Has the Court of Appeal provided clarity on the construction of covenants against assignment to group companies?

What’s  happened?

In Tindall Cobham 1 Ltd v Adda Hotels (an unlimited company) [2014] EWCA Civ 1215, [2014] All ER (D) 49 (Sep) the tenants were all associated companies in the Hilton Group Adda Hotels and Puckrup Hall Hotel Limited were the original tenants of ten hotels in the UK under separate leases granted in 2002 by the landlord’s predecessors in title (expiring in 2029). Each of the leases was substantially the same and reserved significant base and turnover rent with Hilton Worldwide Inc (the parent company in the Hilton Group) as guarantor.

The facts:

In July 2014 Adda and Puckrup assigned each of the leases (separately) to the tenants as part of a reorganisation. Those advising Adda and Puckrup took the view (although later accepted that this was wrong) that, as the second requirement of cl 3.14.6 of the leases—, - that the landlord could require the tenant on an intra-group assignment to procure a guarantee from its existing guarantor—, was void following K/S Victoria Street v House of Fraser (Stores Management) Ltd and others  [2011] EWCA Civ 904, it was not necessary to obtain the landlord’s prior consent to the assignments. If lawful, the assignments would have the effect of releasing Adda and Puckrup as original tenants and, more importantly, Hilton Worldwide as guarantor . The landlord was in the process of refinancing —a highly material factor in the negotiations for a new loan facility was the valuation of the hotel which would be affected by the continued existence or not of the Hilton Worldwide guarantee.

What did the High court find?

The assignments had been carried out in breach of clause 3.14 of the leases and so were excluded assignments within the meaning of the Landlord and Tenant (Covenants) Act 1995, s 11 (LT(C)A 1995),. It also made a declaration that, under cl 3.14.6 of the leases, the tenants were not permitted to assign the leases without first applying for the written consent of the landlords (such consent not to be unreasonably withheld) and that the landlord was entitled, as a condition of giving consent, to require the assigning tenants to procure a new guarantor in place of Hilton Worldwide . (whose own guarantee would expire on the lawful assignment of the leases).

The tenants appealed.

What did the Court of Appeal have to decide?

Whether the Chancery Division had been right to construe cl 3.14.6(b) as allowing the landlord to require a new guarantor

What did the leases say?

Clause 3.14.6 of the leases provided a restriction in assignment to any associated company without the consent of the landlord and entitled the landlord to imposet the various conditions set out in sub-clauses (a) and ( b) of the lease

'                         “(a) that the Tenant shall provide the Landlord with notice of any such assignment within 10 Working Days of completion of the same;

(b) that on any such assignment, the Tenant shall procure that the Guarantor and any other guarantor of the Tenant shall covenant by deed with the Landlord in the terms set out in the Sixth Schedule at the Tenant's sole cost

and subject to the Tenant's compliance with such conditions the Landlords consent shall be given'

It was common ground that the tenants could not be required to procure that Hilton Worldwide act as guarantor as this would infringe the anti-avoidance provisions of LT(C)A 1995, s 25(2).

What is the law in this area?

  • K/S Victoria Street confirmed the principle in Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch), [2010] All ER (D) 238 (Mar) that the guarantor for an assigning tenant could not guarantee the assignee’s liability under the lease.
  • LT(C)A 1995 provides that if a tenant assigns the whole of the premises demised, it is released from the tenant covenants of the tenancy and ceases to be entitled to the benefit of the landlord covenants in the tenancy.
  • LT(C)A 1995, s 24(2) provides that where a tenant is released from covenants in a tenancy, any guarantor is released at the same time and to the same extent that the tenancy is released
  • LT(C)A 1995, s 25(1) (a) invalidates any agreement relating to a tenancy which would have the effect '"to exclude, modify or otherwise frustrate the operation of the provisions of the Act'". In K/S Victoria Street, the Court of Appeal confirmed that a tenant’s guarantor cannot agree to give, nor give, a guarantee for the tenant’s assignee other than by guaranteeing the tenant’s obligations under an authorised guarantee agreement. One of the consequences of this is that a parent company which has guaranteed the lease obligations of its subsidiary cannot give a new guarantee on an intra-group assignment to guarantee the obligations of the assignee.

What did the court decide?

The Court of Appeal confirmed that the reference in cl13.4.6(b) to a guarantee from 'the Guarantor and any other guarantor of the Tenant' meant the persons who, at the time of the assignment, were the guarantors of the tenant's obligations under the lease. The provision was therefore void under LT(C)A 1995 , s 25.

The tenants argued that they therefore only needed to satisfy the first condition in cl 13.4.6(a) - —to give notice of assignment. The court disagreed. The solution which respected the structure of the contract and gave effect to the provisions of LT(C)A 1995 was to regard, the whole of the proviso as avoided. This left just the qualified covenant against assignment, which could be operated according to its terms and to the usual requirement to act reasonably under the Landlord and Tenant Act 1927, s 19(1).

So What?

The decision in K/S Victoria Street was unwelcome, particularly in relation to the consequences for intra-group assignments where a parent company guarantor is perfectly happy to stand as guarantor for the incoming group company tenant. However, tThe decision may be unpopular for the same reasons— although it should be noted that it ultimately turned on the particular wording. Lawyers drafting post-K/S Victoria Street will be alive to the point and both landlord's and tenant’s lawyers alike should ensure that they consider carefully whether the clause works legally and reflects the commercial intentions of the parties.

Melissa Moore, solicitor in the Lexis®PSL Property team.

Filed Under: Property

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