section passon
an assignment
of
the whole
or
any part
of
those premises
or
![]()
of
the reversion in them.
(2) Where the assignment is by the tenant under the tenancy, then as from the assignment the assignee –
(a) becomes bound by the tenant covenantsof
the tenancy except to the extent that –
(i) immediately before the assignment they did not bind the assignor,or
(ii) they fall to be complied with in relation to any demised premises not comprised in the assignment; and
(b) becomes entitled to the benefitof
the landlord covenants
of
the tenancy except to the extent that they fall to be complied with in relation to any such premises.
…
(3) In determining for the purposesof
subsection (2)
or
(3) whether any covenant bound the assignor immediately before the assignment; any waiver
or
release
of
the covenant which (in whatever terms) is expressed to be personal to the assignor shall be disregarded."
"B. Privityof
Estate
(i) Covenants enforceable by landlord and tenant and their successors
2.20. Covenants in leases may be divided into twogroups:
(a) those which "touch and concern the land"or
have "reference to the subject matter
of
the lease", term which have the same meaning; and
(b) those which impose personalor
collateral
obligations.
Most leases probably imposeobligations
![]()
of
both types. The
original
parties remain bound by all the covenants in the lease by
virtue
![]()
of
privity
of
contract. In respect
of
the first
group
![]()
of
covenants
only,
there is also liability, by way
of
privity
of
estate, between the persons, who for the time being, stand in the shoes
of
the
original
landlord and the
original
tenant.
2.21. Thus, when theoriginal
tenant assigns his lease, the assignee (and any subsequent assignee) automatically becomes directly liable to the landlord, with whom he has privity
of
estate, in respect
of
those covenants which "touch and concern" the land. Examples
of
such covenants are covenants to pay the rent; to repair buildings; to insure them against fire ..."
"First, a landlordor
tenant
or
property should not continue to enjoy rights nor be under any
obligation
arising from a lease
once
he has parted with all interest in the property.
Secondly, all the termsof
the lease should be regarded as a single bargain for letting the property. When the interest
of
![]()
one
![]()
of
the parties change hands the successor should fully take his predecessor's place as landlord
or
tenant, without distinguishing between different categories
of
covenant."
"4.46 Although to accord withour
first principle it may be necessary to differentiate between covenants which apply to different parts
of
property let by a lease,
our
second principle suggests that covenants should not be put into different categories for
other
reasons. We accordingly recommend that there should be no distinction between lease covenants which touch and concern the land and
other
covenants. Abolishing this distinction will
of
itself simplify the law, because the current parties to leases will be able to be sure that they are bound by and benefit from all the
obligations
set
out
in the lease."
"21. I consider that the way in which the 1995 Act wouldoperate
in relation to these steps is, prima facie, as follows:
(1) T2 will be released from the tenant covenants: section 5(2)(a);
(2) T1 will be released from the tenant covenants entered into at the time the lease was granted to T1: section 11(2)(b);
(3) G will be released from the earlier guarantee which it gave: section 24(2);
(4)On
the re-assignment to T1, T1 again becomes bound by the tenant covenants: section 3(2)(a).
22. If this is right so far, the problem would then be: if G is released under section 24(2) from the earlier guarantee which it gave, can it effectively be bound by a fresh guarantee entered intoon
the re-assignment to T1? The concern is that the decision in
Victoria
Street would produce the result that the re-imposition
of
such a liability
on
G would frustrate the
operation
![]()
of
a provision
of
the 1995 Act (ie section 24(2)) and would therefore be invalid."
"28. … it was not possible under the 1995 Act to assign the termof
the lease back to T1 because to re-impose liability
on
T1 would be contrary to a release
of
T1 under section 11(2)(b). This somewhat improbable argument was said to be supported by a statement in
Victoria
Street as to the position
of
a guarantor. In that case, Lord Neuberger said at [37]: "It would also appear to mean that the lease could not assigned to the guarantor, even where both the tenant and the guarantor wanted it."
"29. What Lord Neuberger was referring to in this statement was the possible conflict between a releaseof
a guarantor under section 24 and the re-imposition
of
liability
on
the former guarantor as assignee. The statement is
obiter
and somewhat tentative. For present purposes, I do not need to consider whether I should follow that statement in a case to which it applies. In the present case, there is no suggestion
of
an assignment to G so the statement is not directly applicable. I am not prepared to extrapolate from that statement about a guarantor so as to reach the result that it is not possible in the present case for T2 to reassign to T1. As explained in paragraph 21 above [set
out
at para 57 above], the position
of
T1 is governed by two provisions, first section 11(2)(b) and, secondly, section 3(2)(a). I am not prepared to hold that the release under section 11(2)(b) means that section 3(2)(a) cannot take effect. I consider that both provisions take effect. Accordingly I will adopt the analysis set
out
in paragraph 21 above [set
out
at para 57 above]. "
"41. Theother
possibility is an assignment by T2 to G followed by an assignment by G to T1, guaranteed by a fresh guarantee from G, but without any commitment prior to the assignment to G that the assignment to T1 (and the fresh guarantee by G) would be entered into. Would these steps be effective under the 1995 Act? I do not think that a problem would arise in relation to the fresh guarantee given by G
on
the assignment by G to T1. The fresh guarantee could be an AGA within section 16, which would therefore be effective under the 1995 Act. However, a problem could arise in relation to the earlier assignment,
or
purported assignment, from T2 to G in
view
![]()
of
the statement at [37] in
Victoria
Street, which I have quoted at paragraph 28 above. This statement is
obiter
and somewhat tentative. A question was raised in the course
of
argument as to whether this statement was really correct. However, I was not asked to rule
on
that point. If I had been asked to hold that the statement was incorrect, I would have required further argument before being persuaded not to follow this dictum
of
the Court
of
Appeal. In the circumstances, it would not be right for me to consider the matter further in this judgment."
"71. In my judgment, I leftopen
the question
of
whether Lord Neuberger had been right to suggest that where the lease was
vested
in T and T's
obligations
were guaranteed by G, then the lease could not be assigned to G even where T and G wanted that to happen. Let me now consider that proposition. The argument is that the Act is intended to produce the result that G is released under section 24(2)
on
an assignment by T1. If G becomes the assignee, it will be bound by the tenant covenants and so will not be released. Therefore, the assignment to G has effect to frustrate the
operation
![]()
of
the Act.
72. What this argument misses is that the reason the assignment to G makes G liableon
the tenant covenants is that section 3(2)(a) so provides. So the Act
operates
in two different ways.
On
the assignment, section 24(2)
operates
to release G from its earlier guarantee and section 3(2)(a)
operates
to impose the burden
of
the tenant covenants
on
G as assignee. So the Act
operates
in two consecutive ways. Why should it not
operate
to the full in both
of
these ways? The
operation
![]()
on
![]()
one
way does not frustrate the
operation
![]()
of
the Act in the
other
way. The release under section 24(2) does not frustrate the
operation
![]()
of
section 3(2)(a). The imposition
of
the burden
of
the covenants under section 3(2)(a) does not frustrate the release under section 24(2).
73. This reasoning was essentially the reasoning that appealed to me when I decided what the position would be when the term was assigned by T2 to T1. Although I did not need to say so in the case I decided, in truth, the same logicought
to dispose
of
Lord Neuberger's tentative suggestion also. There is no conceivable policy reason not to give effect to this logic."
(e) The effect of
section 25
"3.14.6 The Tenant shall not assign this Lease to any Associated Companyof
the Tenant without the prior consent
of
the Landlord Provided Always that for the purposes
of
Section 19(1A)
of
the Landlord and Tenant Covenants Act [1927], the Landlord shall be entitled to impose any
or
all
of
the following conditions set
out
in sub clauses (a) and (b) below:
(a) that the Tenant shall provide the Landlord with noticeof
any such assignment within 10 Working Days
of
completion
of
the same;
(b) thaton
any such assignment, the Tenant shall procure that the Guarantor and any
other
guarantor
of
the Tenant shall covenant by deed with the Landlord in the terms set
out
in the Sixth Schedule at the Tenant's sole cost
and subject to the Tenant's compliance with such conditions the Landlord's consent shall be given."
"45. The argumentson
s.25 which I have already
outlined,
the landlords' argument that s.25(1) avoids the entirety
of
the proviso to clause 3.14.6 (which the judge accepted) and the further argument advanced by Mr Reynolds [counsel for the landlord] that it should be taken to avoid not
only
the proviso but the whole
of
clause 3.14.6 all turn
on
the words "to the extent that" in s.25(1). It is clear that s.25 was intended to provide a comprehensive anti-avoidance provision which, as Lord Nicholls said in London Diocesan Fund
v
Phithwa [2005] 1 WLR 3956,
ought
to be interpreted generously to ensure that the
operation
![]()
of
the 1995 Act is not frustrated either directly
or
indirectly. Mr McGhee [counsel for the tenants] made the point that that legislation which
operates
to avoid the whole
or
a part
of
a contract may produce consequences in terms
of
the legal position which the parties are left with that may be both capricious and uncommercial. I accept that. Any alteration
of
the contract will necessarily change the parties' legal relationship from what they intended it to be and the actual impact upon them in terms
of
the remaining balance
of
liabilities and
obligations
may be fortuitous. But that should not be regarded as an invitation to assume that such will necessarily be the case, still less to attribute to Parliament an intention that the legislation should be interpreted and applied in that way when
other
alternatives are available.
46. Although the words "void
to the extent that" indicate that Parliament did not intend to invalidate more
of
the relevant agreement than was necessary to safeguard the
objectives
![]()
of
the Act in the context
of
the particular assignment under consideration, those words do not in my
view
preclude the Court from taking a balanced approach to invalidation which, while neutralising the
offending
parts
of
the contract, does not leave it emasculated and unworkable.…
47. … We are not concerned with whether the Court is able to sever an illegal contracton
these common law principles because s.25 makes it clear in terms that it
operates
![]()
only
to invalidate limited parts
of
the relevant agreement. The rules
of
severance are not therefore
of
much assistance even by analogy to a determination
of
how much
of
the contract by the Court is required to treat as invalid
or
unenforceable for the purpose
of
s.25. But in carrying
out
that exercise I can see nothing in s.25(1) which prevents the court from looking at the structure
of
the agreement in an
objective
and common sense way.
48. The difficulty I have with Mr McGhee's argument that it is necessaryonly
to remove sub-clause (b)
of
the proviso is that this would treat conditions (a) and (b) as independent and self-sufficient rather than as parts
of
a composite, interdependent proviso under which the landlords must consent to the assignment if the conditions are fulfilled. The removal from the proviso
of
the most important condition from the landlords' point
of
![]()
view
seems to me to call both logically and as a matter
of
drafting for the removal as well
of
the concluding two lines
of
the proviso which apply
only
if "such conditions" are complied with. Mr McGhee accepts that those words have to be changed but submits that his clients should remain entitled to the benefit
of
the requirement
on
the landlords to give consent. That is to create an imbalance in the contractual provisions which in my
view
the legislation was not intended to create unless unavoidable. The far more
obvious
solution which both respects the structure
of
the contract and gives effect to the provisions
of
s.25(1) is to regard, as the judge did, the whole
of
the proviso as being avoided by legislation. This realistically treats the proviso as a complete term
of
the contract (which is what it is) and leaves clause 3.14.6 as a qualified covenant against assignment which can be
operated
according to its terms.
49. For the same reasons, I regard Mr Reynolds'other
argument that the whole
of
clause 3.14.6 should be regarded as invalidated as excessive and I reject it." (emphasis added)
The parties' submissions
(a) The Claimant's submissions
"The contractualobligations
which touch and concern the land having become imprinted
on
the estate, the tenancy is capable
of
existence as a species
of
property independently
of
the contract."
(1) The Lease contains a standard form forfeiture clause providing that the landlord can re-enter if the tenant does not comply with the tenant covenants and that forfeiture clause still exists and is binding on
the Claimant (
or
G1). This is because the forfeiture clause is not a landlord
or
tenant covenant and, in support
of
this proposition, he pointed to section 4
of
the Act. The consequence
of
this, he argued, is that the tenant covenants are "in suspense" against the Claimant (
or
G1). However, notwithstanding this, he accepted that the landlord is quite entitled to forfeit the lease if the tenant covenants are not complied with. Therefore,
on
this analysis (i) the Lease is
vested
in the Claimant, (ii) the Claimant is not under any
obligation
to pay the rent, as the tenant covenant is
void,
but (iii) if the Claimant does not pay any rent, the Defendant can forfeit the Lease.
(2) If the point at (1) above is wrong then, in order
to take a "balanced approach" (per Patten LJ in Tindall Cobham 1
Ltd),
if the landlord cannot enforce the tenant covenants, then the tenant cannot enforce the landlord covenants either.
(b) The Defendant's submissions
Conclusion
(1) T1 is released from the tenant covenants of
the tenancy, as from the assignment: section 5(2)(a).
(2) G1 is released from the tenant covenants of
the tenancy, as from the release
of
T1: section 24(2).
(3) It is the effect and intention of
section 24(2) that "as from the release
of
[T1]", ie
on
the assignment to T2 (formerly G1), G1 should be released from its liabilities as guarantor under the lease.
(4) However, as from the assignment to T2 (formerly G1), T2 becomes bound by the tenant covenants: section 3(2)(a).
The assignment therefore releases G1 from the tenant covenants of
the tenancy but, at the
very
same moment in time, binds G1 (but now as T2) with the tenant covenants
of
the tenancy. In practical terms therefore, there is no release at all for G1 in respect
of
its liabilities under tenant covenants. This is because the liabilities under the tenant covenants are simply re-assumed by the guarantor, but this time as an assignee (and not as a guarantor). Further, the liability re-assumed by G1 as T2 is the
very
same in a case such as the present, where the guarantor is also primarily liable in respect
of
the tenant covenants. The
objective
effect
of
the assignment is that G1 re-assumes precisely the same liability in respect
of
the tenant covenants as a result
of
becoming T2 pursuant to the assignment. It is that consequence which "frustrates" the
operation
of
section 24(2)(b) and the assignment is rendered
void
by section 25(1)(a), an anti-avoidance provision which is to be interpreted generously. The guarantor is therefore absolutely precluded from becoming the assignee,
on
an assignment by the tenant whose tenant covenants he is guaranteeing.
"51. ... [If] theoriginal
tenant and the
original
guarantor are released from liability under the tenancy
on
the first assignment, and the fact that they choose subsequently, namely
on
a further assignment, to reassume liability under the lease cannot be said to "frustrate" their release
on
the first assignment."