EMI Group Ltd v O & H Q1 Ltd
| Jurisdiction | England & Wales |
| Judge | Miss Amanda Tipples |
| Judgment Date | 16 March 2016 |
| Neutral Citation | [2016] EWHC 529 (Ch) |
| Court | Chancery Division |
| Date | 16 March 2016 |
| Docket Number | Case No: HC-2015-001165 |
[2016] EWHC 529 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Rolls Building,
Fetter Lane,
London, EC4A 1NL
Miss Amanda Tipples QC
Case No: HC-2015-001165
Mr J Seitler QC (instructed by GSC Solicitors LLP) for the Claimant
Mr K Reynolds QC (instructed by Clarke Willmott LLP) for the Defendant
Hearing date: 1 December 2015
Miss Amanda Tipples QC:
Introduction
The Landlord and Tenant (Covenants) Act 1995 ("the Act") came into force just over 20 years ago on 1 January 1996. The long title to the Act explains that it is:
"to make provision for persons bound by covenants of a tenancy to be released from such covenants on the assignment of the tenancy, and to make other provision with respect to rights and liabilities arising under such covenants …".
The Act implemented, albeit with significant alterations, the recommendations made by the Law Commission in its report Landlord and Tenant Law: Privity of Contract and Estate (1988) (Law Com No. 174) and represented a major change in the law.
The background to the Act is explained in a number of well known decisions: Wallis Fashion Group Ltd v CGU Life Assurance 81 P&CR 393, Neuberger J at [3]–[5], [21]; London Diocesan Fund v Phitwa (Avonridge Property Co Ltd, Part 20 defendant) [2005] 1 WLR 3956, HL at [10]–[11] per Lord Nicholls of Birkenhead, and at [37]–[39] per Baroness Hale of Richmond; Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426, Newey J at [11]–[13]; and K/S Victoria Street v House of Fraser (Stores Management) Ltd [2012] Ch 497, CA (Lord Neuberger of Abbotsbury MR, Thomas, Etherton LJJ) at [14] to [16].
The Act applies to the lease in this case and, in November 2014, that lease was assigned by the original tenant to its existing guarantor. This gives rise to the two issues I have to decide, namely:
(1) whether the Act precludes the guarantor of an assignor from becoming the assignor's assignee (or, using the terminology used in some of the cases, whether the guarantor (G1) of the tenant (T1) is precluded from becoming the assignee of the tenancy (T2)); and
(2) if this arrangement is precluded by the Act, to what extent are the agreements which purport to give effect to it avoided by section 25(1) of the Act.
The Claimant is the guarantor of the original tenant. It maintains that the lease has been assigned to it by the original tenant, so that it is now the tenant. However, the Claimant's case is that, although the legal interest in the tenancy is now vested in it as the assignee of the lease, the tenant's covenants in the lease are void by reason of sections 24(2) and 25(1) of the Act. The Defendant is the landlord. It maintains that this arrangement between the tenant and its guarantor is not precluded by the Act but, if it is, the consequence is that the assignment of the tenancy by the original tenant to its guarantor is rendered void by the Act. Before me the guarantor was represented by Mr Jonathan Seitler QC and the landlord was represented by Mr Kirk Reynolds QC.
The conclusion I have reached is that a tenant is precluded under the Act from assigning the tenancy to its guarantor and any agreement which seeks to give effect to such an arrangement is void by reason of section 25(1) as it frustrates the purpose of the Act. This means that, on an assignment by T1, G1 cannot become T2.
The reasons are set out below. However, I first of all need to say something about the facts of this particular case (which are not controversial) and then explain the relevant provisions of the Act, together with the few but important cases in which these provisions have been considered.
Relevant facts
By a Lease dated 26 September 1996 ("the Lease") CHB Group Ltd (company number 2356570) as landlord granted to HMV UK Ltd ("the tenant") a tenancy for a term, starting on 24 June 1996 and expiring on 3 February 2021, of retail premises known as 88/89 High Street and Unit 31, Chapel Walk, Crowngate Centre, Worcester. The Lease is a standard form lease of retail premises and it is not suggested that there is anything unusual or remarkable about the terms of it. The Lease, as mentioned above, is a "new tenancy" to which the Act applies.
On the same date a Deed of Guarantee ("the Guarantee") was entered into between EMI Group Plc (which is the Claimant, now known as EMI Group Ltd) as guarantor. By Clause 2.1 of the Guarantee the guarantor, in consideration of the landlord granting the Lease to the tenant, unconditionally and irrevocably covenanted with and guaranteed to the landlord:
"that until the Tenant is released from liability by section 5 of the Landlord and Tenant (Covenants) Act 1995 the Tenant will pay and discharge the Secured Obligations [defined to mean the obligation to pay all sums from time to time due or expressed to be due to the Landlord from the Tenant under the Lease and to perform all other obligations which from time to time are or are expressed to be obligations of the Tenant under the Lease] when the same fall due or are expressed to fall due under the Lease for payment and discharge."
Clause 2.4 of the Guarantee provided that:
"The guarantee and covenant contained in clause 2.1 shall impose upon the Guarantor the same liability as if the Guarantor were itself the principal debtor in respect of the Secured Obligations and such liability shall continue notwithstanding (and shall not be discharged in whole or in part or otherwise affected by): (a) any forbearance by the Landlord to enforce against the Tenant its covenants in the Lease; (b) the giving of time or other concessions or the taking or holding of or varying realising releasing or not enforcing any other security for the liabilities of the Tenant; … and for the purposes of this clause 2 the Tenant shall be deemed to be liable to continue to pay and discharge the Secured Obligations notwithstanding any of the above matters and any money expressed to be payable by the Tenant which may not be recoverable from the Tenant for any such reason shall be recoverable by the Landlord from the Guarantor as principal debtor."
At some point in time CHB Group Ltd assigned its interest in the Lease to the Defendant, O & H Q1 Ltd (company number 05277211).
On 15 January 2013 the tenant, by then known as Record Shop 1 Ltd, went into administration.
On 28 November 2014 a Licence to Assign was entered into, by which licence was given by the Defendant to the tenant to assign the Lease to the Claimant (referred to in the Licence to Assign as "the Assignee"). The Defendant's unchallenged evidence, set out at para 4.3 of Bonnie Martin's witness statement is that:
"it was the Claimant itself (which was then bound as Guarantor under the Deed of Guarantee) which suggested to the Defendant that there should be an assignment of the Lease to the Claimant with the expressed intent that the obligations of the Claimant as Guarantor should, by virtue of the assignment itself, be replaced by the tenant obligations under the Lease, at the same time as the Original Tenant was released from the tenant obligations by operation of the Act."
I mention this piece of evidence because at one point the Claimant submitted that the Defendant landlord "brought the present situation all on itself" as it could have refused consent to the assignment on the basis that the assignment would be to a party, the Claimant, who would not be bound by the tenant covenants. This contention seems somewhat unfair in the light of Ms Martin's evidence and, to the extent it is of any relevance, I do not accept it.
By Clause 4.1 of the Licence to Assign the Claimant, as Assignee, covenanted with the Landlord:
"at all times after the completion of the Assignment throughout the residue of the Term or until it is released from its covenants pursuant to the 1995 Act to pay the rents and all other sums payable under the Lease and to observe and perform all the covenants and conditions on the lessee's part contained in the Lease."
On the same day by a Deed of Assignment made by the tenant, the Claimant and the tenant's administrators, the Lease was assigned to the Claimant. Also on 28 November 2014 an Underlease was granted by the Claimant to a new company, HMV Retail Ltd, for a term starting on the date of grant and expiring on 31 January 2017. The rent is £226,450 per annum, the same amount as that passing under the Lease.
On 18 December 2014 the Claimant's solicitors wrote to the Defendant's solicitors stating that that, although the assignment of the Lease and the grant of the Underlease were valid, the tenant's covenants in the Lease could not be enforced against the Claimant. They relied on para [37] of the Court of Appeal's decision in K/S Victoria Street in support of this proposition. On 4 March 2015, the Defendant's solicitors responded to this letter setting out their reasons why this argument was wrong.
On 11 March 2015 the Claimant issued this claim seeking a declaration that the Lease has "as a matter of law vested in the Claimant by assignment and by operation of law, the tenant covenants thereunder are void and cannot be enforced against the Claimant." On 7 May 2015 the Defendant issued an application seeking permission to bring a counterclaim for alternative declarations, together with a declaration based on mistake in the event a declaration is made in terms set out in the claim form.
By a consent order sealed on 2 June 2015 Master Clark directed the trial of the following preliminary issue, namely "Whether the court should declare that, for the purposes of [the Act]:
(1) (as sought by the Claimant) the Lease has as a matter of law vested in the Claimant by assignment, and by operation of law the tenant covenants therein are void and cannot...
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