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EMI v Prudential (2020)

Summary

John McGhee QC and Maxim Cardew successfully appear for Prudential (the landlord) in a claim brought by EMI (the guarantor) in relation to a lease of valuable commercial premises on Oxford Street formerly occupied by HMV. Maxim also analyses the decision in an article, which can be found here.

Properly construed, a commercial lease that obliged the tenant's guarantor to guarantee the tenant's continuing obligations under an authorised guarantee agreement if the lease was assigned, did not offend against the Landlord and Tenant (Covenants) Act 1995.

Facts

The claimant guarantor brought a claim for declarations as to its liability under guarantees given in respect of a commercial lease. The defendant landlord sought a counter-declaration and sums totalling around £4.9 million.

The lease was for 25 years and had been granted to a tenant and guaranteed by the claimant in 2000. In 2011, the landlord permitted the tenant to assign the lease. The lease contained a condition that, before such assignment, the tenant had to enter into an authorised guarantee agreement (AGA), guaranteeing the assignee's obligations under the lease, and the claimant was obliged to guarantee the AGA by a form of guarantee known as a GAGA. In 2013, the tenant went into administration and was dissolved in 2015. In 2019, the assignee fell into financial difficulties, failed to meet its obligations to pay the rent and service charges under the lease and went into administration. The landlord demanded the outstanding sums from the claimant pursuant to the GAGA. The claimant sought a declaration that the GAGA was void under the Landlord and Tenant (Covenants) Act 1995. Its claim was based on language in the lease under which the claimant covenanted to indemnify the landlord against any failure of the "principal" to pay rent or service charges "while the principal is bound by the tenant covenants". The principal was defined as "the person who is or is to become the tenant".

The claimant submitted that: (1) the definition of "principal" meant that the claimant was obliged to indemnify not just the tenant but any future tenant, which went against s.25 of the Act; (2) the word "while" offended against s.16(4) as it left the claimant open to liability if the lease was reassigned back to the tenant at a future date; (3) under the lease, the landlord had to act reasonably in requiring the tenant to give an AGA but could automatically require the claimant to provide a GAGA, and such different treatment went against s.24, which required a guarantor and tenant to be treated "to the same extent"; (4) the dissolution of the tenant meant that the claimant was no longer bound by the lease covenants.

Held

Meaning of "principal" - On its natural and ordinary meaning, the clause that defined "principal" should be interpreted such that it meant the tenant only, not the tenant plus assignees/future tenants. That was the most obvious reading of the clause in context, whereas the claimant's interpretation made no sense (see paras 32-33 of judgment). If that conclusion was wrong and the words "or is to become" meant that the claimant was required to guarantee the obligations of future tenants as well as the tenant, the court would be prepared to omit those words. First, s.25 invalidated an agreement only to the extent that provisions of the Act were offended, whereas the guarantees in the lease could have continued to operate limited to the claimant's obligation to guarantee the tenant's liabilities and its AGA. Second, the parties had agreed under the lease that in so far as terms offended s.25, they should be severed (paras 41-44).

Meaning of "while" - It seemed unlikely that the parties had contemplated a position where the lease was assigned back at some future time to a tenant. The definitions of assignor and assignee in the lease clearly contemplated a single assignment being in the parties' contemplation at any one time. Therefore, in context, "while" was clearly intended to mean a single period when the tenant was bound by the covenants of the lease and did not contemplate a future and unlikely assignment back to that tenant. Applying the validation principle, that interpretation validated the relevant lease provisions, unlike the claimant's interpretation, and was an entirely realistic construction. Further, like s.25, s.16(4) operated to invalidate only to the extent necessary. Accordingly, the AGA would still be valid up until the assignment on by the assignee (paras 49-51).

Equivalent treatment - A GAGA was made valid by the operation of s.24(2) of the Act, which dealt with the release of a guarantor when a tenant was released from its obligations under a tenancy. The requirements for an AGA set out in s.16 did not apply to the GAGA, but the guarantor could enter into the GAGA because it would be released at the same time as the tenant, K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904 followed. Accordingly, the focus of the wording "to the same extent" was on the fact that the guarantor would be released when the tenant was released, not on the terms which required the AGA to be entered into (paras 54-55).

Dissolution of tenant - The lease clearly provided that the dissolution of the tenant would not affect the liabilities of the guarantor. That was what the parties had agreed, and there was nothing that affected that in any way (para.61).

Disposal - The GAGA was valid and the landlord was entitled to the sums sought (para.63).

Judgment for defendant

Chancery Division
Penelope Reed QC
Judgment date
31 July 2020
References
LTL 3/8/2020 : [2020] 7 WLUK 497

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