Assignments + Guarantees - TLT Annual Commercial Leases Seminar
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This presentation from TLT's Annual Commercial Leases Seminar considers issues with assignments and guarantees.
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Assignments + Guarantees - TLT Annual Commercial Leases Seminar
- 1. TLT LLP Assignments and Guarantees TLT Annual Commercial Leases Seminar 2015
- 2. TLT LLPTLT LLPTLT LLP TLT LLP Assignments • Most commercial leases contain restrictions on assignments • Absolute • Qualified (landlord's consent required not to be unreasonably withheld or delayed) • Section 19(1A) allows the landlord to set out when consent can be refused and what conditions are reasonable. • Court cannot look behind reasonableness of these but can see if made out
- 3. TLT LLPTLT LLPTLT LLP TLT LLP Landlord and Tenant (Covenants) Act 1995 • Some history • Recession of the late 1980s brought the law of privity of contract into disrepute • Privity of contract – right of a landlord to sue the original tenant and his guarantor at any point during the term • Claims brought many years after the lease had been assigned • Parliament legislated to change this
- 4. TLT LLPTLT LLPTLT LLP TLT LLP Landlord and Tenant (Covenants) Act 1995 • Effect • On the lawful assignment of a lease the tenant is released from all future liability • The guarantor is also released • The only qualification is the tenant can give an authorised guarantee agreement (AGA) by which the tenant guarantees only his immediate successor • On a further assignment the former tenant is then released from the AGA • Section 25 contains anti-avoidance measures
- 5. TLT LLPTLT LLPTLT LLP TLT LLP Landlord and Tenant (Covenants) Act 1995 • Landlords frequently and rightly insist on guarantees • Any agreement which has the effect of continuing the liability of tenant (other than under an AGA) or guarantor is void • So: • Tenant (T1) cannot act as the guarantor of Assignee (T2) other than through an AGA • T1's guarantor (G) cannot act as the guarantor of T2 as there is no equivalent for guarantors of an AGA • Nearest is a guarantee of the AGA (a GAGA) but that is not the same thing and may not be acceptable to landlord
- 6. TLT LLPTLT LLPTLT LLP TLT LLP Landlord and Tenant (Covenants) Act 1995 Example 1 - Yes: Landlord T1 (Former Tenant) T2 (Former Tenant) Tenant (T1) Assignee (T2) Assignee (T3) Lease AGA1 AGA2 Assignment Assignment
- 7. TLT LLPTLT LLPTLT LLP TLT LLP Landlord and Tenant (Covenants) Act 1995 Example 2 - Yes: Landlord Former Tenant (T1) Former Tenant (T2)Guarantor Tenant (T1) Assignee (T2) Assignee (T3) Former Guarantor GuaranteeLease AGA1 GAGA AGA2 Assignment Assignment
- 8. TLT LLPTLT LLPTLT LLP TLT LLP Landlord and Tenant (Covenants) Act 1995 Example 3 - No: Landlord Mr and Mrs Smith (G) Mr and Mrs Smith (G) Tenant (T1) Newco Limited Assignment Guarantee GuaranteeLease
- 9. TLT LLP Landlord and Tenant (Covenants) Act 1995 • Rationale for this complexity is not clear • Particularly difficult to understand in a consensual situation • Problematic where group company structure is involved • Landlords need to protect the parent company guarantee
- 10. TLT LLPTLT LLPTLT LLP TLT LLP Tindall Cobham 1 Limited v Adda Hotels [2014] Tindall Cobham 1 Limited (L) Hilton Worldwide Hilton Worldwide New Co (T2)Adda Hotels (T1) Lease Guarantee Guarantee Assignment
- 11. TLT LLPTLT LLPTLT LLP TLT LLP Tindall Cobham 1 Ltd v Adda Hotels [2014] Facts • Standard qualified covenant against assignment • Additional subclause aimed directly at assignment to associated companies • This required the parent company to continue to guarantee the assignee • But this fell foul of Section 25 as the guarantee could not continue • What was the effect?
- 12. TLT LLP Tindall Cobham 1 Ltd v Adda Hotels [2014] Decision • Entire subclause struck down • Cherry picking discrete elements of the subclause produced an unfair result to one party or the other • This way the main qualified covenant against assignment applied and the landlord could still call for a guarantor albeit not the existing guarantor
- 13. TLT LLPTLT LLPTLT LLP TLT LLP UK Leasing Brighton Ltd v Topland Neptune Ltd [2015] • Parties could not agree on how to remedy the situation and preserve the parent company guarantee • Various solutions proposed - Judge agreed that • assignment by T2 to T1 with a new guarantee from the parent company would work • T2 assigning to an intermediate company T3 and then T3 assigning to T1 with parent company guarantee was also ok (but not acceptable to landlord) • What about assigning to the parent company (posed by Lord Neuberger in K/S Victoria Street)? Judge declined to decide this question
- 14. TLT LLPTLT LLPTLT LLP TLT LLP Landlord and Tenant (Covenants) Act 1995 • Some conclusions • Byzantine in complexity and field day for lawyers • Differences between guarantees, AGAs and GAGAs subtle but important • Has the potential to alter or scupper a sale or group reorganisation • Landlords must take care to preserve parent company guarantees - may be only thing of value • Much may depend on the quality of the drafting • Law ripe for reform
- 15. TLT LLPTLT LLPTLT LLP TLT LLP Lankester & Son Limited v Rennie [2014] Facts • Car showroom let to Mr and Mrs Rennie in 2007 • Lease runs to 2017 • Qualified covenant against assignment • Personal right to break on 6 months notice • Mr Rennie wanted to surrender lease • Landlord agreed to consider an assignment to The Car Agency
- 16. TLT LLPTLT LLPTLT LLP TLT LLP Lankester & Son Limited v Rennie [2014] Facts (cont.) • Number of hurdles to overcome • Landlord required personal guarantees from TCA's directors • Part of the premises included in the registered title to the Tesco Express next door preventing registration of the Rennie's lease • TCA wanted the same break right as the Rennies. • Despite this the Rennies vacated and TCA moved in • Landlord warned the Rennies this would change nothing but they ignored the warning
- 17. TLT LLP Lankester & Son Limited v Rennie [2014] Facts (cont.) • Matters dragged on • TCA asked the Landlord to carry out repairs and accept monthly rent • When it became clear TCA would not get the terms it wanted TCA moved out • Landlord sued the Rennies for unpaid rent
- 18. TLT LLPTLT LLPTLT LLP TLT LLP Lankester & Son Limited v Rennie [2014] The Rennies' arguments • The executed deed of assignment was effective to assign the lease • Landlord estopped by conduct from denying that TCA was the tenant • Everyone worked on the basis that the assignment had taken place and so an "estoppel by convention" had arisen
- 19. TLT LLPTLT LLPTLT LLP TLT LLP Lankester & Son Limited v Rennie [2014] Decision • Formal deed of assignment required to change the legal title (even if in breach of covenant) • Execution of a deed is not enough; there must be delivery: • Evidence that the maker of the deed intends to be bound • Dating is usual but not essential • No evidence of delivery here
- 20. TLT LLPTLT LLPTLT LLP TLT LLP Lankester & Son Limited v Rennie [2014] • Decision (cont.) • No representations by the Landlord that it accepted TCA as tenant; quite the contrary. • Subsequent dealings between Landlord and TCA did not change this • Rennies had not acted to their detriment. The decided to vacate unilaterally • If they believed they were no longer bound by the lease, that was not down to the Landlord
- 21. TLT LLPTLT LLPTLT LLP TLT LLP Lankester & Son Limited v Rennie [2014] • Landlords • Be clear in your dealings with proposed assignees • Make it clear that the existing tenant remains liable until completion of assignment/licence to assign • Arguments about estoppels and equitable assignments are difficult to sustain • Tenants • No lawful assignment until deed of assignment completed • If lease assigned in breach then an "excluded assignment" and tenant remains liable