10 November 2014 #Commercial Real Estate
The recent case of Tindall Cobham 1 Ltd v Adda Hotels  has questioned the position reached by the K/S Victoria v House of Fraser (Store Management) Ltd  case. As we reported in our update “A Guarantor or not a guarantor? That is the question.” the K/S Victoria case confirmed that a lease obligation requiring an existing group company guarantor to guarantee the lease obligations of an associated assignee company was void.
In the Tindall case the tenants were all members of the Hilton group whose lease obligations under various leases were guaranteed by Hilton Worldwide Inc. The tenants chose to assign their leases to associated companies as part of a corporate restructuring without obtaining landlords’ consents and then argued that the parent company guarantee had fallen away.
The leases contained restrictions on assignment without landlord consent but also provided that consent would be given to an intra-group assignment so long as:-
(a) notice of assignment was given; and
(b) the guarantor gave a fresh guarantee of the incoming tenant’s lease obligations.
The tenants argued that as the second requirement was unenforceable following the K/S Victoria decision they only needed to satisfy the notice test (which they did following completion of the assignments).
The Court of Appeal held that Section 25 of the Landlord and Tenant (Covenants) Act 1995 was not intended to create “an imbalance in... contractual provisions”. As such both requirements were to be disregarded and the specific lease provisions relating to intra-group assignment should be ignored. The tenant was subsequently under an obligation to obtain consent under the standard assignment provisions in the lease.
The decision seems to help prevent Landlords from being left with tenants of a low covenant strength following intra-group assignments. However, the decision could cause concern for tenants where they only have one associated group company who previously guaranteed their position. In that situation a tenant may find it difficult to find a suitable replacement guarantor.