The decision of the Court of Appeal last month in Tindall Cobham 1 Ltd v Adda Hotels (an unlimited company) and others [2014] EWCA Civ 1215; [2014] PLSCS 249, analysed so lucidly by Allyson Colby in EG on 20 September 2014, offers a good example of two forces at play in the thriving field of landlord and tenant law: statutory interference and interpretation by the court.
The role of statute
Landlord and tenant is not an area in which freedom of contract has a free rein. Parties may of course choose what terms to put into their agreements – but will (usually) be aware that parliament, in the shape of statutes enacted in some cases centuries ago, then looks over their shoulder and decides whether any or all of the terms should be enforceable. Examples abound, ranging from the Statute of Marlborough 1267 (yes, really), through the Unfair Contract Terms Act 1977, to the many Landlord and Tenant Acts.
In each case, it may plausibly be said that the statute was enacted in order to ameliorate or remove a perceived unfairness that the common law alone was unable to remedy. Sometimes, however, the parliamentary draftsperson has failed to foresee consequences of the legislation that in themselves are unfair – sometimes arguably more so than the original mischief the statute was intended to cure.
A candidate that must surely be in the shortlist for best illustration of the law of unintended consequences is the Landlord and Tenant (Covenants) Act 1995 (the “1995 Act”). Enacted with the laudable aim of releasing from liability original tenants and guarantors following assignments of the term (save in restricted circumstances), the 1995 Act has since played havoc with the commonly encountered situation of inter-group assignments. Readers will be familiar with this situation: L and T agree terms for a lease; T wants the flexibility to pass its interest to associated companies where it needs to restructure; L agrees, provided its covenant is not prejudiced; the easiest way of doing this is to have a solid parent guarantor, and that is what is invariably agreed.
Until recently, that is. Such arrangements now fall foul of section 24(2) of the 1995 Act, which (I paraphrase) requires a guarantor to be released on assignment; and section 25(1), which renders void any term “to the extent that” it has effect to exclude, modify or otherwise frustrate any provision of the 1995 Act.
Accordingly, the paradigm example where the lease provides that T’s parent company, G, guarantees the performance not merely of T, but also of any associated company to which the lease is assigned, no longer works. All that the parties can now do is to build in an AGA binding in G to the immediate, but no further, assignment. Further ingenious expedients providing for a more enduring liability have not yet been tested before the courts.
This is frustrating for L and T, to whom the expedient of a continuing parent guarantee was a useful means of unlocking flexibility for T, while securing L’s position. As Lord Neuberger MR said in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] 32 EG 56, in producing the opposite outcome, the 1995 Act has “an unattractively limiting and commercially unrealistic effect”.
The role of the courts
Lord Neuberger did not, as we know, leave it at that. He and his fellow judges in the Court of Appeal were able to construe the 1995 Act in such a way as to allow the parent guarantee to survive, in the shape of a guarantee of the assigning tenant’s liability under the AGA which, in that case, L was entitled to require.
The approach of the court in K/S Victoria provides a good illustration of the preparedness of judges to adopt creative solutions to the unfair by-products of statutory interference. The decisions in Tindall provide another.
In that case, leases granted in 2002 contained densely drafted alienation provisions, extending to 820 words, the obvious purpose of which was to allow assignments provided that the landlord’s financial position was secured. As part of this regime, the leases allowed inter-group assignments provided that the parent guaranteed the assignee – a state of affairs, however, which the 1995 Act had outlawed some six years previously. The original tenants proceeded to assign to worthless associated companies without providing any guarantees, and later argued that since the provision of a repeat guarantee was prohibited, the assignments could perfectly properly proceed without any guarantees at all, leaving the landlord with tenants of no substance, and with no parent company behind them.
The judge at first instance would have none of this, describing the result contended for by the tenant as “topsy turvy”. He adopted a very purposive interpretation of the relevant clause in the lease, holding that the landlord could require a replacement guarantor for an inter-group assignment.
The Court of Appeal sympathised with the judge’s “understandable hostility” to the interpretation contended for by the tenants, but felt unable to construe the leases in the same way. However, the court was able instead to construe section 25(1) of the 1995 Act in such a way as to avoid not merely the requirement for the existing guarantor to guarantee the assignee, but also the bulk of the alienation provision itself. The net result was to leave the tenant with an ability to assign to an associated company – but only with the landlord’s consent (leaving it to the landlord to require a replacement guarantee where reasonable).
The decision is interesting, involving as it does the interpretation not merely of contracts, but also of an interfering statute. The end result in this case approximates to the position for which the original parties would have considered they were legislating.
We have become used to contracts being construed to achieve what is considered by the courts to be their commercial purpose, provided that their words may be pulled into the requisite shape. As this decision shows, statutes, too, have degrees of elasticity, and may be stretched and moulded within their textual confines to achieve similarly commercial outcomes.
Guy Fetherstonhaugh QC is a barrister at Falcon Chambers
