EMI Group Ltd v O & H Q1 Ltd

B e f o r e :

MISS AMANDA TIPPLES QC ____________________

____________________

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 ____________________

HTML VERSION OF JUDGMENT ____________________

Crown Copyright ©

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:

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:

Clause 2.4 of the Guarantee provided that:

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:

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:

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 be enforced against the Claimant; or

(2) (as sought by the Defendant) notwithstanding that the Lease has been vested in the Claimant, the tenant covenants therein are valid and can be enforced against the Claimant; or

(3) (as sought by the Defendant in the alternative) the purported assignment of the Lease to the Claimant is void and of no effect, with the result that the Lease remains vested in the Original Tenant, and that the Claimant remains bound as Guarantor of the Original Tenant's obligations under the Lease by virtue of [the Guarantee] and has not been released from its obligations under the Deed of Guarantee by the operation of [the Act]."

On 6 July 2015 the tenant's Administrators filed notice to move from administration to dissolution and the tenant was duly dissolved on 14 October 2015. The Lease is now vested in the Crown as bona vacantia. In relation to the alternative declaration sought by the Defendant, it is also relevant to mention that in 2015 the Defendant gave written notice to the Claimant pursuant to clause 3.1 of the Guarantee that the Defendant, as landlord, required the Claimant, as Guarantor, to take a new Lease of the Premises.

The Act

(a) Section 5

Sections 5(1) and (2) provide:

Section 28 provides that "tenant covenant", in relation to a tenancy, means a covenant falling to be complied with by the tenant of premises demised by the tenancy and "covenant" includes term, condition and obligation, and references to a covenant (or any description of covenant) of a tenancy include a covenant (or covenant of that description) contained in a collateral agreement.

Section 5 only applies to "new tenancies", being tenancies granted on or after 1 January 1996, the date the Act came into force: sections 1(1) and 1(3).

In London Diocesan Fund Baroness Hale of Richmond (who was a member of the Law Commission at the time of the report) explained that (para [39]):

In K/S Victoria Street Lord Neuberger of Abbotsbury MR (giving the judgment of the court) said that "this aim is centrally achieved through section 5, subsection (2)(a)" (para [16]). In London Diocesan Fund Lord Nicholls described sections 5 to 8 of the Act as "relieving provisions" and in relation to these provisions:

However, if an assignment has been made in breach of covenant or by operation of law then section 5 does not have any effect in relation to that assignment: section 11(2)(a).

The only exception to the operation of section 5 (and also section 24(2), set out below) is an authorised guarantee agreement or AGA under section 16 under which the existing tenant whose covenants would be released under section 5 agrees to guarantee the performance of those covenants by the assignee only until any subsequent assignment of the lease: section 25(3). However, the issues in this case do not concern AGAs.

(b) Section 24(2)

Section 24(2) is concerned with the position of any party, other than a tenant, who is bound by any of the tenant's covenants in a tenancy (see K/S Victoria Street at para [17]). This sub-section provides:

At para [24] of K/S Victoria Street the Court of Appeal explained that:

Further, just as section 5 is intended to benefit tenants, section 24(2) is intended to benefit guarantors: K/S Victoria Street at para [37] (p. 511D). It is therefore a "relieving provision" and, applying by analogy what was said by Lord Nicholls in London Diocesan Fund , the guarantor "should have an exit route from his future liabilities" which "cannot be ousted".

The background to this is explained at paras 4.53 to 4.55 of the Law Commission's report:

The Claimant in this case is not simply a guarantor, but is also a principal debtor with primary liability in respect of the obligations under the Lease: see clause 2.4 of the Guarantee set out at paragraph 10 above.

(c) Section 25

Section 25, so far as material, provides:

Section 25 is, as Lord Nicholls explained in London Diocesan Fund , a "comprehensive anti-avoidance provision" which is "of course to be interpreted generously, so as to ensure the operation of the Act is not frustrated, either directly or indirectly" (paras [14] and [18]).

Section 25(1)(a) was considered in detail by the Court of Appeal in K/S Victoria Street . In that case the claimant, referred to in the judgment as "Victoria", had agreed to purchase the freehold of a large department store from the then freehold owner, House of Fraser (Stores Management) Ltd, referred to in the judgment as "Management", which was a subsidiary of House of Fraser plc, referred to in the judgment as "HoF". The agreement provided that, immediately upon completion of the purchase, Victoria would grant, and Management would accept the lease, with HoF acting as guarantor of Management's liabilities. Victoria did not regard Management as a satisfactory tenant and the parties agreed that the lease would be assigned to another company within the HoF group (with the default position being that the lease should be assigned to a company referred to in the judgment as "Stores") and, in relation to that assignment, HoF would enter into a deed of guarantee of that assignee's liabilities as surety. The obligation of HoF to enter into a further guarantee was recorded in clause 3.5(iii) of the agreement. The lease was not assigned and remained vested in Management. The claimant, Victoria, contended that it should be assigned to Stores, with HoF renewing its guarantee "pursuant to its apparent obligation to do so under clause 3.5(iii)". Management and HoF contended that clause 3.5(iii) was unenforceable and refused to effect the assignment to Stores.

Victoria then brought proceedings, seeking an order that the lease be assigned to Stores with HoF as guarantor of Stores' liability. The defendants' contention was that clause 3.5(iii) was rendered void by section 25(1)(a), as it would "frustrate the operation" of section 24(2)(b). The defendants' argument is recorded at para [20] of the judgment of the Court of Appeal:

The Court of Appeal held that this argument was correct (para [21]), and the reasons for doing so are set out at paras [21] to [29] of the judgment of the court. Lord Neuberger explained:

Pausing there, Mr Seitler, counsel for the Claimant, submitted that there is no distinction to be drawn between the example given by Lord Neuberger in the first four lines of para [21], and the present situation. This is because the Claimant is the tenant's guarantor falling within (a) and, in relation to (b), the Claimant guarantor having become the tenant, will be liable as the assignee, and the landlord can enforce that obligation, which is the very same obligation it had as guarantor before the assignment. Further, he submitted it does not make any difference whether the landlord's requirement that the tenant's guarantor provide the guarantee has been agreed in advance, or whether the request for such a requirement had been made "spontaneously" (by which I think he meant "freely offered" by the assignor and guarantor), as this point had been resolved in K/S Victoria Street . He therefore submitted, in this case, there was a "renewal", but not a "renewal obligation" as such.

Returning to the judgment in K/S Victoria Street, Lord Neuberger continued:

The claimant, Victoria, ran two arguments against this conclusion. The first argument, recorded at para [26] of the judgment, was that the purpose of section 24(2) was "solely to ensure that the release of a tenant under section 5(2) was effective", so that the tenant's guarantor is unable to "to seek through subrogation an indemnity from the tenant as the principal creditor, even though the tenant had been released from primary liability" and on that basis "a provision such as clause 3.5(iii), or indeed a renewal obligation, does not "frustrate" the purpose of section 24(2)". This argument was rejected by the Court of Appeal on the following basis:

Victoria's second argument was that, on the unusual facts of the case, section 25(1)(a) should not apply. In particular, Victoria's counsel pointed to the fact that the parties did not have any intention of evading the provisions of the Act (para [28]). The Court of Appeal expressed "considerable sympathy" with this second argument. However, it was also rejected. This was explained by Lord Neuberger at para [29]:

The Court of Appeal then said that the discussion, which I have set out above, was "enough to dispose of Victoria's appeal". However, it then went on to consider the reasoning and decision of Newey J in Good Harvest because, amongst other things, the decision in Good Harvest seemed to have led to some controversy and uncertainty in the field of landlord and tenant.

At para [34] Lord Neuberger said:

Lord Neuberger then said "what is less clear, however, is how much further the ambit of section 25(1) goes". He then turned to two interpretations of section 25(1) which he referred to as "interpretation (i)" and "interpretation (ii)". Interpretation (i) was the interpretation given by Newey J to section 25(1) in Good Harvest "which meant that [section 25(1)] invalidated any agreement which involves a guarantor of the assignor guaranteeing that assignor's assignee". The alternative interpretation, interpretation (ii), is that "section 25(1) only invalidates such an agreement if it was entered into at the insistence of the landlord". The Court of Appeal began by considering this issue without regard to AGAs.

Lord Neuberger continued:

The advantages and disadvantages of interpretation (i) having been identified, Lord Neuberger then turned to interpretation (ii):

So the Court of Appeal had to choose between interpretations (i) and (ii). The court chose interpretation (i), but subject to a very important qualification, which relates to AGAs under section 16, and "removes most of the unsatisfactory commercial consequences to which interpretation (i) appears otherwise to give rise" (para [44]). Interpretation (i) was chosen because it leads to "a clear and simple position" and "avoids argument … as to whether [the guarantee] had really been insisted on by the landlord or freely offered by the assignor" (para [38]). That was even though interpretation (i) gives the Act "an unattractively limiting and commercially unrealistic effect" (para [36]). The decision of Newey J in Good Harvest was therefore correct.

In UK Leasing Brighton Ltd v Topland Neptune Ltd [2015] EWHC 53 (Ch) Morgan J summarised the other propositions established by K/S Victoria Street as a result of interpretation (i) as follows (para [15]):

Therefore, having accepted interpretation (i) of section 25(1) as the correct approach, one of the consequences of that interpretation was identified as follows (per Lord Neuberger at para [37]):

The focus of the argument before me has been whether, on the correct interpretation of the Act, this statement is actually correct. This point was raised, but not decided, in UK Leasing Brighton Ltd at paras [28] to [30] and [41]. It is, of course, important to consider the statement in the context in which it was made and, for that reason, I have set out in some detail above the relevant passages from the judgment of K/S Victoria Street .

Before I turn to the facts of UK Leasing Brighton Ltd , I need to set out the provisions of section 3 of the Act.

(d) Section 3

Sections 3(1), (2) and (4) provide:

The background to section 3 is also explained in the Law Commission's report. The law as it then stood in relation to covenants in leases is set out at para 2.20 (p. 8):

The Reform Proposals are set out at Part IV of the report. At para 4.1 (p. 19) the Law Commission explains that their proposals for reform recognise the importance of two principles:

There is then a section entitled "General" in Part IV of the report (p. 27). The first part of this section deals with the "distinction between covenants" and explains:

The tenth recommendation in the summary on p. 33 of the report was that "the distinction between lease covenants which touch and concern the land and those which do not should be abolished". Mr Seitler relied on these passages from the Law Commission report and submitted that the purpose of section 3 is to enable the Act to provide a "complete and self-contained framework" so that the Act applies to all landlord and tenant covenants. Section 3 is not, he submitted, directed at the main thrust of the Act, which is that a tenant or any other person who is associated with the tenant's liability should not remain liable under a tenancy after the tenant has been released from his liability.

Indeed, section 3 is not referred to in the arguments, or in the decision of the court, in K/S Victoria Street . This is perhaps not surprising given that the issue in that case was about imposition of a renewal obligation on the tenant's guarantor, and not about the consequences of an assignment on the assignee of the lease. In the course of his submissions Mr Reynolds accepted that section 3 was part of the "tidying up", which took place as part of the reforms recommended by the Law Commission in its report.

In UK Leasing Brighton Ltd a lease, to which the Act applied, was granted to a tenant (T1). T1's obligations under the lease were guaranteed by a guarantor, G. In breach of covenant T1 assigned the lease to a new tenant, T2. The assignment was therefore an "excluded assignment" and T1 and G were not released from their liabilities in relation to the tenant covenants in the lease. The parties wished to resolve the situation, but were concerned about the impact of the Act in relation to the solutions proposed. The landlords suggested that T2 could re-assign the lease to T1, with G giving a fresh guarantee of the obligations under the lease. This solution was considered by Morgan J at paras [20] to [33] of his judgment and, in relation to these steps, he said this:

Counsel for the landlords in that case submitted that this analysis did not correctly describe the effect of the Act. His first point was based on the interpretation of section 11(2)(b) which the judge described as a "radical argument", and rejected. Counsel for the landlords' second point was that:

Morgan J then made the following observation about Lord Neuberger's statement at para [37] of K/S Victoria Street :

Morgan J concluded that it was open to the parties to proceed with a direct assignment by T2 to T1 with T1's obligations being guaranteed by G (para [33]). Finally, Morgan J commented on a "third way" which he had identified, but the parties had not themselves put forward, and said this:

At the hearing I was told by Mr Seitler that Lord Neuberger's statement at para [37] of K/S Victoria had given rise to considerable debate in the property sector. I was therefore curious to know whether there had been any academic writing on this topic. Counsel checked this, and were unable to find any articles which were directly relevant. I then became aware of talk delivered by Morgan J to the Property Bar Association on 4 November 2015 entitled "The Landlord and Tenant (Covenants) Act 1995: 20 years on". I drew this talk to the attention of Counsel and invited them to provide me with written submissions, if they wished to comment on it. I received written submissions from both Counsel in respect of the talk on 28 January 2016.

In his talk, Morgan J referred to his decision in UK Leasing Brighton Ltd and said this:

In their written submissions, both Counsel reminded me that these observations were made by Morgan J in the context of a talk (rather than as a result of legal argument), and they should not be given more weight than "the words of any reputable author": see Cordell v Second Clanfield Properties Ltd [1969] 2 Ch 9, per Megarry J at 16F-17B. In any event, Mr Reynolds adopted everything said by Morgan J at paras [72] and [73] of his talk, whereas Mr Seitler disagreed with the judge's analysis.

(e) The effect of section 25

The last case I need to mention is Tindall Cobham 1 Ltd v Adda Hotels (an unlimited company) [2014] EWCA Civ 1215 . In Tindall Cobham 1 Ltd the tenant assigned the lease to an associated company without the landlord's consent, and then sought to justify this by reference to section 25 as interpreted in K/S Victoria Street . The alienation provision in the relevant leases provided that:

The first point before the Court of Appeal concerned a point on the construction of this clause in the lease. The Court of Appeal then moved on to consider the effect of section 25 on clause 3.14.6. The arguments raised "the more fundamental question which applies to all the agreements about the effect of s.25 which is how far the section should be regarded as avoiding the contractual provisions in this case". This issue was dealt with by Patten LJ in relation to the facts of that case as follows:

The Court of Appeal therefore concluded that the whole of the proviso to clause 3.14.6 was avoided by section 25(1). Ryder LJ and Longmore LJ agreed with the reasons of Patten LJ (paras [51] and [52]).

The parties' submissions

(a) The Claimant's submissions

Mr Seitler, counsel for the Claimant, contends that it is absolutely clear that an existing guarantor of an assigning tenant cannot be made to guarantee the liabilities of an assignee. He says, the whole thrust of the Act, from the time of the Law Commission's report, is to draw no distinction between the liabilities as tenant and the liabilities as guarantor. This means that, if a guarantor cannot guarantee the liabilities of assignor's assignee, then it cannot assume them itself either. So, on the release of the original tenant, the original tenant's guarantor must be released from the tenant's covenants to the same extent. Mr Seitler maintains that the guarantor must be released – that is the central policy of the Act – and not re-instated as tenant. That is why, he says, in K/S Victoria Street , the Court of Appeal held that it would not be legitimate for the term to be assigned to the guarantor, but that the guarantor can lawfully guarantee a second assignment (para [51]).

This conclusion, Mr Seitler submits, is not undermined by section 3(2)(a). This is because: (i) that is not what the Court of Appeal has said, albeit obiter , at para [37] of K/S Victoria Street ; (ii) section 3(2)(a) is not what the thrust of the Act is directed to (see paras 51 to 55 above) and, in any event, section 3(2)(a) is subject to sections 5, 24 and 25 of the Act; (iii) if liability can be re-imposed on G1 when it becomes T2, this would "drive a coach and horses through the Act", as landlords could easily devise schemes to disable the Act (e.g. he said that a landlord could provide in a lease that the original tenant, T1, could only assign to a joint tenancy T1 and T2 and, if this was permitted, then there would be no release for T1 at all, and that would frustrate the purpose of the Act); (iv) the point was not decided in UK Leasing Brighton Ltd ; and (v) Morgan J's extra-judicial views, set out in his recent talk to the Property Bar Association, about the effect of section 3(2)(a) are wrong.

Mr Seitler then submits that there are two consequences of section 25(1)(a) in the present circumstances. First, clause 4.1 of the Licence to Assign (being an agreement relating to a tenancy) is rendered void. Second, the tenant covenants in the Lease are void as against the Claimant, but the Lease itself still exists and is vested in the Claimant. In relation to this second consequence, Mr Seitler says this is possible as a matter of law. In support of this submission he referred to Woodfall's Law of Landlord and Tenant (Vol 1) para 1.003 and City of London Corporation v Fell [1994] 1 AC 458 , HL at 465D-E, where Lord Templeman approved what Nourse LJ had said in the Court of Appeal:

Mr Seitler argued that the tenant covenants are, on assignment, void as against the Claimant because:

(1) The Lease contains a standard form forfeiture clause providing that the landlord can re-enter if the tenant does not comply with the tenant covenants and that forfeiture clause still exists and is binding on the Claimant (or G1). This is because the forfeiture clause is not a landlord or tenant covenant and, in support of this proposition, he pointed to section 4 of the Act. The consequence of this, he argued, is that the tenant covenants are "in suspense" against the Claimant (or G1). However, notwithstanding this, he accepted that the landlord is quite entitled to forfeit the lease if the tenant covenants are not complied with. Therefore, on this analysis (i) the Lease is vested in the Claimant, (ii) the Claimant is not under any obligation to pay the rent, as the tenant covenant is void, but (iii) if the Claimant does not pay any rent, the Defendant can forfeit the Lease.

(2) If the point at (1) above is wrong then, in order to take a "balanced approach" (per Patten LJ in Tindall Cobham 1 Ltd ), if the landlord cannot enforce the tenant covenants, then the tenant cannot enforce the landlord covenants either.

(b) The Defendant's submissions

Mr Reynolds, counsel for the Defendant landlord, contends that the Court of Appeal in K/S Victoria Street was right to decide that interpretation (i) of section 25(1) was correct (a proposition accepted by the Defendant for the purposes of this hearing). He accepted that the statement at para [37] of K/S Victoria Street that it appears a lease cannot be assigned to the guarantor was "obviously carefully considered by the court". However, he submitted that this statement made by Lord Neuberger should not be applied in the way contended for by the Claimant. He identified three principal reasons in support of this submission.

First, great difficulties arise when applying this statement in practice, whereas no such difficulties arise in striking down as void a guarantee which has been given, or an obligation to give such a guarantee , in relation to an assignment the efficacy of which is not dependent upon the giving of the guarantee.

Second, the Claimant's argument is inconsistent with section 3 of the Act, and the Defendant adopts everything said by Morgan J extra-judicially in relation to the effect of section 3(2)(a) after section 24(2) has operated (see paras [72] and [73] of the talk set out at paragraph 62 above). Indeed, the Claimant's interpretation of the Act contravenes section 25(1) because it frustrates the operation of section 3 of the Act.

Third, the Claimant's argument as to the effect of section 25(1) in the present circumstances offends against all the principles of landlord and tenant, and it creates a tenancy which is not one that we would ordinarily recognise as a tenancy. Indeed, as Mr Reynolds colourfully put it, it is a "Frankenstein's monster" of a tenancy and the Claimant's argument in this regard is absurd.

Alternatively, Mr Reynolds submitted that if the Lease could not be assigned to the Claimant, as the guarantor, then the assignment dated 28 November 2014 is a nullity. This means that the conflict between section 3 and second 25 is avoided and, if this alternative argument is correct, then the present position is that the Lease remained vested in the tenant until its recent dissolution and is now vested in the Crown as bona vacantia. The consequence of this is that the Claimant as guarantor remains liable by virtue of the Guarantee (and its obligation to take a new lease pursuant to clause 3.1 thereof).

I should add here that I am indebted to both Counsel for the detail of their written arguments and oral submissions.

Conclusion

The Law Commission in its report recommended that, whenever the liability of a tenant would be wholly cancelled by their recommendations, then liabilities which had been undertaken "in parallel and are essentially to the same effect" should also be terminated.

The "whole thrust of the Act" is that there should be no re-assumption or renewal of liabilities, whether on the tenant or the guarantor. That is the effect of 5(2)(a) in the case of tenants and section 24(2)(a) in the case of a guarantor (or "other person" bound by the tenant covenants). This means that, if a tenant and the tenant's guarantor are each liable for the same or essentially the same liabilities as a result of the tenant's covenants of the tenancy, the guarantor cannot as a result of assignment by the tenant to it of the tenancy re-assume those very same, or essentially the same, liabilities as the tenant. Or, using the terminology used in some of the cases, G1 cannot on an assignment by T1, become T2.

This is because on the assignment by T1 to G1:

(1) T1 is released from the tenant covenants of the tenancy, as from the assignment: section 5(2)(a).

(2) G1 is released from the tenant covenants of the tenancy, as from the release of T1: section 24(2).

(3) It is the effect and intention of section 24(2) that "as from the release of [T1]", ie on the assignment to T2 (formerly G1), G1 should be released from its liabilities as guarantor under the lease.

(4) However, as from the assignment to T2 (formerly G1), T2 becomes bound by the tenant covenants: section 3(2)(a).

The assignment therefore releases G1 from the tenant covenants of the tenancy but, at the very same moment in time, binds G1 (but now as T2) with the tenant covenants of the tenancy. In practical terms therefore, there is no release at all for G1 in respect of its liabilities under tenant covenants. This is because the liabilities under the tenant covenants are simply re-assumed by the guarantor, but this time as an assignee (and not as a guarantor). Further, the liability re-assumed by G1 as T2 is the very same in a case such as the present, where the guarantor is also primarily liable in respect of the tenant covenants. The objective effect of the assignment is that G1 re-assumes precisely the same liability in respect of the tenant covenants as a result of becoming T2 pursuant to the assignment. It is that consequence which "frustrates" the operation of section 24(2)(b) and the assignment is rendered void by section 25(1)(a), an anti-avoidance provision which is to be interpreted generously. The guarantor is therefore absolutely precluded from becoming the assignee, on an assignment by the tenant whose tenant covenants he is guaranteeing.

It seems to me that this is what Lord Neuberger is referring to in K/S Victoria Street when he says "it would appear to mean that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it" (para [37]). Further, it also seems to me, that there is additional support for this conclusion when one looks at the main part of the judgment in K/S Victoria Street at para [27]. Here the Court of Appeal gave its reasons for rejecting Victoria's argument based on section 24(2) and said "the whole thrust of section 24(2), indeed of the 1995 Act itself, is that a person should not remain liable under a tenancy after the tenant with whose liability he is associated has been released from his liability" ( emphasis added).

In UK Leasing Brighton Ltd Morgan J explained that what Lord Neuberger was referring to in this statement was the possible conflict between a release of a guarantor under section 24(2) and the re-imposition of liability on the former guarantor as an assignee under section 3(2)(a) (para [29]). I have given this point a considerable amount of thought, particularly in the light of the observations contained in Morgan J's recent talk to the Property Bar Association. However, I am not sure that I agree with this. This is because, what I think Lord Neuberger is referring to is the consequence of interpretation (i) and the policy of the Act that a tenant or guarantor cannot, as the result of an assignment, re-assume the very same, or essentially the same, liabilities in respect of the tenancy.

It is, as I have mentioned above, correct to say that section 3 of the Act is not mentioned in terms in the judgment of the Court of Appeal in K/S Victoria Street . However, in the light of what was said by Lord Neuberger at para [37], it would appear that the Court of Appeal did have section 3 in mind (and this is what Morgan J thought in UK Leasing Brighton Ltd (para [29])). It is therefore necessary to consider whether section 3 alters the conclusion that, on an assignment of the tenancy, the guarantor cannot re-assume its liabilities by becoming the assignee.

I agree with the submission made by Mr Seitler that section 3 is not directed to the main thrust of the Act, namely that a person should not remain liable under a tenancy after the tenant with whose liability he is associated has been released from his liability. It is, as Mr Reynolds pointed out, part of the "tidying up" that took place as a result of the reforms recommended in the Law Commission's report.

Nevertheless, Mr Reynolds submitted that section 3(2)(a) is significant. This is because what is happening under the Act in the present circumstances (and as part of the same transaction) is that, first, the guarantor is released from liability under section 24(2) then, as a second step, or sequentially, the same liability is imposed on the very same person, but this time as assignee, under section 3(2)(a). This he submits is how the Act operates, and the operation of the Act in this way is not contrary to section 25(1)(a). In support of this contention he pointed to UK Leasing Brighton Ltd and submitted that the facts of that case are not that dissimilar from facts of the present case.

The difficulty I have with this argument is that there is nothing in the Act, which provides for there to be sequential steps in relation to the release of the guarantor from his liabilities under the tenant covenants, and the re-assumption of those very same liabilities on him as the assignee. Rather, sections 5(2), 3(2) and 24(2) provide that these events should all happen at the very same moment in time, which is "as from" the assignment. There is therefore no moment in time when a person who is the guarantor, and then becomes the assignee, is actually released from, or otherwise freed from, his liabilities in respect of the tenant covenants. This means that, whether as guarantor or as assignee, the liabilities in respect of the tenant covenants have continued unchanged. Indeed, the need for an actual period of release is clear from K/S Victoria Street at para [51] when Lord Neuberger explained:

Therefore, in my view, there is nothing in section 3(2)(a) which alters the conclusion expressed above that the guarantor is absolutely precluded from becoming the assignee, on an assignment by the tenant whose tenant covenants he is guaranteeing. As is clear from K/S Victoria Street , the fact such a conclusion is unattractively limiting and commercially unrealistic is neither here nor there.

In this case the assignment of the Lease was executed on 28 November 2014. The next question is to what extent is the assignment, or the Licence to Assign, avoided by section 25(1). It is quite clear from Tindall Cobham 1 Ltd that the court is required to take "a balanced approach to invalidation which, whilst neutralising the offending parts of the contract, does not leave it emasculated and unworkable", and the court is entitled to look at "the structure of the agreement in an objective and common sense way".

To my mind, Mr Seitler's submissions as to what happens to the Lease on an assignment to the Claimant do not make any sense at all. I do not see how, on the one hand, the tenant covenants are rendered void or kept in "suspense" and, on the other, the landlord is entitled to exercise his rights of re-entry if they are not complied with (which, on any footing, would be enforcing by the "back door" covenants rendered void by the Act). This cannot work as a matter of law. Take, for example, the obligation to pay rent. If Mr Seitler is right and the obligation to pay rent is void, then it must follow that the landlord cannot re-enter if he is not paid any rent by the assignee, in this case the Claimant. This is because no rent will be due from the assignee to the Defendant landlord as that obligation will be void by reason of section 25(1) and, if that obligation is void, then a right of re-entry cannot arise in respect of it under the Lease. The position must be the same in respect of all the other tenant covenants under the Lease which, on Mr Seitler's argument, have been rendered void by section 25(1). This Mr Seitler says is a "shell" of a lease. However, as Mr Reynolds contends, it is not a tenancy as we would ordinarily know it, but an arrangement which is unbalanced as well as "emasculated and unworkable" (per Patten LJ in Tindall Cobham 1 Ltd ).

It seems to me that the obvious consequence of section 25(1)(a) in the present circumstances is that the assignment is void. The assignment, an "agreement relating to a tenancy", purports to make the Claimant, as the assignee, liable in respect of the very same covenants from which it had just been released as the guarantor. This has the effect of frustrating section 24(2) and, in order to safeguard the objectives of the Act, the assignment itself must be void, and the consequence of this is that the assignment will not take effect to vest the Lease in the Claimant, as an assignee.

This leads to a clear and simple position and one which is certain. This conclusion is re-inforced by the actual statement of Lord Neuberger in K/S Victoria Street that " the lease could not be assigned to the guarantor, even where both the tenant and guarantor wanted it" ( emphasis added). It is not a question of picking and choosing which aspects of the lease will survive the assignment from the original tenant to the guarantor. Rather, as Lord Neuberger said, such an assignment is a transaction which cannot be done and the assignment will be struck down as void in the event that the tenant seeks to assign the lease to its guarantor.

I will dismiss the claim and make the declaration in the alternative form sought by the Defendant, namely the purported assignment of the Lease to the Claimant is void and of no effect, with the result that the Lease remains vested in the Original Tenant, and that the Claimant remains bound as Guarantor of the Original Tenant's obligations under the Lease by virtue of the Guarantee and has not been released from its obligations under the Guarantee by the operation of the Act.