Assigning a lease to a guarantor

Commercial Property Solicitor, Lauren Toynton, talks us through assigning a lease to a guarantor.

In many commercial leases, a Landlordlauren-toynton-spire-solicitors-norfolk will require someone to act as a guarantor. The guarantor will become a party to the lease and in effect agrees to vouch for the tenant and accepts the liabilities of the lease on behalf of the tenant. Essentially, if for whatever reason the tenant cannot comply with the obligations under the lease (e.g. overdue rent, damage to the property etc.) then the guarantor will be legally bound to accept such liability.

Previously, parties may well have agreed that where a guarantor was to inherit such liability the guarantor could have the opportunity to become the tenant. In this respect, the lease may be assigned to the guarantor who would then take the role of the new tenant.

However, in a recent High Court ruling ‘EMI Group Limited c O & H Q1 Limited [16 March 2016]’ it was found that a ‘new tenancy’ (being one which was entered into on of after 1 January 1996) could not be assigned to the guarantor. This would result in the assignment being held void, regardless of whether all parties agreed with this course of action.

The legal reasoning for this controversial decision is that the assignment would simultaneously release the guarantor from the tenant liabilities in one capacity, whilst at the same time providing for the guarantor to re-assume that exact same liability (albeit in the form of the tenant). The court took the view that this went against the nature of the Landlord and Tenant (Covenants) Act 1995, and therefore held such assignments to be void.

Ultimately this is now a matter which Lawyers should be considering when acting for their clients, as not only is this an important decision moving forward but also has retrospective application.

It is still to be seen whether this case will prompt legislative change or whether there shall be an appeal, but for now, this is the Law as it stands today.

For more information, please contact Lauren Toynton at our Norwich office on 01603 677077.