When tenants offer landlords guarantees of their lease liabilities landlords need to take care what assignment rights the tenant can have and this was demonstrated in last week’s Court of Appeal decision in Tindall Cobham 1 Ltd v Adda Hotels.
As you may recall, prior to the KS Victoria case (previously reported here) it was quite common for guarantors of an outgoing tenant to also guarantee the obligations of the incoming assignee. The KS Victoria case held that this arrangement fell foul of the provisions the 1995 Act as it sought to limit the release of the liabilities of outgoing tenants and guarantors upon assignment.
In the Tindall case the tenant sought to take advantage of the outcome of the KS Victoria case on a lease assignment to a group company where there was only one pre-condition to the assignment to a group company - that the tenant’s guarantor had to provide a repeat guarantee of the group company assignee. The lease was drafted before the KS Victoria case and contained stringent controls on assignment to a company outside the tenant’s group but more freedom to assign intra-group.
Since the KS Victoria case it has been clear that a repeat guarantee will be invalid. In light of this the tenant took the view it did not need to re-state the guarantee previously given and the tenant simply assigned the lease without landlord’s consent. The landlord objected to this on the basis that it had lost the valuable guarantor of the lease and the assignee of lease was now a shelf company which it would not have consented to.
Implications of case for Landlords
- What the Court of Appeal did was apply a common sense approach to removing from the lease the invalid provisions for the repeat guarantee on a group company assignment. It found a commercial solution.
- The court therefore stated that landlord’s consent to the assignment to a group company would still be needed, such consent not to be unreasonably withheld. It specified that the Landlord and Tenant Covenants Act 1927 applied to enable the landlord to impose reasonable requirements upon the assignment in order to sufficiently protect the investment value of their lease.
- This enabled the landlord to request a replacement guarantor (not a repeat guarantor) thus protecting asset value.
On first reading this would appear to be a sensible decision and victory for common sense as it would appear at the time the lease was entered into it was the intention of the parties that the tenant and any permitted assignee would need to be a substantial company or be supported by a guarantor. The result of this case preserved this intention.
The Uncertainty for Landlords and Tenants
As always this case turns on its particular facts and has not created a general rule as to how invalid assignment provisions will be severed. When tenants offer a parent company guarantee of their lease liabilities landlords have to be aware of the fact that the guarantee exists for the time during which the tenant holds the lease and then may continue as a sub-guarantee following assignment but not as a fresh guarantee of the assignee. This case again shows the difficulties tenants may face in assigning leases where they only have one parent company who has the covenant strength to provide a guarantee and that company has already provided a guarantee of the tenant’s obligations.