A briefing on the Court of Appeal's decision in Tindall Cobham 1 Limited & others v Adda Hotels (an unlimited company) and others which preserved a landlord's right to consent to an intra-group assignment by its tenant, nothwithstanding the unenforceability of provisions in the lease requiring an existing guarantor to guarantee the incoming tenant.
Parent company lease guarantees: expedited court case preserves value for landlords - Tindall Cobham 1 Limited & others -v- Adda Hotels (an unlimited company) and others.
The Court of Appeal today decided to preserve a landlord’s right to consent to an intra-group assignment by its tenant, notwithstanding the unenforceability of provisions in the lease requiring an existing guarantor to guarantee the incoming tenant.
Landlords and their funders will be relieved at the decision, which mitigates some concerns landlords have had since the 2011 House of Fraser Court of Appeal decision, and which in this case preserved the value of the property (and the funders’ security).
The case is also important for tenants and their guarantors seeking to manage ongoing property liabilities following sales or corporate reorganisations.
The tenants were members of the Hilton group. Hilton Worldwide Inc guaranteed the tenants’ obligations under leases of 10 hotels and associated premises. The tenants assigned the leases to affiliated shell companies as part of a corporate restructuring without requesting or obtaining landlords’ consent. The tenants argued that the landlords’ consent to the assignment was not required despite the terms of the leases because a provision in the leases requiring Hilton Worldwide Inc to guarantee the shell companies (as the new tenants) was invalid, and that this guarantee had fallen away on the assignment.
The assignments were carried out at the same time as the landlords were trying to refinance existing debt secured against the hotels. The hotels would be worth less than the debt if the assignments were valid and Hilton Worldwide Inc’s guarantee had fallen away. This would have significantly affected the landlords’ ability to refinance.
In light of the materiality of the issues between the parties in the context of the landlords’ imminent refinancing, the case was heard on an expedited basis. The case decided that:
- the assignments were unlawful and that the original tenants and guarantor remained liable under the leases; and
- before future assignments of the leases, the landlords’ consent had to be obtained, and could be withheld where it was reasonable to do so.
- The covenant strength of the tenant and its guarantor is key to the value of a property, affecting both landlords and their funders. Any uncertainty about the enforceability of tenant or guarantor covenants can make it very difficult to sell or raise finance on a property.
- It can be equally important for a parent company to be released from a lease guarantee, for example on a sale or group restructuring. The high stakes for both sides mean parties may be willing to incur the expense of litigation to protect their position.
- The courts can be prepared to interpret leases and other agreements so they make business sense. Here the High Court said it was “obvious” that the intended structure of the leases was that the landlords always had either a tenant or a guarantor of sufficient covenant strength to meet the tenants’ lease obligations.
- It is common for a tenant to covenant not to assign the lease without the prior consent of the landlord. If the tenant then assigns the lease without consent, it risks both the tenant and its guarantor remaining liable under their lease covenants after the assignment. This may be the case even where it seems that consent would have to be granted, or where conditions to obtaining landlord’s consent cannot be complied with.