Guaranteed or not? Court backs landlords in real estate dispute about Hilton’s restructuring

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Summary: In an important decision, the Court of Appeal has ruled how the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995 operate where the tenant wishes to assign intra-group but there is a requirement for a guarantee which void under those provisions.

In an authoritative ruling today (Tindall Cobham 1 Limited & Others v Adda Hotels & Others [2014] EWCA Civ 1215), the courts have held that tenants of a portfolio of hotels cannot assign their leases intra-group in a way that would release the parent company guarantor of the tenants’ obligations.

Background


In 2002 Hilton sold to and leased back from Tindall a portfolio of 10 hotels. The leases were granted to companies in the Hilton Group. The tenants’ obligations were guaranteed  by a parent company of substance. On 1 July 2014 the tenants assigned the leases without Landlord’s consent to newly formed associated companies.

The lease contained specific provisions for intra-group assignment.

Under the Landlord and Tenant (Covenants) Act 1995 as explained in the case of K/S Victoria Street v House of Fraser (Stores Management) Ltd a guarantee of an assignee  given by the guarantor of the tenant is void.

The Hilton portfolio leases allowed the tenants to assign intra-group without obtaining consent if such a guarantee was given. But the guarantees would be void. Did that mean that Hilton could proceed with intra-group assignments without providing any guarantees at all; or that the fast-track route for intra-group assignments did not work?

A High Court judge held that as the guarantee by the original tenant’s guarantor of the assignee was void, the landlord could require an acceptable alternative guarantee.

Hilton appealed.

Today, the Court of Appeal has unanimously dismissed the appeal.

The Court of Appeal analysed the problem differently. They said that the void nature of the guarantee of the assignee meant that the whole of the proviso dealing with the conditions for intra-group assignment were ineffective. What is left of the clause is a qualified covenant against assignment, whereby the Tenants cannot assign without the consent of the Landlord, not to be unreasonably withheld.

The significance of the ruling


Today’s judgment provides helpful guidance on how the courts will manage the tensions between landlords and tenants when intra-group assignments are required. It is an important decision for parties who have entered into leases where the covenant of a guarantor is critical to the deal.

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