In the wake of a ruling that intra-group transfers of the leases of 10 Hilton hotels were unlawful, a judge is being asked to rule on how the parties can successfully go back to square one.
Morgan J’s ultimate decision is expected to provide clarity on how unlawful assignments of leases can be reversed, while keeping original guarantee agreements in place.
Earlier this year, the Court of Appeal upheld a ruling by Peter Smith J and found that purported inter-group assignments of the leases in July were not lawful due to a failure to request the landlords’ consent in advance.
Now the parties in respect of those 10 hotels – plus an 11th, the Brighton Metropole Hotel, for which the lease was also assigned within the Hilton Group – are asking Morgan J for guidance on how the original position can be restored without contravening section 25 of the Landlord and Tenant (Covenants) Act 1995.
The judge is being asked to decide, where a lease containing a guarantee has been wrongfully assigned, by what means a landlord can ensure that the lease becomes vested again in the original tenant with the benefit of a valid and enforceable guarantee of the tenant’s obligations by the original guarantor – in each of these cases, Hilton Worldwide.
At the hearing today, John McGhee QC, representing the Hilton companies, said that the parties are all “pushing in the same direction” and want the transactions “unwound”, but disagree as to how that can be achieved.
He said that the landlords are concerned that the market will perceive their covenants as weaker as a result of the current position, potentially reducing the value of their reversionary interests, while his clients are faced with the fact that their company organisation has been rendered ineffective by Peter Smith J’s decision.
The landlords favour a “direct reassignment” approach, through which each lease is reassigned to the original tenant with a fresh guarantee simultaneously being given by Hilton Worldwide.
Meanwhile, the Hilton companies prefer an “indirect reassignment” in two stages, with reassignment via a fresh Hilton group company and a fresh guarantee being given by Hilton Worldwide on the second of those assignments.
Each side takes the view that the other’s method will not work, and would end up being void under section 25.
The judge is being asked to rule on each approach, but warned that it was theoretically possible that he could ultimately hold that neither method would work.
Mr McGhee said that it would be “extremely surprising” if there were not some route by which the transaction could be unwound under the Act, but the judge said that it would not be the first time that the Act had produced surprising results.
He will give a written decision in the case.
Zinc Cobham 1 Ltd and ors v Adda Hotels and ors & UK Leasing Brighton Ltd and ors v Topland Neptune Ltd and anr Chancery (Morgan J) 11 December 2014
John McGhee QC (instructed by Paul Hastings (Europe) LLP) for the claimants
Kirk Reynolds QC and Julian Greenhill (instructed by Berwin Leighton Paisner LLP) for the defendants in the Zinc Cobham case
Timothy Fancourt QC (instructed by Osborne Clarke) for the defendants in the UK Leasing Brighton case
