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Repeat guarantees back in the headlines

In the latest round of litigation on the vexatious issue of repeat guarantees, the Court of Appeal reached a sensible, commercial decision in Tindall Cobham 1 Limited v Adda Hotels [2014].  You will remember that repeat guarantees require the same guarantor to guarantee successive tenants. They were seen as a practical solution for both landlord and tenant when subsidiary companies of little covenant strength wished to transfer leases between themselves as part of a corporate re-structuring.  Landlords had no objection as long as each tenant was backed by the same parent guarantee. Repeat guarantee clauses were relatively commonplace until the Court of Appeal’s decision in House of Fraser –v- K/S Victoria Street [2011], when the Court decided that a direct guarantee of the immediate assignee’s obligations given by the current tenant’s guarantor would be void under the Landlord and Tenant (Covenants) Act 1995.

In the Tindall case, the Tindall companies were the tenants of a portfolio of hotels owned by Adda. The Tindall companies were part of the Hilton Group and their obligations under the leases were guaranteed by the Hilton parent company.

The leases under which Tindall occupied the portfolio all contained two alienation provisions in respect of assignment.  First, the usual qualified covenant, subject to a number of stringent conditions under the Landlord and Tenant Act 1927.  Second, a covenant permitting assignment to associated companies subject to Tindall (a) providing notice of any assignment within 10 working days and (b) procuring that the “Guarantor and any other guarantor of the Tenant ” would directly covenant with the Landlord as guarantor of the assignee.

Following the K/S Victoria Street case, Tindall argued that condition (b) was void and should be struck out.  This would mean the leases gave them an unrestricted right to assign to any associated company provided that they gave notice as per condition (a).

The landlord disputed this interpretation. The Court at first instance held that the principle of “validate where possible” applied. Consequently, condition (b) should be interpreted as imposing an obligation to procure a guarantee from “any other guarantor [of equivalent covenant strength]” as opposed to from “the Guarantor“. This then allowed the covenant to survive “intact“. Tindall therefore could not assign unless it procured a guarantor of equivalent covenant strength to Hilton.

Tindall appealed. The Court of Appeal held that the trial judge’s interpretation went too far. Condition (b) was indeed void under the 1995 Act. However, conditions (a) and (b) were part and parcel of the same proviso to the qualified covenant and therefore they must stand or fall together. They were both struck down by the Court and the clause was reduced to a standard qualified covenant against assignment.