The Court of Appeal has recently had to consider the extent to which parent company guarantees can be given on assignment and their treatment if a renewal of a parent company guarantee is rendered void by the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act).

A requirement in a lease that on assignment the current guarantor, guarantees the incoming tenant is void pursuant to section 25 of the 1995 Act.  In the case of Tindall Cobham 1 Limited v Adda Hotels [2014] EWCA Civ 1215, the tenant hotel occupiers, all part of the Hilton group, sought to assign their leases to associated shell companies and drop the parent company guarantee.  The Court of Appeal held on Friday that they were not entitled to do so.

The leases contained restrictions on assignment without landlord’s consent.  However in relation to assignments to associated companies the lease stated that the landlord’s consent would be forthcoming provided that 1) the tenant provided notice of assignment to the landlord within 10 working days of assignment and 2) on assignment the guarantor shall stand as guarantor to the incoming tenant.  The tenant companies believed that because the second requirement was void (following the KS Victoria case) they only needed to satisfy the first requirement which they did following their assignment of all the leases to shell companies without a guarantor.   

The Court of Appeal disagreed.  It said that if only the second requirement was void then this would create “an inbalance in the contractual provisions which … the legislation was not intended to create unless unavoidable”.  The Court of Appeal therefore said that to give effect to the anti-avoidance provisions in section 25 of the 1995 Act both requirements should be disregarded so the particular lease provision on assignments to associated companies fell away and instead the tenant was required to obtain the landlord’s consent, which would allow the landlord to seek an alternative guarantor or refuse consent if not satisfied as to the covenant strength of the assignee.  The Court said that “this realistically treats the proviso as a complete term of the contract and leaves the [covenant] as a qualified covenant against assignment which can be operated according to its terms”. 

This decision will be of heightened significance to the hotel & leisure sectors, supermarkets and logistic sectors, as well as holders of special assets buildings such as headquarters offices where tenants are looking for long term leases, holding them without any intention of assigning out of group but where flexibility is required to move the asset around within the group.  The Court of Appeal’s ruling may make it much harder to assign to an associated tenant without providing an equivalent guarantee, which may not be available.