Intra-group Assignments – What can a landlord expect from a parent company guarantor?

It is not unusual or unreasonable for businesses holding large assets, such as long term leases, to require flexibility to reallocate assets during a lease term within the company group. 

However, since the decisions in Good Harvest v Centaur and K/S Victoria v House of Fraser there has been a question over the extent to which parent guarantees can be provided on an assignment if the parent company is already acting as a guarantor of the existing tenant.

The recent decision in Tindall Cobham 1 Limited v Adda Hotels has gone some way to clarify this.

In this case, the Tindall companies, part of the Hilton Group, were the tenant of a portfolio of hotels owned by Adda.  Their obligations under the lease were guaranteed by the Hilton parent company.

Not only did their leases contain the usual restrictions on assignment without landlord’s consent, acting reasonably, but a further clause permitted intra-group assignments without landlord’s consent provided that:

1. notice was given to the landlord of the assignment; and
2. the “Guarantor and any other guarantor of the Tenant” guaranteed the incoming tenant’s performance of the obligations.

Following the decision in K/S Victoria v House of Fraser that a requirement for a repeat guarantee was void under the Landlord and Tenant (Covenants) Act 1995, Tindall decided these additional provisos were invalid and so proceeded to assign the leases without consent.

Needless to say Adda, when faced with the loss of a valuable guarantor and a tenant of no value, which it would not have consented to under normal circumstances, disputed this interpretation claiming that the tenant was in breach of its covenants.

On appeal, whilst Tindall had by then conceded that landlord’s consent to the assignments was required, it maintained the landlord had to consent in accordance with the subsequent intra-group provisos.  As the requirement for repeat guarantee was void under the Landlord and Tenant (Covenants) Act 1995, the parent company was therefore off the hook.

In considering the extent to which the invalid intra-group proviso should be severed the Court of Appeal applied a common sense approach to ensure a commercial solution.  It held that both requirements should be disregarded and so the lease provision in respect of intra-company assignments fell away entirely.  This meant the tenant continued to have a degree of flexibility to transfer the leases to other intra-group company albeit with landlord’s consent and the landlord had the opportunity to seek a different guarantor or to refuse consent if it was not satisfied with the covenant strength offered so protecting its assets.

Whilst this case has provided us with an insight into how the Court will look at these obligations, it should be noted that the outcome did turn on the interpretation of the wording of the lease.  A different case may lead to a different outcome. 

It is clear that the question surrounding repeat guarantees will continue to be a concern for landlords and tenants alike. Tenants, wishing to reorganise their business, may well find themselves in a difficult position if unable to provide an equivalent guarantee or suitable alternative, whilst landlords, wishing to protect their assets, will need to ensure they are fully aware of the circumstances to any proposed intra-group assignment.  Both parties should consider other options.  For example, an existing parent company guarantor could continue to act as guarantor for the existing tenant under the authorised guarantee agreement it will be providing on the assignment of the lease or a rent deposit from the incoming tenant may be a sufficient substitute.