It has been common practice in the property industry for tenants to assign their leases to their guarantors, either as part of inter-group transfer or simply an agreement between the parties which permits the Landlord to maintain a strong covenant.

On 16 March 2016, the High Court in EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch) ruled that such assignments are no longer possible.

The EMI case provides that any assignment of a lease (entered into after 1 January 1996) by a tenant to its guarantor is void.

If you are a landlord, tenant, guarantor or a sub-lessee of a lease in these circumstances, you should take immediate steps to regularise your legal position.

What are the likely consequences of this ruling?

  1. You cannot assign a lease from a current tenant (T1) to its guarantor (G1).
  2. As the assignment is void, it is as if it never happened. Therefore if the tenant (T1) assigns its lease to its guarantor (G1), that transaction never happened as a matter of law and T1 remains the tenant and is and remains liable for all of the obligations under the terms of the lease.
  3. The position is slightly different where the lease has been registered. Where the guarantor (G1) has been registered at the Land Registry as leasehold owner, due to the provisions of the Land Registration Act 2002, G1 is the legal owner. However, as the transaction is void, he holds the legal estate on bare trust for the previous tenant (T1). He is therefore potentially liable to pay all rent received from sub-tenants etc. to T1.
  4. As the judgment states what the law has always been, the assignment from T1 to G1 has always been void. This means that G1 will have been paying the rent and other charges under the lease in circumstances where they were not tenant. Depending on the factual background to these payments, there may be claims that can be made by the guarantor.

Given that the decision has only been recently made, it is difficult to ascertain how the property industry will deal with the potential consequences outlined above. However, the ruling means that landlords, tenants, guarantors and sub-tenants are all left in a state of uncertainty and will need to take swift action to regularise their legal position.