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NOVOSTI August 2016 Real Estate

REAL ESTATE AUGUST 2016

ASSIGNMENT OF YOUR “NEW TENANCY” LEASE TO YOUR GUARANTOR: A WORD OF CAUTION TO TENANTS

Most commercial leases granted to tenants have provisions that someone (usually an individual) will guarantee the tenants performance of the lease covenants; in other words, someone to act as a surety for the tenant (personal guarantor). If the tenant breaches the covenants of the lease – for example if the tenant does not pay rent, the landlord can hold the guarantor to account.

It is often the case that most tenants struggling to meet the provisions of the lease and assign the lease to their guarantors-mostly with the consent of the landlord. This is a very common practice with commercial leases. The High Court judgement in the case EMI Group Limited V O & H Q1 Limited (16th March 2016) is important for lease tenants in the sense that it precludes the tenants from being able to assign their leases to their guarantors even in a case where the landlord consents to the assignment. The Court took the view that guarantors should be released from their liabilities on assignment of a lease to a third party. The court held that that scenario was contrary to the anti-avoidance provision in the Landlord and Tenant (Covenants) Act 1995.

The Court has decided that a tenant cannot assign a “new tenancy”- one entered into on or after 1 January 1996 – to his guarantor. Any such purported assignment is of no effect and the assignor remains the tenant and the guarantor continue in its role to guarantee the tenant’s obligations in the lease. The tenant remains a tenant and the guarantor continues to perform his or her duties of a guarantor. If the tenant assigns his or her tenancy agreement to a third party, the guarantor is released from his obligations but the tenant is not.

In conclusion, it is important to emphasise that the decision should be understood first of all by landlords. If the tenant does not fulfil his or her obligations under the tenancy agreement, he cannot assign the agreement to the guarantor. Moreover, when the tenancy agreement is assigned to a third party, the guarantor is released from his or her obligations as the guarantor.

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