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 on their covenants. The 1995 Act contains a comprehensive anti-avoidance provision, which renders agreements that frustrate the operation of these provisions void, except to the extent that the agreement in question constitutes an authorised guarantee agreement (AGA).
Much to the relief of landlords, the Court of Appeal decision in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] PLSCS 198 confirmed that landlords can require outgoing tenants’ guarantors to guarantee the liabilities of an outgoing tenant under an AGA – but not the liabilities of an incoming assignee. What is the position 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? Landlords will welcome the Court of Appeal decision to the contrary in Tindall Cobham 1 Ltd v Adda Hotels [2014] EWCA Civ 1215; [2014] PLSCS 249, although it must be remembered that the decision turned on the construction of the leases in question.
The landlords had granted leases of 10 hotels to tenants in the Hilton group of companies. The tenants assigned their leases to £1 subsidiaries in the same group without asking their landlords for licences to assign or proffering any guarantees. They claimed, at first instance, that the assignments had terminated the liabilities of themselves and their parent company guarantor – but, in the Court of Appeal, accepted that they should have asked for permission to assign their leases. Consequently, the assignments were “excluded assignments” and they remained liable under their leases. However, the question remained: could the landlords, if and when approached at some point in the future, prevent a similar intra-group assignment in the absence of alternative guarantees?
The Court of Appeal rejected the suggestion that it should take a minimalist approach, which would have invalidated any reliance by the landlords on the provision in the leases requiring fresh parent company guarantees for the assignees while leaving the clause permitting intra-group assignments intact. The court also considered and rejected the idea that the condition requiring the provision of fresh guarantees was invalid, but that the rest of the clause facilitating intra-group assignments should stand. It ruled that the anti-avoidance provision in the 1995 Act did not prevent it from using its common sense, or from neutralising the offending part of the contract without emasculating it.
The most obvious solution was to strike out the offending provisions while preserving the specific requirement for the tenants to obtain the landlords’ consent to intra-group assignments. This would constitute a qualified covenant against assignments to associated companies, which should enable the landlords to insist on a substantial guarantee in the case of assignments to companies of little worth.
Allyson Colby is a property law consultant
