Tenants Cannot Assign Leases to Their Own Guarantors
In a decision that clarifies a problem area of the law and will be required reading for commercial property professionals, the High Court has ruled that it is not legally possible for a tenant to validly assign a lease to a guarantor of that lease.
The case concerned a retail shop which had been let by company A to company B, with company C standing as the latter's guarantor. After company B went into administration, the lease was purportedly assigned 'with company A's consent' to company C. A dispute later arose as to whether the assignment was valid and whether company C was bound by various covenants under the lease.
In ruling in company A's favour, the Court found that, by operation of Section 25(1) of the Landlord and Tenant (Covenants) Act 1995, a tenant is precluded from assigning a lease to its guarantor and that any agreement which seeks to give effect to such an arrangement is void. The Court concluded that the lease was still vested in company B and that company C remained bound by its guarantee.