Summary

Where a lease had been assigned by a tenant in breach of covenant, a re-assignment of the lease back to the original tenant, together with the guarantor of the original tenant's obligations giving a fresh guarantee, would not be invalidated by the Landlord and Tenant (Covenants) Act 1995 s.25 as having the effect of frustrating the operation of the Act.

Facts

The court was required to determine whether certain transactions by tenants, landlords and guarantors would be effective under the Landlord and Tenant (Covenants) Act 1995.

The transactions involved the grant of a lease to the original tenant (T1). T1's obligations under the lease were guaranteed by a guarantor (G). The lease was a new tenancy within the 1995 Act. T1 assigned the term of the lease to another tenant (T2). The assignment was a breach of a covenant in the lease but was nevertheless effective to vest the term of the lease in T2, and T2 became liable under the tenant covenants in the lease under s.3(2)(a). Because the assignment was in breach of covenant, it was an "excluded assignment" within s.11. Accordingly under s.11(2)(a) T1 as the original lessee was not released from the tenant covenants pursuant to s.5(2)(a), and G as the guarantor was not released under s.24(2) in relation to the tenant covenants in the lease. Because the assignment by T1 to T2 was a breach of covenant the parties did not want to leave the position as it was. The landlords proposed that T2 should re-assign the lease to T1 and G should give a fresh guarantee of the tenant obligations. They said that those steps would not be invalidated by the 1995 Act. The tenants contended that the fresh guarantee by G would be void. They proposed an assignment by T2 to a new company (N) followed by a further assignment from N to T1 and a fresh guarantee by G. The landlords were concerned that all the steps might not be carried out and did not wish the lease to be assigned to N unless they could be certain that it would then be assigned by N to T1. A possible solution was an agreement obliging the parties to follow through all the steps, but that gave rise to the question whether such an agreement would be invalidated by the Act. The parties sought declaratory relief as to the validity of the proposed courses of action.

Held

(1) The steps proposed by the landlords would have the following effect under the 1995 Act: T2 would be released from the tenant covenants, by virtue of s.5(2)(a); T1 would be released from the tenant covenants entered into when the lease was originally granted to it, by virtue of s.11(2)(b); G would be released from the earlier guarantee which it gave, under s.24(2); on the assignment back to T1 it would be bound by the tenant covenants under s.3(2)(a). If G was released from its original obligations under its original guarantee but entered into a fresh guarantee in relation to the tenant covenants, then G was released "to the same extent" as T1 was released within the wording of s.24(2). Section 24(2) took effect in accordance with its terms and the re-imposition of guarantee liability would not be invalidated by s.25 as having the effect of frustrating the operation of the Act, K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904, [2012] Ch. 497 applied. Accordingly it was open to the parties to proceed with an assignment by T2 to T1 with T1's obligations being guaranteed by G (see paras 21-22, 30-33 of judgment). (2) It was not necessary to decide on the validity of the alternative route of an assignment by T2 to N. However, it appeared that that route would be invalidated by s.25. Before G was released on the assignment to N, it would be required to agree that it would commit itself again as a guarantor, not on the assignment to N but shortly thereafter on the assignment by N to T1, which they would contract to effect. In view of the meaning given in Victoria Street to the phrase "otherwise frustrate the operation of any provision of this Act", the suggested agreement would frustrate the operation of s.24(2) (paras 34-38).

Declaration granted