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Release of assignors and guarantors of leases

Although it often comes as a surprise to many tenants and guarantors, most landlords are aware that an assignment of lease by an existing tenant (the Assignor) to a new tenant (the Assignee) does not release the Assignor or existing guarantor(s) from the obligations they took on under the lease (unless of course the Deed of Assignment contains a specific release clause). This principle has been reaffirmed in the terms of the Property Law Act 2007 (Section 241).

In practice, what that means is that even though the previous tenant no longer has anything to do with the premises or the new or ongoing business being run from the premises, it can still be “on the hook” to the landlord should rent fall into arrears etc. Indeed, although it is unusual in practice, the landlord is actually under no obligation to go after the current tenant for arrears if it considers the previous tenant and/or its guarantor(s) to be a “better bet” in terms of recovery.

It is however often thought that an Assignor and its guarantor(s) remain “on the hook” for the duration of the lease. The 2011 case of New Wing Development v Wain reminds us that matters are not quite as simple as that.

The case has some degree of complexity, and as yet only preliminary matters have been dealt with, but the summary judgement hearing raised two significant points that landlords, assignors and guarantors should bear in mind:

1. Where a right of renewal contained in the original lease is exercised by an Assignee after the lease was assigned to it, the Assignor and its guarantor(s) are no longer liable for any obligations undertaken in the original lease – this is because the renewal of the lease is deemed to constitute a new lease to the existing tenant (the Assignee).

2. Unless the original lease contains an option to extend the length of the term (which is unusual), a lease extension agreed between landlord and (current) tenant is also deemed to constitute the surrender of the existing lease and its replacement with a new lease for the longer term.

This means that when a lease is assigned, the Assignor and its guarantor(s) remain “on the hook” but only until such time as the Assignee exercises a right of renewal contained in the lease or the Assignee and the landlord enter into a lease variation to extend the term of the lease. Once either of those events occurs, the Assignor and its guarantor(s) are released from their obligations, even though they will not be a party to, and most likely will have no knowledge of, the renewal or extension of the lease.

Article is supplied by East Brewster Ltd in Rotorua – Commercial and Property Law Specialists