The litigation in UK Leasing Brighton Ltd v Topland Neptune Ltd [2015] EWHC 53 (Ch); [2015] PLSCS 15 stems from the proceedings in Tindall Cobham 1 Ltd v Adda Hotels [2014] EWCA Civ 1215; [2014] PLSCS 249. The case concerned the effect of provisions in the Landlord and Tenant (Covenants) Act 1995 and was triggered by the assignment of leases between companies in the same group. The tenants were brought to accept that they should have asked their landlord for permission to assign their leases and that the assignments were unlawful because they did not do so. Consequently, they and their guarantors had not been released from liability under their leases.
Both sides wanted to “undo” the unlawful assignments, but were unable to agree on the way forward. The landlord suggested re-assignments accompanied by fresh parent company guarantees, but the tenants argued that the new guarantees would be invalid. They cited the strict anti-avoidance provisions in the legislation and argued that that the landlord’s scheme would fall foul of section 25 of the 1995 Act because it would frustrate the release of the guarantor by re-imposing liability on it at the very point in the cycle when the legislation provides for guarantors to be released.
The tenants suggested that there should be an intermediate step in the process. They argued that the leases should first be assigned to new companies. This would release the parent company from its guarantees. When this had been done, the leases could be assigned back to the original tenants, and the parent company would then be free to enter into new and effective guarantees.
However, in the absence of binding agreements with all parties, the landlord could not be certain that the tenants and their guarantor would complete all the stages of this process. It was also concerned that any mechanism that would bind the guarantor to give fresh guarantees would also be invalid, since this would frustrate the release of the guarantor.
The judge agreed that the tenant’s scheme would fall foul of the anti-avoidance provisions in the 1995 Act because the landlord would be requiring the guarantor to commit itself to future guarantees before being released from liability under its existing guarantees. However, the judge drew a parallel with K/S Victoria Street v House of Fraser [2012] Ch 497 and used thinking from that case to uphold the landlord’s scheme.
If an outgoing tenant’s guarantor cannot be required to guarantee an incoming tenant’s liabilities under a lease, but can be required to guarantee the outgoing tenant’s liabilities under an authorised guarantee agreement, it would also be legitimate for the guarantor in this case to provide fresh guarantees for its tenants when the leases were re-assigned to them. The re-assignments would release the guarantor “to the same extent” as the tenants were being released, as is required by the legislation, leaving the guarantor free to enter into the further guarantees.
The decision makes commercial sense in the circumstances of this case. However, some may question the rationale that the judiciary has forced to adopt in recent cases to help the parties out of a hole. What a pity that the calls for reform prompted by the decisions in K/S Victoria and Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch), have yet to find favour with the legislature.
Allyson Colby is a property law consultant
