Intra-Group Assignments – the landlord’s risk of losing the guarantor to the lease

February 23, 2015

Since the decisions in Good Harvest[1] and K/S Victoria Street[2] were published, landlords have been very careful in permitting assignments by tenants that could invalidate an existing guarantee. The main concern following these decisions was that an obligation by a guarantor to continue to guarantee the assignee’s performance following a sale of the lease is void under section 25 of the Landlord and Tenant (Covenants) Act 1995 (LTCA 1995), whether or not the guarantor was voluntarily offering such guarantee.

The recent decisions in Tindall Cobham[3] and UK Leasing Brighton Ltd[4] have brought the issues surrounding void guarantor promises into the spotlight again. It is not unusual to find alienation provisions in leases that allow intra-group assignments by the tenant without landlord’s consent, provided that the guarantor remains in situ.

This was also the case in Tindall Cobham and when the tenant took legal advice on a group restructure involving assignments of some of its leases, the tenant’s lawyers advised that since the requirement to continue the guarantee was void under section 25 of the LTCA 1995, the intra-group assignment could validly take place by simple notice to the landlord and the requirement to give a guarantee consequently terminated.

The tenant subsequently assigned the lease to a group company without any involvement of the existing guarantor. The landlord objected to this intra-group assignment on the basis that no continuing guarantee was provided. In this case the guarantor had been the Hilton Group and the strength of the guarantor covenant was pivotal to the landlord’s investment. The landlord argued that whilst the requirement to continue the guarantee may have been void under section 25, the result would have been that the tenant ought to have obtained landlord’s consent, which would have been withheld on the basis that it was reasonable to do so.

The Court of Appeal agreed with the landlord’s interpretation and construed the clauses to the extent that the proviso did not apply and hence the tenant would require the landlord’s consent to assign to a group company. The assignment was therefore unlawful.

In light of the Tindall decision in late 2014, a number of parties were seeking clarification by way of declaratory judgement on intra-group assignments, which the tenant had effected without landlord’s consent in the same and similar scenarios. The parties in UK Leasing Brighton Ltd were in agreement that they wanted to achieve the right outcome, namely that the existing guarantor should continue to guarantee the performance by the tenant. It should be noted that assignments that take place without landlord’s consent are “excluded assignments”, which means that the original tenant and the original guarantor are not released from their obligations under the lease until this assignment is authorised by the landlord. The position therefore was that the tenant remained in breach of the alienation covenant and the parties agreed that the situation could not continue as it was.

The tenant suggested that a further assignment could be effected to a third group company to re-assign the lease to the other group company and therefore enabling the requirement for the old guarantor to revive. However, the landlord would not have been prepared to agree to a free assignment to a shell company without an obligation by the guarantor to guarantee the second limb of assignment back to the tenant. Such a binding agreement, as the High Court confirmed, would have been an invalid promise according to section 25 of the LTCA 1995.

The landlord had suggested that the tenant re-assigns the lease to the original tenant and that the guarantor provides a ‘fresh’ guarantee of the original tenant’s obligations, but the parties were concerned that this may still frustrate the operation of the LTCA 1995 and consequentially the guarantee could be invalid.

The High Court confirmed that the arrangement was possible in view of there being a clear break between the tenant’s obligations under the authorised guarantee and the taking on of new obligations as tenant on re-assignment. The guarantor could therefore provide an entirely new guarantee in these circumstances, it was not a continuing guarantee, which could have avoided the operation of the LTCA 1995.

The High Court also suggested a third option to resolve the issue, which was to assign the lease to the guarantor and enabling the guarantor to assign the lease to the original tenant. The guarantor could then remain liable as authorised guarantor. This arrangement has to be treated with care as any commitment by the parties to this arrangement could invalidate the dealing under the LTCA 1995.

The most recent cases are relevant to tenants who are planning group restructuring involving leases and facing the issue of having to obtain landlord’s consent. Landlords will be looking critically at group restructuring where they could lose the benefit of the lease’s guarantor and consent could be reasonably withheld in such circumstances. It will be for the tenants to propose structures which will satisfy the landlord that the benefit of the guarantee will not be lost in the course of the transaction.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or consitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

[1] K/S Victoria Street v House of Fraser [2012] Ch 497

[2] Good Harvest Partnership LLP v Centaur Services Limited [2010] Ch 426

[3] Tindall Cobham 1 Ltd v Adda Hotels (an unlimited company) [2014] EWCA Civ 1215

[4] UK Leasing Brighton Ltd v Topland Neoptune Ltd and Zinc Cobham Ltd v Adda Hotels [2015] EWHC 53 (Ch)

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