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Lease Assignment Thwarted Due to Guarantee Provisions

Tuesday, 4 November 2014

The court of appeal heard an important case in 2014 regarding the validity of an assignment where a commercial lease guarantee existed.

In Tindall Cobham 1 Limited & Others v Adda Hotels & Others [2014] the tenants were all associated companies in the Hilton Group Adda Hotels; while Packrup Hall Hotel Limited were the original tenants of ten hotels in the UK under separate leases granted back in 2002. Each of the leases was substantially the same and they reserved significant base and turnover rent with Hilton Worldwide Inc (parent company in the Hilton Group) as guarantor.

Prior to the K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2011], it was fairly common for guarantors of an outgoing tenant to also guarantee the obligations of the incoming assignee. The KS Victoria case held that this arrangement breached the Landlord and Tenant (Covenants) Act 1995 by attempting to release the liabilities of tenants and guarantors upon assignment.

The facts of Tindall Cobham 1 Limited & Others v Adda Hotels & Others [2014]

On 1st July this 2014, leases were assigned by the existing tenants (subsidiary companies of Hilton Worldwide Inc: Adda Hotels and Packrup Hall Hotel), as part of a group-reorganisation to newly incorporated shell companies without any financial standing, without prior consent of Tindall.

The leases contained a clause allowing for intra-group assignment, with the landlord’s consent, provided that (a) notice was given to the landlord within ten days of completion and (b) the tenant would procure a guarantee from any existing guarantor. The clause stated that upon satisfaction of these conditions the landlord’s consent would be given.

The tenant argued on the basis of the outcome in KS Victoria that the requirement regarding the guarantee was void and therefore only the first condition needed to be satisfied. Its claim basically suggested that any intra-group assignment simply required notice to be given to the landlord in order to receive consent.

Inevitably this was not how the landlord perceived the working of the clause as it was potentially left with no guarantors and tenants without any substance.

The Court of Appeal Decision in Tindall Cobham 1 Limited & Others v Adda Hotels & Others [2014]

The Court of Appeal held that the whole provision allowing intra-group assignment upon providing notice and providing a guarantor was void for breaching section 25 of the LTCA 1995.

The court also held that the valid part of the clause was a qualified covenant requiring the tenant to gain the landlord’s consent to assign intra-group. Therefore, the landlord could reasonably refuse consent if the tenant was unable to find a suitably substantial assignee or an alternative guarantor.

The Implications of this Decision

The decision in this case is important for both landlords and tenants, particularly where guarantees are essential to the wider business context. It was perhaps unsurprising that the Court of Appeal did not allow the fact that the guarantee element in the assignment clause was void to enable the tenant and its guarantor to escape their obligations unhindered.

For specialist advice on commercial lease guarantees or assignment of contracts where a guarantee exists please contact Peter Gourri today by email or telephone 0207 611 4848.

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