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This case concerned the assignment of a number of leases, which were completed without the landlord’s consent. At first instance, the Defendants (comprising the tenants, their assignees and the tenants’ guarantor) argued that there was no requirement to seek landlord’s consent under the terms of the leases.
This interpretation of the lease provisions was rejected at first instance and was not appealed.
The focus of the appeal was the relevant covenant within the leases relating to intra-group transfers of the leases. This stated that such transfer required the landlord's prior consent, but it also contained a proviso that consent would be given where two conditions were satisfied.
The first condition required the tenants to give notice of the transfer within ten working days of completion. The second condition was as follows:
“…the Tenant shall procure that the Guarantor and any other guarantor of the Tenant shall covenant by deed with the Landlord in the terms set out in the Sixth Schedule…"
The Defendants submitted that the guarantee requirement was void because it breached the anti-avoidance provisions in section 25 of the Landlord and Tenant (Covenants) Act 1995 - as interpreted in the case of K/S Victoria Street v House of Fraser (Stores Management) Limited (2011).
The tenants therefore considered that they were only required to give notice of the intra-group assignment in accordance with the first condition.
The landlords argued against this, pointing out that the result would be to allow the leases to be assigned (even on the day they were granted) to essentially worthless shell companies and the guarantor (a company of substance) to be released from its liability.
The judge accepted the landlord’s argument that the clause should be construed so as to enable the landlord to require the outgoing tenant to provide a new (and suitable) guarantor for the incoming tenant, or else to create a free-standing entitlement (without the offending second condition) for the landlord to refuse consent to an intra-group assignment.
The Court of Appeal recognised the importance of seeking to construe a document so as to make it legally effective and to produce the most commercially workable version of the contract. However, it also emphasised that such an approach should not be used as a method to avoid the consequences of legislation being applied to a contract.
In the Court’s view, the second condition required any existing guarantor of the tenants’ obligations under the lease to provide a new guarantee in respect of the assignee. The court rejected the argument that the provision required the assigning tenants also to procure a new guarantor.
Turning to the effect of section 25 on the lease restriction relating to intra-group assignments, the Court noted that the section invalidates any contractual provision which frustrates the operation of the 1995 Act and that this was the effect of the second condition in the lease here.
The court was not persuaded by the arguments from either party as to the operation of section 25 in these circumstances.
Patten LJ stated that section 25 ought to be interpreted generously to ensure that the operation of the Act is not frustrated, either directly or indirectly. He accepted that legislation which operates to avoid the whole or a part of a contract might result in a “capricious and uncommercial” legal position for the parties, possibly even changing the parties’ legal relationship from that which they had intended and negotiated.
However, the Court emphasised that there was no reason to apply the legislation in that way when other alternatives are available, particularly since the wording of section 25 indicates that no more of the relevant agreement should be invalidated than is necessary.
Patten LJ felt there should be “a balanced approach to invalidation which, whilst neutralising the offending parts of the contract, does not leave it emasculated and unworkable”.
The Court felt that the “obvious solution” so as to respect the structure of the contract and give effect to section 25 was to regard the whole of the proviso within the covenant as being avoided by the legislation.
The result of this was to leave the covenant as requiring the landlords’ consent for an intra-group assignment of the Leases, without applying either of the specified conditions.
However, this is not the end of the story since (in light of the deeming provision at section 19 of the Landlord and Tenant Act 1927) the adjusted covenant is subject to an implied proviso that the landlords’ consent is not to be unreasonably withheld.
In one sense, this is a straightforward judgment: it gives a common sense interpretation of a contractual clause and directly applies a statutory anti-avoidance provision. However, it is interesting to see the Courts' continuing reluctance (particularly at appellate level) to imply terms into leases.
The case is a useful reminder that the courts will tend to interpret the anti-avoidance provisions of the 1995 Act generously to ensure that the Act is not frustrated and it may come as a shock to some landlords that parts of their leases (designed to protect their interests) may be disregarded by the Courts.
Going forward, landlords will no doubt be wary of the Court of Appeal's warning that its application of these anti-avoidance provisions may sometimes have "capricious and uncommercial" implications, potentially altering the terms of the parties' legal relationship from that which they intended and negotiated.
This article was written by Emma Humphreys.
For more information please contact Emma on +44 (0)20 7203 5326 or email@example.com