Five points for Investment Managers and Corporate Property Advisers from the EMI Case

It is not often in property law that we are told that things are “void” without there being either some element of moral or financial culpability, or exploitation. However, Miss Amanda Tipples QC, sitting as a Deputy Judge in the Chancery Division, following dicta in KS Victoria, has told us that a

“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 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 (Landlord and Tenant (Covenants) Act 1995). 

The statement applies to all leases granted since 1995, whether commercial or residential. So, what are the implications to look out for:

• If asked for consent to assign a post 1995 lease to a guarantor (or even from joint tenants to one of them), currently you can refuse on the basis of this case (but be prepared for a court case if the tenant’s lawyer disagrees and is willing to go to the Supreme Court!).
• A void assignment or transfer breaks the chain of title. Subsequent assignees or transferees, therefore, cannot have title either. So:
  • Applications may need to be made to the Land Registry for correction of the registers.
  • If there has been a void assignment, what is the current status of the assignor/transferor? Have they been struck off the register? Is there still the insolvency procedure being undertaken? Will you have to deal with the Treasury Solicitor? Will you have to make an application to Court for a tenant to be restored and a liquidator appointed to deal with this asset?
  • This could impact on past Group reconstructions and reorganisations, where there may have been hive-ups or similar to guarantors, whether or not these are solvent or insolvent.
• Have there been any sub-leases purported to be have been created by an assignee or subsequent assignee? What will be their status? What about covenants for title the assignee landlord may have given, or covenants for quiet enjoyment?
• What about Tax?
  • Suppose SDLT (or prior to 2003, stamp duty) been paid on void assignments/transfer? Can this be recovered from HMRC? Have incorrect tax returns been made based on that void assignment?
  • What is the VAT position? Has there been an incorrect VAT return submitted by the landlord and/or “tenant”.
  • What is the status of rent payments in the hands of landlord and tenant, and has this been accounted for properly for tax?
• Given that “rent” will have been paid by the assignee, what actually is the status of that?
  • It cannot be rent under a lease, as there has been no assignment. (There cannot even have been an equitable assignment because the assignment is void, and incapable of having been carried out.)
  • Will it have to be repaid as a payment made under a mistake of law?
  • As “rent” is outstanding (because what has been paid is not rent), has the right to recover it against the guarantor been lost because Section 17 notices will not have been served in time?

Lots of questions, and probably many more. Take care. We do not yet know if the case is to be appealed, and many think that absent a change in the Act, it is unlikely that the position will be altered, following, as it does, what Lord Neuberger said!