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Landlords cannot claim equivalent guarantee for lease arrangements if previous guarantee is struck out under UK property law, says Court of Appeal

Out-Law News | 08 Sep 2014 | 2:28 pm | 1 min. read

Landlords cannot force tenants to provide an equivalent guarantee on an assignment of leases when the obligation in the lease that the existing guarantor stands against is void under UK property laws, the Court of Appeal has ruled.

Lord Justices Longmore, Patten and Ryder determined that where a company has been under an obligation to provide a guarantee for property lease arrangements and that guarantee has been struck out because it does not conform to rules set out in the Landlord and Tenant (Covenants) Act, landlords are not entitled to require an equivalent guarantee from a company who is lawfully able to give that guarantee under the Act.

The judges made the ruling in part-overturning a previous judgment by the High Court in a dispute over the way a major hotel chain assigned leases to properties they rent. Two companies within the Hilton Group hotel chain transferred the leases to property they occupied to other companies within that group.

The transferal of the leases by Adda Hotels and Puckrup Hall Hotel Limited to other Hilton Group companies set up specifically "for the purpose of taking the assignments", if lawful, have the effect of "releasing from further contractual liability" Adda and Puckrup as well as Hilton Worldwide, the Hilton Group's parent company "as guarantor of those liabilities" according to rules contained in the Landlord and Tenant (Covenants) Act, the judgment said.

The leases between Adda and Puckrup with the landlords allowed the tenants to assign the lease to another company within the same group subject to certain conditions, including that the original guarantor of the lease arrangements also guaranteed the obligations of the new tenants.

Previous case law has, however, determined that landlords cannot impose such a requirement under the Landlord and Tenant (Covenants) Act. The High Court, though, ruled that the provisions allowed the landlords to insist on a guarantee from an equally suitable company to the original guarantor. However, the Court of Appeal has said that this is not the case.

However, both Adda and Puckrup were required to obtain the consent of the landlord to assign their leases. Landlords' consent could not be unreasonably withheld or delayed. The Court of Appeal said that it would be reasonable for a landlord to require a guarantee from a substantive company where the covenant strength of the tenant was being diluted by the assignment since they could not validly place such a requirement on the guarantor as set out in the leases.

The fact that Adda and Puckrup did not obtain the consent of the landlord to assign their leases to other Hilton Group companies did not mean that that the assignments were void. Instead it means that each assignment is classed as an 'excluded assignment' with the effect being that both the former tenants and the guarantor remain liable under the lease until the lease is next assigned in accordance with the terms of that lease.