Deed Does Not Protect Assignor

The Court of Appeal has overturned a 2007 decision and its judgment may make tenants who are considering assigning their leases pause for thought.

The circumstances were that tenants assigned their lease, with the permission of the landlord, to new tenants. Under the terms of the assignment, the outgoing tenants had to guarantee performance of the lease by the new tenants. The landlord and the new tenants, a professional partnership, subsequently entered into a separate deed which provided that the new tenants’ liability under the assigned lease would not exceed the assets of the partnership and that the personal assets of the partners would not be subject to a claim under the guarantee.

When the partnership became insolvent and failed to meet its obligations to the landlord, the landlord claimed against the original tenants under the guarantee. The original tenants claimed they were protected by the deed between the partnership and the landlord. The landlord claimed that since the original tenants were not a party to the deed, they could not rely on it.

The High Court accepted the original tenants’ argument, but the Court of Appeal overturned the decision, ruling that the purpose of the deed between the landlord and the partnership was to limit the liabilities of the partners by preventing the landlord from claiming against their personal assets. The purpose of the deed was not to confer a benefit on the original tenant.