Lease – Assignment – Intra-group transfers – Appellant tenants assigning leases to associated companies without seeking consent of respondent landlords – Respondents commencing proceedings for breach of covenant – High Court granting respondents’ application for summary judgment – Whether assignments requiring written consent – Whether assigning tenants being required to procure new guarantor – Appeal dismissed – Judge’s order varied
The respondent companies owned a number of hotels and associated premises, each of which was subject to a lease granted to the first and second appellants. The third appellant was the original guarantor. A dispute arose out of the assignment by the first and second appellants of the various leases to companies in the same group without seeking or obtaining the respondents’ consent. The assignments were carried out as part of a group reorganisation with the consequence, if lawful, of releasing from further contractual liability under the various leases both the original lessees and the guarantor, as a result of the operation of sections 5 and 24(2) of the Landlord and Tenant (Covenants) Act 1995.
Clause 3.14.6 of the leases contained a covenant relating to intra-group transfers which provided that, such transfers would only be permitted if the consent of the landlord was sought and two conditions were fulfilled, namely (a) the giving of notice of the transfer in advance and (b) the original tenant’s guarantor becoming the assignee’s guarantor. Those advising the appellants took the view that it was not necessary to obtain the prior consent of the respondents to the assignments. The appellants subsequently conceded that the assignments were not lawful and that under section 11 of the 1995 Act they were therefore ineffective to release the appellants from their covenants under the leases. However, the issue remained whether similar assignments to other associated companies would have the effect of achieving such release and whether the respondents could lawfully prevent the assignments without at least the substitution of some suitable alternative guarantee. The respondents issued proceedings seeking a declaration that the assignments were unlawful as being in breach of covenant and applied for summary judgment.
The High Court held that the assignments had been carried out in breach of covenant so that they were excluded assignments. However the judge also decided that, under clause 3.14.6, the assignments were not permitted without first applying for the written consent of the respondents; and that the respondents were entitled to require the assigning tenants to procure a new guarantor, in place of the third appellant, whose own guarantee would expire on the next lawful assignment of the leases: [2014] EWHC 2637 (Ch). The appellants appealed.
Held: The appeal was dismissed. The judge’s order was varied.
(1) The principle applied by the judge that, as between possible constructions of an agreement, one had to choose the construction which made the instrument legally effective, as opposed to ineffective, originated in the context of the need to opt for a meaning which produced the most commercially workable version of the contract. It was not devised as a means of avoiding the consequences of legislation being applied to the contract which the parties had made. It was not possible to apply the maxim in order to create an interpretation of the contract or other instrument which, on ordinary principles of construction, could not be justified: Hillas (WN) & Co Ltd v Arcos Ltd (1932) 147 LT 503 and Re Baden’s Deed Trusts [1969] 2 Ch 388 considered.
(2) In the present case, the starting point was to construe clause 3.14.6 in its proper contractual context in order to decide whether there were in fact realistic alternative constructions of the relevant words that might require the application of the “validate if possible” principle. The reference in 3.14.6(b) to “and any other guarantor of the tenant” appeared as part of a composite condition which the landlord might impose as a condition of consent to an assignment to an assignment to an associated company. It specified what the landlord could insist should happen on any such assignment and it identified whom the tenant was required to obtain the new guarantee from. In the circumstances, the “validate if possible” principle had no application.
(3) Section 25(1)(a) of the 1995 Act invalidated 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”. Section 25 made it expressly clear that section 25(1) could apply to a covenant in the lease against assignments insofar as it regulated the giving of consent for the assignment. It was clear that section 25 was intended to provide a comprehensive anti-avoidance provision which ought to be interpreted generously to endure that the operation of the 1995 Act was not frustrated either directly or indirectly: London Diocesan Fund v Phithwa [2005] 1 WLR 3956 considered.
A condition which required the tenant to procure a continuing guarantee from an existing guarantor had the effect identified in section 25(1)(a). Section 25(1) was concerned to invalidate agreements which would have the section 25(1)(a) consequences. It was not limited to the exercise of the rights which such agreements contained. The ability of landlords to bring about one of the prohibited consequences by the exercise of those rights was enough to bring the contractual provision conferring those rights within the ambit of the section. The solution which both respected the structure of the contract and gave effect to the provisions of section 25(1) was to regard, as the judge did, the whole of the proviso being avoided by the legislation. That realistically treated the proviso as a complete term of the contract and left clause 3.14.6 as a qualified covenant against assignment which could be operated according to its terms.
Kirk Reynolds QC and Julian Greenhill (instructed by Berwin Leighton Paisner) appeared for the claimants; John McGhee QC and James Ballance (instructed by Paul Hastings (Europe) LLP) appeared for the defendants.
Eileen O’Grady, barrister
