How to hit "Undo" on an Unlawful Assignment

How can parties undo an unlawful assignment so that the original parent company guarantor remains on the hook?

The original actions involving UK Leasing Brighton v Topland Neptune; Zinc Cobham 1 v Adda ( [2015] EWHC 53 (Ch)) found that various assignments to group companies were unlawful – they were completed without landlord’s consent. The leases provided for the existing parent company guarantor to guarantee the assignee group company’s obligations. Following K/S Victoria Street v House of Fraser [2011] All ER (D) 262 (Jul) this was void under the Landlord and Tenant (Covenants) Act 1995 ( LT(C)A 1995).

The result

The leases vested in group company assignee (T2) who became liable under the tenant covenants in the lease but the assignment was in breach of covenant and the assignor (T1) and the guarantor (G) were not released under LT(C)A 1995 from their liabilities in relation to the tenant covenants in the lease.

Finding a solution

Both parties wanted to rewind the situation so that the leases were again vested in T1 with its obligations again guaranteed by G but disagreed on how to proceed:

• The landlords suggested simply T2 re-assigning to T1 with G giving a fresh guarantee of T1’s obligations under the lease. The tenants argued those steps would be invalidated by LT(C)A 1995, arguing the fresh guarantee would be void.
• The tenants’ favoured T2 assigning to an associated company (Newco). Then (a day or so later), Newco assigning to T1 with G entering into a fresh guarantee of T1’s obligations under the lease. - the landlords worried that the tenants’ might not carry through all the steps.
• One possible solution was an agreement binding all relevant parties, prior to the assignment by T2 to Newco, obliging the parties to follow through all the steps needed to re-vest the term in T1, with the benefit to the landlord of G’s guarantee- both parties were concerned that this would be invalid under LT(C)A 1995.

The parties sought declaratory relief from the High Court as to how they should proceed.

What did the court decide?

T2 could assign directly to T1 with T1’s obligations being guaranteed by G.

Why?

T2 is released from the tenant covenants on assignment to T1-T1 is released from the tenant covenants entered into at the time the lease was granted to T1 (as this is a subsequent lawful assignment)-G is released from the earlier guarantee which it gave as it is released to the same extent as T1 and on the re-assignment to T1, T1 again becomes bound by the tenant covenant. A re-imposed fresh guarantee by G did not frustrate the operation of LT(C)A 1995. It was analogous to the reasoning in K/S Victoria Street – a guarantor can guarantee an assignor’s obligations under an AGA.

What about using Newco?

Although not necessary to do so, the court commented on the tenants’ proposal to assign the lease first to Newco and then to T1. The initial assignment to Newco would be permitted under LT(C)A 1995 . G would be released on the assignment to Newco and could thereafter, on the subsequent assignment by Newco to T1 (just like any other assignee), enter into a guarantee in relation to that assignee. But if the landlord required to a binding commitment in the form of an agreement from Newco, T1 and G, prior to or as part of it giving consent to the assignment to Newco, that the further assignment to T1 would take place with a fresh guarantee being given by G, this  would fall foul of LT(C)A 1995 as G will have agreed to commit itself again as guarantor before it was released on assignment to Newco. Following K/S Victoria Street this would frustrate the operation of LT(C)A 1995.

What about assigning to G?

The court also considered the scenario T2 assigning to G followed by an assignment by G to T1, guaranteed by a fresh guarantee from G without any commitment prior to the assignment to G that the assignment to T1 (and the fresh guarantee by G) would be entered into. They did not think the fresh guarantee raised a problem as this could be an AGA. But an obiter (and somewhat tentative) remark in K/S Victoria Street that a lease could not be assigned to a guarantor - even where both the tenant and the guarantor wanted it - raised a question mark as to whether assignment to G was possible. The court declined to consider the matter further as it had not been asked to rule on the point and would have required further argument.

So what’s the practice point?

This decision at gives parties a way out  where there has been an unlawful assignment – they can reverse the assignment and reinstate the original guarantor without falling foul of K/S Victoria Street. For related articles on Purpose Built see Has the court of appeal provided clarity on the construction of covenants against assignment to group companies? Subscribers to Lexis®PSL Property can find a fuller review on the news feed on the PSLProperty landing page - Unravelling Tindall Cobham written by Joanna Bhatia, solicitor in the Lexis®PSL Property team first published on LexisPSL Property on 19 January 2015 2015.   Otherwise, click  here for a free one week trial of Lexis®PSL Property.