EMI Group Ltd v The Prudential Assurance Company Ltd
| Jurisdiction | England & Wales |
| Judge | Penelope Reed |
| Judgment Date | 31 July 2020 |
| Neutral Citation | [2020] EWHC 2061 (Ch) |
| Docket Number | Case No: PT-2019-00982 |
| Court | Chancery Division |
| Date | 31 July 2020 |
[2020] EWHC 2061 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
PROPERTY, TRUSTS AND PROBATE LIST (ChD)
Royal Courts of Justice
Rolls Building, 7 Rolls Buildings
Fetter Lane, London EC4A 1NL
Penelope Reed QC
(Sitting as a Deputy Judge of the High Court)
Case No: PT-2019-00982
Jonathan Seitler QC and Nicholas Taggart (instructed by GSC Solicitors LLP) for the Claimant
John McGhee QC and Maxim Cardew (instructed by Hogan Lovells International LLP) for the Defendant
Hearing dates: 2 nd & 3 rd July 2020
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Penelope Reed QC
Penelope Reed QC:
Introduction
This claim concerns a sublease of premises part of 360/366 Oxford Street/Stratford Place, London W1 (“the Lease”) granted by Sears Properties Netherlands BV to HMV UK Limited on 19 th June 2000 for a term of 25 years commencing on 29 th September 1999. The Lease was later promoted to a headlease and the Defendant (“Prudential”) became the landlord. The Claimant (“EMI”) was the guarantor of the Lease. The parties have helpfully agreed facts and a chronology.
The Claimant guaranteed the tenant's liabilities under the Lease. HMV assigned the Lease to Forever21 (UK) Limited (“Forever21”) on 1 st April 2011. Licence to assign was granted prior to that on 17 th November 2010 (“the Licence”). Under that Licence, a guarantee of the tenant's liabilities was provided by Forever 21 Inc, Forever21's parent company. HMV also provided a guarantee and EMI in turn provided a guarantee of its liabilities although the validity of both guarantees is disputed in these proceedings. The guarantee provided by HMV was stated to be an authorised guarantee agreement ostensibly within section 16 of the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) commonly referred to as an AGA. The guarantee of the obligations under that AGA by EMI was by way of what is commonly referred to as a GAGA. Those terms will be used in this judgment.
On 15 th January 2013 HMV went into administration and was dissolved on 14 th October 2015. On 24 th June 2019 Forever21 failed to pay the rent and service charge under the Lease and on 29 th September 2019 Forever21 Inc (its guarantor) sought a chapter 11 Bankruptcy Protection Order in the State of Delaware. Forever21, the assignee, entered into administration the following day.
Prudential as the current landlord claimed the outstanding rent and service charges from EMI (by way of service of a notice under section 17 of the 1995 Act) and EMI responded by disputing it is bound by the guarantee.
The Proceedings
By part 8 claim form EMI seeks declarations that:-
a. Both the GAGA and the wider guarantee in the Lease of which it forms part are void as they fall foul of section 25 of the 1995 Act;
b. Alternatively, EMI was released from its ongoing obligations under the guarantee and the GAGA on the dissolution of HMV;
c. Alternatively, the benefit of the guarantee did not pass to Prudential when it became landlord.
Mr. Seitler QC who appeared for EMI abandoned the claim to that final declaration in his Reply, having heard the arguments put by Mr. McGhee QC on behalf of Prudential. It seemed to me that he was right to do so and I make no further comment on this head of relief.
By order of Master Clark dated 4 th February 2020 Prudential was given permission to bring a counterclaim by which it seeks the following relief:-
a. A declaration that the GAGA imposed by the Lease is valid;
b. Judgment for sums due from EMI: standing at £4,909,645.81 at the date of the hearing according to the latest evidence.
The central issue is therefore whether EMI is liable under the GAGA contained in paragraph 5.1.1 of Schedule 1 to the Lease. To understand and answer that question it is necessary to have regard to the provisions of the 1995 Act.
The 1995 Act in its nearly quarter of a century of existence has been the subject of a number of cases as to its meaning and effect. Its purpose is clear. Following a Law Commission Report it was enacted “ 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; to restrict in certain circumstances the operation or rights of re-entry, forfeiture and disclaimer and for connected purposes.” In essence it abrogates the common law rule that an original tenant remained bound by the covenants in a lease sometimes long after he had assigned it. I set out some of the salient provisions for the purpose of this judgment below, with some of the most significant provisions highlighted in bold.
Section 5(2) of the 1995 Act provides:-
“If the tenant assigns the whole of the premises demised to him, he—
(a) is released from the tenant covenants of the tenancy, and
(b) ceases to be entitled to the benefit of the landlord covenants of the tenancy, as from the assignment”.
The 1995 Act recognises that if the tenant is to be properly released any guarantor had to be released too so that the guarantor could not seek an indemnity from the tenant. Therefore section 24 (2) of the 1995 Act provides:-
“Where—
(a) by virtue of this Act a tenant is released from a tenant covenant of a tenancy, and
(b) immediately before the release another person is bound by a covenant of the tenancy imposing any liability or penalty in the event of a failure to comply with that tenant covenant,
then, as from the release of the tenant, that other person is released from the covenant mentioned in paragraph (b) to the same extent as the tenant is released from that tenant covenant”.
Section 25 of the 1995 Act contains an anti-avoidance provision preventing landlords, tenants and guarantors from attempting to circumvent the provisions of the Act. It has been described as a “ comprehensive anti-avoidance provision” (by Lord Nicholls in London Diocesan Fund v Pithwa [2005] 1 WLR 3956 at para 14) and as it is of central importance to this case merits it being set out in full:-
“(1) Any agreement relating to a tenancy, is void to the extent that—
(a) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act, or
(b) it provides for—
(i) the termination or surrender of the tenancy, or
(ii) the imposition on the tenant of any penalty, disability or liability, in the event of the operation of any provision of this Act, or
(c) it provides for any of the matters referred to in paragraph (b)(i) or (ii) and does so (whether expressly or otherwise) in connection with, or in consequence of, the operation of any provision of this Act.
(2) To the extent that an agreement relating to a tenancy constitutes a covenant (whether absolute or qualified) against the assignment, or parting with the possession, of the premises demised by the tenancy or any part of them—
(a) the agreement is not void by virtue of subsection (1) by reason only of the fact that as such the covenant prohibits or restricts any such assignment or parting with possession; but
(b) paragraph (a) above does not otherwise affect the operation of that subsection in relation to the agreement (and in particular does not preclude its application to the agreement to the extent that it purports to regulate the giving of, or the making of any application for, consent to any such assignment or parting with possession).
(3) In accordance with section 16(1) nothing in this section applies to any agreement to the extent that it is an authorised guarantee agreement; but (without prejudice to the generality of subsection (1) above) an agreement is void to the extent that it is one falling within section 16(4)(a) or (b).
(4) This section applies to an agreement relating to a tenancy whether or not the agreement is—
(a) contained in the instrument creating the tenancy; or
(b) made before the creation of the tenancy”
The reference in sub-section 25(3) to an AGA refers back to section 16 of the 1995 Act which provides that nothing will prevent a tenant released from a tenant covenant entering into an AGA provided that it complies with section 16 which provides:-
“(1) Where on an assignment a tenant is to any extent released from a tenant covenant of a tenancy by virtue of this Act (“the relevant covenant”), nothing in this Act (and in particular section 25) shall preclude him from entering into an authorised guarantee agreement with respect to the performance of that covenant by the assignee.
(2) For the purposes of this section an agreement is an authorised guarantee agreement if—
(a) under it the tenant guarantees the performance of the relevant covenant to any extent by the assignee; and
(b) it is entered into in the circumstances set out in subsection (3); and
(c) its provisions conform with subsections (4) and (5).
(3) Those circumstances are as follows—
(a) by virtue of a covenant against assignment (whether absolute or qualified) the assignment cannot be effected without the consent of the landlord under the tenancy or some other person;
(b) any such consent is given subject to a condition (lawfully imposed) that the tenant is to enter into an agreement guaranteeing the performance of the covenant by the assignee; and
(c) the agreement is entered into by the tenant in pursuance of that condition.
(4) An agreement is not an authorised guarantee agreement to the extent that it purports—
(a) to impose on the tenant any requirement to guarantee in any way the...
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