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Difficulties of the 1995 Act

We looked, in March 2010, at the liability of guarantors to original tenants upon assignment of a tenant’s leasehold interest in the light of the Landlord and Tenant (Covenants) Act 1995.  S5 of the Act releases a tenant of its covenants upon assignment and s24(2) automatically releases too the tenant’s existing guarantor.  S25 of the Act declares void any agreement to the extent that it excludes, modifies or frustrates the operation of any provision of the Act.  The Court of Appeal has now considered the practical implications of s25 (see Tindall Cobham 1 Ltd & others v Adda Hotels & others [2014] EWCA Civ 1215).

The landlord granted 10 hotel leases to companies within the Hilton Group for which the parent company, Hilton Worldwide Inc, stood guarantor.  Pursuant to the leases, the tenant should seek landlord’s consent to any assignment such consent not to be unreasonably withheld.  However, by clause 3.14.6 of each lease, the tenant could not assign to any associated company without the prior consent of the landlord but the landlord could impose any or all of two conditions i.e. (a) notice of any assigment within 10 working days and (b) that the guarantor shall give a guarantee for the assignee.  The tenants, believing condition (b) void, purported to assign the leases to shell companies thus releasing the original tenants and the guarantor.  It was accepted later that landlord’s consent to the assignment should have been sought.  Nevertheless, as condition (b) fell foul of s25 of the Act, the Court of Appeal had to consider whether one simply struck from the lease the 2nd conditon or the whole sub-clause.

Lord Justice Patten said removal of condition (b) alone creates “an inbalance in the contractual provisions which in my view the legislation was not intended to create unless unavoidable.  The far more obvious solution which both respects the structure of the contract and gives effect to the provisions of s25(1) is to regard, as the judge did, the whole of the proviso as being avoided by the legislation.”

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