Section 25(1)(a) of the Landlord & Tenant (Covenants) Act (“the 1995 Act”) invalidates any agreement relating to a tenancy which would have the effect “to exclude, modify or otherwise frustrate the operation of the provisions of the Act” (“section 25(1)(a) consequences”).
The operation of the 1995 Act is, of course, to release former tenants and guarantors from future tenant and guarantor liabilities under most post 31 December 1995 leases when the relevant lease is lawfully assigned i.e. normally with the landlord’s prior written consent.
Section 25(2) of the 1995 Act says that s.25(1) can apply to a covenant in a lease against assignments insofar as it regulates the giving of consent for the assignment.
The Court of Appeal case of Tindall Cobham 1 Ltd & Ors v Adda Hotels & Ors  concerned various Hilton Hotel leases.
Clause 3.14 of the hotel leases contained two covenants against assignment of the whole of the property.
The first was clause 3.14.3 which was general and enabled the landlords to take advantage of s.19(1A) of the Landlord and Tenant Act 1927 by:
– withholding consent in any one of four circumstances specified in clause 3.14.4 and
– by imposing any one or more of the conditions set out in clause 3.14.5 as a condition of giving consent.
The effect of those provisions was to entitle the landlords:
1. to limit any assignments to a company of sufficient financial standing and business competence; and,
2. to the benefit of a substantial new guarantee and/or an Authorised Guarantee Agreement by the outgoing tenant.
In contrast, Clause 3.14.6, was limited in its application to an assignment to an Group Company of the tenant.
Where that was proposed the landlord had limited itself to the right to impose only two possible conditions:
1. the obligation to give notice to the landlord of the completed assignment (“condition (a)”) and
2. the requirement in clause 3.14.6 (b) that the tenant “should procure that the guarantor and any other guarantor of the tenant” should enter into a deed of covenant in the terms of the Sixth Schedule (“condition (b)“).
If those conditions (if and whenever imposed) were complied with the landlords had to give consent to the assignment (“the consent override” applied).
This regime for Group Companies was very different to clause 3.14.3 where the landlord could theoretically refuse consent even if the proposed assignment otherwise complied with the circumstances and conditions mentioned in clauses 3.14.4 and 3.14.5, so long as the landlord would be acting reasonably in so doing.
The landlord did not have this option under clause 3.14.6. Clause 3.14.6 was designed to provide a more simple and streamlined process for the tenants to obtain consent for an assignment to other companies in the Group on the basis that the parent company would continue to guarantee their obligations under the lease.
If consent could not be obtained under clause 3.14.6 then, if the landlords chose to rely upon all of the circumstances set out in clause 3.14.4, it could not be obtained under clause 3.14.3 because a Group Company like the present assignees would not satisfy any of the criteria in clause 3.14.4. That would be unfortunate for the tenant because any future assignments were likely to be to a Group Company.
The lead appeal judge said the reference to “the Guarantor and any other guarantor of the Tenant” in clause 3.14.6 denoted the persons who were the guarantors of the tenant’s obligations under the lease at the time of the assignment.
The condition imposed on the tenant was no more than that it should procure a new guarantee from those persons.
The lead appeal judge said the condition in clause 3.14.6 which required the tenant to procure a continuing guarantee from an existing guarantor did have the effect identified in s.25(1)(a) of the 1995 Act i.e. “the section 25(1)(a) consequences”.
Section 25(1) is concerned to invalidate agreements which would have “the section 25(1)(a) consequences“. It was not limited to safeguarding the actual exercise of the tenant’s/guarantors’ rights which such agreements contain. That’s to say it was NOT only engaged if the tenant tried to assign its lease to a Group Company.
The words “void to the extent that” indicated that Parliament did not intend to invalidate more of the relevant agreement than was necessary to safeguard the objectives of the 1995 Act in the context of the particular assignment under consideration. And, those words did not preclude the Court from taking a balanced approach to invalidation which neutralised the agreement’s offending parts but did not leave the agreement emasculated and unworkable.
If it was necessary only to remove condition (b) of the proviso as the tenant contended this would treat “conditions (a) and (b)” as independent and self-sufficient rather than as parts of a composite, interdependent proviso under which “the consent override” would apply, and the landlords must consent to the assignment, only if both the conditions are fulfilled.
The Court of Appeal said that the proviso of “condition (b)” was clearly the most important condition from the landlords’ point of view both logically and as a matter of drafting. Its removal called also for the removal of the concluding two lines of the proviso i.e. “the consent override” which could apply ONLY if BOTH “conditions (a) and (b)” were complied with.
This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.