RESOURCES | Repeat offenders: assigning leases between group companies

Many corporate tenants are still requesting alienation clauses that allow them to assign the lease within their corporate group without landlord’s consent, provided the assignor gives an authorised guarantee agreement (AGA) and the parent company guarantees the assignee, writes Jonathan Dover of Hill Dickinson.

The problem with such arrangements is twofold:

(i) repeat parent company guarantees have been declared unlawful by the courts; and
(ii) an AGA given where the lease does not require consent to the assignment is also unlawful.

This potentially leaves the landlord who agrees such a favourable regime with no remedy against either the assignor or the parent company following the assignment.

The Good Harvest and House of Fraser cases a couple of years ago decided that one effect of the Landlord and Tenant (Covenants) Act 1995 is that an outgoing tenant’s guarantor can never guarantee the assignee, even where all parties desire this and the repeat guarantee is being offered because the guarantor is the parent company of both assignor and assignee. This outcome is of course incredibly inconvenient for many corporate tenants, who require maximum flexibility to move property interests around within the group.

The most that the parent company can offer in such a scenario is to guarantee the assignor’s AGA obligations.

The Court of Appeal in House of Fraser suggested that the parent company guarantor may come back into the picture on subsequent assignments, although any attempt to contractually oblige the parent company to guarantee future tenants will fail.

Where such intra-group assignment arrangements already exist but a valid parent company guarantee as required by the lease cannot be given, the Court of Appeal has demonstrated in the recent case of Tindall Cobham v Adda Hotels that it will not simply allow the tenant to assign to any other group company regardless and will so far as possible interpret such clauses as traditional qualified covenants against assignment.

It is also important to remember that the Landlord and Tenant (Covenants) Act 1995 specifically provides that an AGA is only valid if given as a condition of landlord’s consent to an assignment. If there is no requirement to obtain landlord’s consent, the AGA is invalid and the outgoing tenant obtains a complete release on assignment. Like the prohibition on repeat guarantees, this statutory requirement for consent if an AGA is to be valid is causing practical difficulties in situations where both landlord and tenant would otherwise be happy to adopt a more flexible approach to alienation.

This article was originally published through Place Resources