Can companies assign leases intra-group with impunity if requirements for the provision of further parent company guarantees fall foul of the LL&T(C)A 1995?

The Landlord and Tenant (Covenants) Act 1995 provides that on an assignment of a lease created after 1 January 1996, tenants and their guarantors are released from liability under their leases. The 1995 Act contains a comprehensive anti-avoidance provision, which renders agreements that frustrate the operation of these provisions void. However, tenants are allowed to enter into authorised guarantee agreements (AGAs) with their landlords when they assign their leases. An AGA contains a guarantee from an outgoing tenant that its assignee will comply with the lease – but the 1995 Act does not say whether an outgoing guarantor can accept similar liabilities to the landlord. So the property industry breathed a collective sigh of relief when the Court of Appeal decided K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] PLSCS 198. The judgment confirms that outgoing tenants’ guarantors can guarantee outgoing tenants’ liabilities in AGAs – but not the liabilities of incoming assignees. However, several questions remain unanswered in the wake of the decision. One concerns the legal consequences where a lease provides that the tenant cannot assign its interest without the landlord’s consent – but that the landlord will allow the tenant to assign to another in the same group of companies if the current guarantor enters into a further guarantee for the incoming tenant. The requirement for the further guarantee is invalid. Does this mean that the tenant is free to assign intra-group without any strings? The property industry has been waiting for a test case to answer to this question – and now has one in Tindall Cobham 1 Ltd v Adda Hotels [2014] EWHC 2637 (Ch); [2014] PLSCS 248. The tenants, who were members of the Hilton group of companies, assigned leases of ten hotels to new shell companies within the same group without asking their landlords for licences to assign or proffering any further guarantees. They claimed that the assignments had terminated the liabilities of their parent company, which had stood as their guarantor. The landlords alleged that the tenants were in breach of the covenants in their leases because the tenants should have asked them for permission to assign their leases, which would have given them the opportunity to require a different guarantor. They argued that assignments were, as a result, “excluded assignments” for the purposes of section 11 of the 1995 Act – and had not released the outgoing tenants and their guarantor from liability under their leases. The judge preferred the landlords’ construction of the leases in question. The tenants’ interpretation would undo the checks and balances designed to preserve their covenant strength, which would offend commercial common sense. The tenants had presented their landlords with a “fait accompli” in breach of the alienation provisions in their leases, and remained liable on their covenants. Landlords’ and tenants’ reactions to the case will vary. Meanwhile, practitioners will be keen to see the full judgment, as and when it becomes available, to assess its implications.  One thing is certain; the outcome of the appeal, which is expected later this year, will be hugely significant, especially as the Law Commission’s 12th Programme of law reform makes no mention of leasehold reforms and Parliamentary time is at a premium. Allyson Colby is a property law consultant