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Tindall Cobham Limited & Others and Adda Hotels (an Unlimited Company) and Others  EWCA Civ 1215
The Court of Appeal has confirmed that a clause requiring the guarantor of an outgoing tenant to guarantee a new assignee is unenforceable. Such a provision would conflict with the provisions in the Landlord and Tenant (Covenants) Act 1995 ("the Act") that operate to release tenants and guarantors when the lease is assigned.
Where such a provision exists, it must be severed from the rest of the clause. If other terms can survive the severance then both parties must comply with them. In this case, severing the condition left a straightforward qualified covenant against assignment, ie not to assign without the consent of the landlord, such consent not to be unreasonably withheld or delayed.
The period for which a tenant will remain liable post-assignment depends on when the lease was granted. A lease that pre-dates 1 January 1996 is known as an "old" lease. If it was granted after this date, it will be a "new" lease. The distinction is very important when it comes to ongoing liability.
Tenants under "old" leases remain liable for the entire length of the term. But for "new" leases, the Act applies to give the tenant an automatic release, provided that the assignment is not excluded. Excluded assignments include assignments by operation of law, such as when a trustee in bankruptcy is appointed, or where the assignment is in breach of the terms of the lease, for instance when consent has not been obtained.
The Act also releases guarantors from liability when the tenant's liability comes to an end. This means that an assignment will also release the guarantor. The Act contains very broad anti-avoidance provisions, to prevent landlords from granting "new" leases that would keep tenants and guarantors on the hook despite the automatic release.
The Act does permit the outgoing tenant to guarantee the liabilities of the assignee. This is known as an Authorised Guarantee Agreement ("AGA"). However, when the lease is subsequently assigned again, the original tenant will be released from the AGA. The guarantor can guarantee the performance of the original tenant under the AGA (this is known as a "GAGA") but cannot guarantee the assignee directly, nor a subsequent assignee.
This can be problematic where large groups of companies wish to carry out multiple intra-group transfers over the term of the lease.
The tenants and proposed assignees in this case were all associated companies in the Hilton Group. The leases were all "new" and were in substantially the same form for significant rents. The same parent company, Hilton Worldwide, Inc. (Hilton), had guaranteed all the leases. The tenant companies were not worth very much, but Hilton was an extremely valuable guarantor.
The leases contained covenants against assigning the whole of the premises. First, there was an overarching general restriction to prevent assignments without the prior consent of the landlords. This clause allowed the landlords to refuse consent, provided that it was acting reasonably. It also allowed the landlords to limit consent to assignees that it considered suitable, with a new guarantor and/or an AGA from the original tenant.
The second clause, prevented the tenants from assigning the lease to group companies without consent. The landlords could also impose the following conditions, known as "Proviso A" and "Proviso B":
- To give notice to the landlord of the assignment; and
- To "procure that the guarantor and any other guarantor of the tenant shall covenant with the landlord" to guarantee the assignee's performance of the covenants
If the tenants complied with these requirements, the landlords were obliged to give consent to assignments to intra-group companies. However, the wording of the leases was called into question when the Court decided in K/S Victoria Street –v- House of Fraser  that such repeat guarantees were invalid under the Act. The tenants decided that this meant it could simply proceed with the assignments without consent, because the covenants were void.
As part of a corporate restructure, the tenants assigned their respective leases to other companies in the group without procuring a guarantee from Hilton, and without seeking consent from the landlords, in breach of the tenant covenants of the lease. The tenants believed that both they and Hilton would be released under the provisions of the Act. Again, the assignee companies were only nominal companies that were not worth anything.
The landlords, not wishing to lose the Hilton guarantor, made an application to Court for a declaration that the assignments were unlawful because the tenants had breached the assignment provisions in the leases.
The first decision
The High Court found in favour of the landlords for two main reasons: the wording of the leases and the application of the Act. It found that the assignments were in breach of the alienation provisions in the leases because the tenants had failed to obtain consent. As such, the original tenants and Hilton were not released by the Act, and remained on the hook.
The Court found that the leases were worded so that the landlords would either have tenants who could pay the rent or guarantors who could pay the rent if the tenants failed to do so. If Proviso B were to be deleted from the leases, it would have precisely the opposite effect. Therefore it was necessary to read Proviso B as "any other guarantor procured by the tenant" rather than "any other guarantor of the tenant".
The alternative way to read the lease was to remove Proviso B as invalid, and to read the second covenant as a simple qualified covenant against assignment without consent. When faced with a potentially worthless assignee, the landlord was then likely to be able to act reasonably by insisting upon a guarantor.
The tenants and Hilton appealed.
The Court of Appeal
By the time the matter reached the Court of appeal, the tenants and Hilton had accepted that the assignments were unlawful, and therefore excluded from the release under the Act, because they had not applied for consent before completing them. However, they wanted to appeal the decision on the application of the Act and the interpretation of Proviso B. The Court, in line with the modern approach of trying to give contracts the most commercial and sensible interpretations, had to consider the terms objectively and apply common sense so that one party did not receive a windfall.
The Court of Appeal had to consider two main issues:
- What was the correct interpretation of Proviso B?
- What was the effect of the Act?
Overall, the Court of Appeal dismissed the appeal and thus found in favour of the landlords. It overruled the High Court on its interpretation of Proviso B, but upheld the decision on the Act.
The Court felt that there were no good grounds for reading Proviso B to require not only a new guarantor, but also a new guarantee. Nor did it agree that the lease could be stretched to require the approval of the landlords for the new guarantor. Reading the wording in its plain, ordinary meaning, the contentious phrase "the guarantor and any other guarantor of the tenant" meant the parties that were the guarantors of the tenant at the time of assignment. Proviso B required that the tenants procured guarantees from those parties, and nobody else. Whilst the Courts had to apply a modern and commercial approach, this did not mean that the Act could be avoided.
On the Act, the Court considered that this was a situation where the anti-avoidance provisions applied. The Act did not come into play until the rights under the lease were exercised. If a landlord had the ability to restrict or prohibit consequences because of the wording of the lease, then that ability was subject to the requirements of the Act. In this case, the wording would have frustrated the Act, and so it was void.
Having decided this, the Court then had to go on to consider the extent to which the contract was voided by the Act. Was it the entire clause, or just part of it? The judges found that both the Provisos were void. However, the covenant that was a mere qualified covenant against assignment could remain.
The reasoning was based on the Act. It is not the purpose of the Act to invalidate any more of the contract than is necessary. The Court had to take a balanced approach and consider the structure of the contract objectively, taking a "common sense" view. The way to do this was to treat both Provisos as void, leaving the remaining covenant as a qualified covenant against assignment that could then work on its own terms. This would enable the landlord to withhold consent unless the tenants provided suitable assignees and/or guarantors.
This case law has been brewing for some time, because a great many leases that were drafted prior to K/S Victoria will contain similar provisions.
Although this case is very useful guidance, and an insight into how the Court will treat these covenants, it did turn entirely upon the wording of the leases. Every lease will be different, and that will be the main factor in any decision.
For new leases, great care must be taken when drafting assignment provisions so as not to fall foul of the Act and the K/S Victoria decision. One solution could be to obtain a 'GAGA' from any existing guarantor. Another would be to demand a larger rent deposit from the assignee.
For existing leases, our advice is not to assume that a provision that seemingly falls foul of the Act will be avoided. Tenants should therefore seek advice on how to comply with such provisions without breaching them. Landlords should seek advice on whether tenants have done so, and what requirements they can enforce.