The recent Court of Appeal decision in Tindall Cobham 1 Limited & Others v Adda Hotels (An Unlimited Company) and Others [2014] EWHC 2637 (Ch) (“Tindall Cobham”) has been welcomed by  concerned landlords following the previous case of K/S Victoria Street v House of Fraser (Stores  Management) Limited and others [2011] EWCA Civ 904 (“K/S Victoria”).

In K/S Victoria, the Court of Appeal held that any agreement requiring a current tenant’s guarantor  to guarantee the obligations of an incoming tenant (an assignee) would be void under Section 25 of  the Landlord and Tenant (Covenants)  Act 1995 (“the LTCA”). Many leases which were granted before  K/S Victoria would have contained such a provision as in this case. Until Tindall Cobham, it was  unclear how the Courts would deal with such a provision.

This decision from the Court of Appeal shows that the Courts will interpret leases affected by  Section 25 of the LTCA in a practical and commercial way and not merely render entire clauses void.

Facts

Adda Hotels and Puckrup Hall Hotel Limited (“the Tenants”) were subsidiaries of Hilton Worldwide  Inc. The Tenants had leasehold interests of ten UK Hotels under a lease whereby Tindall Cobham1  Limited (“the Landlord”) was landlord and Hilton Worldwide Inc. (“the Guarantor”) acted as  guarantor. The leases contained covenants that the Tenants were not to assign the Property to a  group company without the prior written consent of the Landlord, save that if (i) the Tenants  provided the Landlord with notice of the assignment within 10 working days of completion (“the first condition”) and that (ii) on assignment, the Guarantor (and any other guarantor of the Tenants) provided a guarantee of  the assignees’ performance under the leases (“the second condition”), the Landlord’s consent would  be deemed given.

The Tenants assigned the leases to group companies (albeit shell companies) without the consent of  the Landlord. As the leases were granted after 1 January 1996, the Tenants and the Guarantor would  have been automatically released from future liability under the lease unless the assignment was   an excluded assignment (if made by operation of law or in breach of the lease covenants). The  Tenants first argued that these were non-excluded assignments.

The Tenants and the Guarantor considered that there was no need to obtain the Landlord’s prior  written consent as the second condition was void as it offended Section 25 of the LTCA. This is  because it sought to keep the Guarantor “on  the hook” when the Tenants were to be released from  their liabilities. The Tenants therefore merely gave the Landlord notice in accordance with the  first condition.

Decision of the High Court

The Landlord applied to Court for a declaration that these assignments were unlawful as they were  in breach of the leases (and therefore excluded assignments so that the Tenants and the Guarantor  would remain “on the hook” with regard to liability under the leases).

The Landlord’s case was that the second condition should be read as meaning that a replacement  guarantor should stand in the place of the Guarantor or that the Landlord was entitled to refuse  consent (should the second condition be removed and no replacement guarantor be offered). The Court  agreed with this submission and said that consent should have still been requested in any event.

The Landlord was granted summary judgment. The Tenants were found to be in breach of the leases and  the assignments found to be excluded. The Tenants and the Guarantor would therefore not be released  from their liabilities under the leases.

The Tenants and the Guarantor appealed as to the interpretation of the second condition (and the  requirement to procure a replacement guarantor) and as to the effect of Section 25 of the LTCA. In  the interim before the appeal was heard, it was agreed that the assignments were unlawful due to the lack of request for consent.

Decision of the Court of Appeal

The Court of Appeal dismissed the Tenants’ and the Guarantor’s appeal but overruled the High Court  decision as to the interpretation of the second condition (i.e. the requirement for a replacement  guarantor). As a result, in order to give effect to Section 25 of the LTCA, both the first  condition and the second condition were to be treated as void. The covenant would therefore become a simple qualified covenant against assignment and  subject to the usual requirement to act reasonably under Section 19(1) of the Landlord and Tenant  Act 1927 – this was the “obvious solution”.

Had the Court of Appeal ordered that the second condition was to be removed but the first condition  was to remain, the Landlord would have been obligated to give consent following the Tenants giving  notice of the assignment. This would provide the Tenants with an unintended and unfair advantage  over the Landlord.

Similarly, the Court of Appeal were reluctant to interpret the clause in a way that the Tenants  were required to procure a replacement guarantor (as the Landlord had argued), as Lord Justice  Patten considered that this would be a “significant re-formulation of the clause”.

Section 25 of the LTCA indicates that an agreement will only be void “to the extent that” it  offended the LTCA. The Court therefore considered the covenant in the context  of the whole of the  leases and did not feel it necessary to disregard more of the clause than absolutely required in order to give effect to the LTCA nor  add additional obligations to provide a replacement guarantor.

Conclusion

Each case going forward will turn on its own facts and the particular wording of the lease. However  the decision will give confidence to both landlords and tenants that the Courts will not try to  reinvent the meaning of an entire agreement and will try to find the most commercially practical  result for both parties.

The decision may have an effect on future drafting in so far as tenants may be required to find  replacement guarantors of equivalent standing. This is particularly difficult in a group of companies where the parent of good financial standing acts as the first  guarantor but there is no other new and substitute company within the group of equivalent standing  to act as a replacement guarantor on an assignment.