UK Leasing Brighton Ltd v Topland Neptune Ltd and Zinc Cobham 1 Ltd v Adda Hotels (an unlimited company)  EWHC 53 (Ch)
This decision provides further clarification on difficult aspects of the operation of the Landlord and Tenant (Covenants) Act 1995. In Tindall Cobham 1 Ltd v Adda Hotels , an assignment of ten leases was held to have been unlawful. In this sequel, combined with another similar case, the High Court was asked to grant declaratory relief on how best to return the parties to the relationship they were in before the unlawful assignment took place.
As a result of the unlawful assignment, the leases were held by T2. The former relationship, which the parties wished to restore, was that the leases were held by T1, and T1’s obligations were guaranteed by G.
The landlord’s proposal was simple and direct: T2 would reassign the lease to T1, and G would give a new guarantee. The tenant doubted whether this was permitted under the 1995 Act. The High Court held that it was permitted. Upon the assignment T1 would be released under s.11(2)(b) of the Act, while at the same time taking on new liability under s.3. G would be “released to the same extent as the tenant” by s.24(2) of the Act, while taking on a new guarantee liability. There was no inconsistency, in relation to either party, in the simultaneous release and the assumption of new liability. This conclusion was arrived at by analogy with certain obiter remarks of Lord Neuberger in K/S Victoria Street v House of Fraser , and thereby confirms those remarks.
The tenant had proposed that:
- T2 would assign to an associated company, Newco, thus releasing T1 and G; and
- Newco would then assign to T1, and G would give a new guarantee.
All parties were agreed that this would not fall foul of the 1995 Act, however the landlord was understandably concerned that there was no obligation on T1/T2/Newco and G to carry out all the required steps without a prior binding agreement to do so, and there was a doubt whether such an agreement itself would fall foul of the 1995 Act.
The Court did not need to consider this proposed arrangement in detail but did hold (obiter) that the prior binding agreement which the landlord would have required would be invalid. Because it would be entered into before G had been released from the original obligation, it would frustrate the operation of s.24(2) of the LTCA 1995. This holding, though obiter, confirms the general view in relation to one of the loose ends left over from K/S Victoria.
The analogy with Lord Neuberger’s comments in K/S Victoria, which the court relied on here to uphold the landlord’s proposal, is not beyond criticism. It is, however, unlikely that the particular circumstances of these two cases will be widely replicated in practice.
Perhaps the most important aspect of the judgment is the obiter holding on the tenant’s proposed solution. It was made clear that any agreement obliging a guarantor to take part in a series of related transactions designed to preserve their liability as a guarantor will be void. It is odd, though, on the face of it, that an agreement to do something which is not invalid under the 1995 Act, should itself be invalid.
The parties had rejected options including a surrender and re-grant, or an agreed court order that the lease should be re-vested in T1. It would have been interesting to see the court’s analysis, but unfortunately these options were not considered as part of the judgment.
Another point worth noting is that there was some discussion of another of Lord Neuberger’s widely quoted obiter comments in K/S Victoria, to the effect that where a lease is held by T1 and guaranteed by G, an assignment of the lease to G would be invalid. The court noted that this remark was obiter, and described it as “somewhat tentative”, but declined to decide whether or not it was correct since the point had not been fully argued. It will be interesting to see whether this issue, one of the most controversial aspects of the K/S Victoria Street judgment, is tested in court at some point in the future.