Anne Waltham
Consultant
Article
9
The Court of Appeal decision in K/S Victoria Street v House of Fraser is applied in another case so that a lease provision requiring a repeat guarantee on an intra-group assignment was void.
In the much-publicised 2011 Court of Appeal decision in K/S Victoria Street v House of Fraser, it was held that a guarantor of an assigning tenant could not - whether compulsorily or voluntarily - provide a continuing guarantee for the performance of the lease covenants by the assignee.
Such a 'repeat' guarantee would breach the wide anti-avoidance provisions in s.25 of the Landlord and Tenant (Covenants) Act 1995. This is because the Act provides for an outgoing tenant - and their guarantor - to be released from liability on an assignment of the lease (although entry into an Authorised Guarantee Agreement (AGA) is permitted).
This decision has important implications for commonly-used corporate restructuring arrangements in that where one company (T1) transfers the lease to another group company (T2), the existing guarantor (G1) - which is often the parent company of both T1 and T2 - cannot act as guarantor for T2, even if it is willing to do so.
In Tindall Cobham 1 Limited & Others v Adda Hotels (an unlimited company) & Others a lease of commercial premises included alienation provisions requiring the prior consent of the landlords to any assignment. The leases provided that such consent could be withheld in certain specified circumstances, or imposed subject to a number of specified conditions.
A further provision separately provided for landlords' consent to be obtained for an assignment to an associated company of the tenant, but subject only to two specific conditions as set out below:
"...3.14.6 The Tenant shall not assign this Lease to any Associated Company of the Tenant without the prior consent of the Landlord Provided Always that ...the Landlord shall be entitled to impose any or all of the following conditions set out in sub clauses (a) and (b) below:
(a) that the Tenant shall provide the Landlord with notice of any such assignment within 10 Working Days of completion of the same;
(b) that on any such assignment, the Tenant shall procure that the Guarantor and any other guarantor of the Tenant shall covenant by deed with the Landlord in the terms set out in the Sixth Schedule at the Tenant's sole cost
and subject to the Tenant's compliance with such conditions the Landlords consent shall be given..."
The Sixth Schedule set out the terms of the guarantee and included obligations to pay the lease rents and perform the tenant's covenants.
In the High Court, the judge had held that this clause permitted an intra-group assignment subject to the prior consent of the landlords (not to be unreasonably withheld) and allowed the landlords to require compliance with conditions (a) and (b). In the case of condition (b), this entitled the landlords to require the assigning tenants to procure a new guarantor (approved by the landlords) in place of the existing lease guarantor.
This construction of the lease provision was challenged on appeal to the Court of Appeal.
Upon considering the effect of the anti-avoidance provisions of s.25 of the 1995 Act in the context of the clause, the Court of Appeal held as follows:
In light of the above, and in order to give effect to s.25 while respecting the structure of the contract between the parties, the Court of Appeal held that the solution in the present case was to treat the entirety of the proviso as being avoided by the legislation. This (in the words of the court) "...leaves clause 3.14.6 as a qualified covenant against assignment which can be operated according to its terms".
In other words, assignment to an associated company would be permitted, but subject to the prior consent of the landlords (not to be unreasonably withheld).
There are a number of points of note here:
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