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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> EMI Group Ltd v O & H Q1 Ltd  EWHC 529 (Ch) (16 March 2016)
Cite as:  Ch 586,  3 WLR 269,  EWHC 529 (Ch),  L &TR 14,  WLR(D) 150
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London, EC4A 1NL
B e f o r e :
| EMI GROUP LIMITED
- and –
|O &H Q1 LIMITED
Mr K Reynolds QC (instructed by Clarke Willmott LLP) for the Defendant
Hearing date: 1 December 2015
Crown Copyright ©
Miss Amanda Tipples QC:
"to make provision for persons bound by covenants of 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.
"that until the Tenant is released from liability by section 5 of 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 respect of 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 Deed of 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 completion of 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]."
(a) Section 5
"5. Tenant released from covenants on assignment of tenancy.
(1) This section applies where a tenant assigns premises demised to him under a tenancy.
(2) If the tenant assigns the whole of the premises demised to him, he –
(1) is released from the tenant covenants of the tenancy, and
(2) ceases to be entitled to the benefit of the landlord covenants of the tenancy,
as from the assignment."
"The mischief at which the [Law] Commission's recommendations were aimed was the continuation of 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 practice of any such exit route…"
(b) Section 24(2)
"(2) Where –
(a) by virtue 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 covenant of the tenancy imposing any liability or penalty in the event of a failure to comply with that tenant covenant,
then, as from the release of 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 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."
4.53 The position of 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 Most of 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 his obligations 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. Agreement void if it restricts operation of the Act.
(1) Any agreement relating to a tenancy, is void to the extent that –
(1) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act, or
(2) it provides for –
(i) the termination or surrender of the tenancy, or
(ii) the imposition on the tenant of any penalty, disability or liability,
in the event of the operation of any provision of this Act, or
(3) it provides for any of 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 generality of 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 whether or not the agreement is –
(a) contained in the instrument creating the tenancy; or
(b) made before the creation of 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 an obligation 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 renewal obligation 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 purpose of 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  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 avoidance of 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 for Victoria] 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 matter of 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 foul of 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 may often 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  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 guarantee of 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 terms of 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 freely offered by the guarantor and a guarantee insisted upon by the landlord:  – ;
(6) there was no distinction as to the effect of the 1995 Act on an agreement to give the guarantee and a guarantee actually given: ;
(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:  – .
(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 again on a subsequent assignment: ;
(9) the proposition in (8) above applies not only 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; ."
"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. Transmission of benefit and burden covenants.
(1) The benefit and burden of 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 pass on 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 covenants of 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 benefit of 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 purposes of 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. Privity of Estate
(i) Covenants enforceable by landlord and tenant and their successors
2.20. Covenants in leases may be divided into two groups:
(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 personal or collateral obligations.
Most leases probably impose obligations 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 the original 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 landlord or 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 terms of 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 with our 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 would operate 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 into on 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 term of 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 : "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 release of 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. The other 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  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 left open 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 liable on 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 logic ought 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 Company of 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 , 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 notice of any such assignment within 10 Working Days of completion of the same;
(b) that on 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 arguments on 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  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 contract on 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 necessary only 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 contractual obligations 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
(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] the original 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."