A new Court of Appeal decision handed down on Friday 5 September has given landlords some comfort that leases entered into before a line of cases that ruled many guarantee provisions invalid will still be interpreted in a sensible commercial manner.
In 2011, in a case involving sales and leasebacks of the House of Fraser retail property portfolio, the Court of Appeal decided that a parent company cannot continue to act as the direct guarantor of a lease which is assigned from one subsidiary to another. Landlords have struggled since then with the question of how to protect their investment value when their tenant wants to enter into a group reorganisation, particularly where their leases were drawn up at a time when the law in this area was unclear.
Adda Hotels and Puckrup Hall Hotel Limited are subsidiaries of Hilton Worldwide Inc. Together they held leases of ten UK hotels with their parent as guarantor. Each of the leases, which were granted in 2002, restricted the tenant from assigning to another company in the same group without the consent of the landlord. This consent could be withheld unless the parent company stood as guarantor of the new tenant. After the decision in the House of Fraser case any such continuing parent company guarantee would be void.
Adda and Puckrup took the view that, because the continuing guarantee would be void, the entire clause requiring landlord's consent to an assignment within the group was void. On 1 July 2014 they assigned the ten leases to other Hilton companies without seeking any consent from their landlords, the Tindall Cobham companies.
The landlords succeeded in persuading a High Court Judge on 14 July that this was an assignment in breach of the leases. Adda and Puckrup appealed, but now the Court of appeal has again backed the landlords. Leases which provide for guarantees to be given which are legally void will be read in such a way as to preserve as much of the commercial bargain between the parties as possible. The landlords' consent is still required and they can impose other reasonable requirements which protect their investment value.