Leases are made between a “landlord” and a “tenant”. However, it is not uncommon for two or more parties to be the joint “tenant”. Take a small business partnership, for example. Both of the partners will sign the lease as the occupants of the property but both of these partners taken together are the “tenant” – just because two people sign as tenant does not mean that there are two tenants. At law they are known as a “joint tenant”. A lease can only ever have one “tenant” at a time. As such, when the lease refers to the “tenant” in this scenario, it is referring to both the partners at the same time.
If the partnership relationship breaks down and one partner (the outgoing partner) wishes to leave the partnership, but one wishes to continue trading (the continuing partner), what happens to the lease?
Obviously the outgoing partner would no longer wish to be liable for the rent. Equally though the continuing partner needs a lease to continue trading from the same property where they have built up the goodwill and reputation of the business.
This is done be ‘removing’ the outgoing partner from the lease. Following a recent case, the mechanism by which this removal is achieved is likely to be radically different in the future.
The case of EMI Group Limited v O & H Q1 Limited (2016) said that where there is a tenant and a guarantor, a lease cannot be transferred to the guarantor.
This is because the Landlord and Tenant (Covenants) Act 1995 (the “Act”) states that, where a lease is granted after 1 January 1996, if a tenant transfers the lease to any party, then that tenant is automatically released from the tenant obligations of the lease. The Act also states that a guarantor is automatically released at this time.
The Act goes on to say that, if anything occurs which seeks to avoid the effect of the Act (i.e. seeks to keep the tenant or the guarantor liable under the lease after the lease is transferred) then the transfer is void. If the partnership’s lease was therefore transferred to only the name of the continuing partner, the transfer would be void. The effect of this is that the outgoing partner would still be the “tenant” (jointly with the continuing partner) and therefore liable for the rent.
In the HMV case, HMV was the tenant of a lease. Its parent company, EMI Group Limited (“EMI”), was the lease guarantor. HMV went into administration. EMI agreed to take on the tenant obligations in the lease so trading could continue. All parties to the lease (the landlord, HMV and EMI) agreed to this. Accordingly, HMV transferred the lease to EMI.
However, the court said that the transfer from HMV to EMI was void because it meant that EMI ceased to be liable as guarantor but immediately became liable as tenant. The court said that the effect of this was that EMI was not released from its lease obligations as required by the Act therefore it was treated as if the transfer had never occurred. HMV was therefore liable for the rent with EMI as guarantor.
This case did not discuss the case of a joint tenancy. However, it is very likely that the court would reach the same decision.
This decision seems to go against commercial reality. Nevertheless it means that where a business structure changes, no longer can a tenant transfer a lease to a guarantor or joint tenants transfer the lease into only one of their names.
What would need to happen instead is that the old lease is surrendered and a brand new lease put in place at the same time with the continuing partner as the tenant on their own. This will involve more paperwork but in the long term it is the correct route to take, particularly from the outgoing partner’s point of view.
If you have any landlord or tenant queries, including the transfer or assignment of a lease, please speak with Chris Morgan, a solicitor in our commercial property department, on 0191 211 1515 or email Chris at email@example.com.