Rolls Building, Fetter Lane, London, EC4A 1NL
B e f o r e :
| (1) UK LEASING BRIGHTON LIMITED
(2) SPLENDID PROPERTY COMPANY LIMITED
(3) HILTON WORLDWIDE INC
|- and -
|(1) TOPLAND NEPTUNE LIMITED
(2)LYNN KAREN BUSH
|("The Second Action")
And between :
|ZINC COBHAM 1 LIMITED AND 21 OTHERS
|- and -
|ADDA HOTELS (an unlimited company) AND 11 OTHERS
|("The First Action"
Timothy Fancourt QC (instructed by Osborne Clarke) for the Defendants in the Second Action
Kirk Reynolds QC and Julian Greenhill (instructed by Berwin Leighton Paisner LLP) for the Claimants in the First Action
Hearing date: 11 December 2014
Crown Copyright ©
Mr Justice Morgan:
The facts as simplified
The 1995 Act
"3 Transmission of benefit and burden of covenants.
(a) The benefit and burden of all landlord and tenant covenants of a tenancy— shall be annexed and incident to the whole, and to each and every part, of the premises demised by the tenancy and of the reversion in them, and
(b) shall in accordance with this section pass on an assignment of the whole or any part of those premises or of the reversion in them.
(2) Where the assignment is by the tenant under the tenancy, then as from the assignment the assignee—
(a) becomes bound by the tenant covenants of the tenancy except to the extent that—
(i) immediately before the assignment they did not bind the assignor, or
(ii) they fall to be complied with in relation to any demised premises not comprised in the assignment; and
(b) becomes entitled to the benefit of the landlord covenants of the tenancy except to the extent that they fall to be complied with in relation to any such premises.
(6) Nothing in this section shall operate—
(a) in the case of a covenant which (in whatever terms) is expressed to be personal to any person, to make the covenant enforceable by or (as the case may be) against any other person; or
(b) to make a covenant enforceable against any person if, apart from this section, it would not be enforceable against him by reason of its not having been registered under the Land Registration Act 1925 or the Land Charges Act 1972.
(7) … "
"5 Tenant released from covenants on assignment of tenancy.
(1) This section applies where a tenant assigns premises demised to him under a tenancy. If the tenant assigns the whole of the premises demised to him, he—
(a) is released from the tenant covenants of the tenancy, and
(b) ceases to be entitled to the benefit of the landlord covenants of the tenancy,
as from the assignment.
(3) … (4) … "
(1) This section provides for the operation of sections 5 to 10 in relation to assignments in breach of a covenant of a tenancy or assignments by operation of law ("excluded assignments").
(2) In the case of an excluded assignment subsection (2) or (3) of section 5—
(a) shall not have the effect mentioned in that subsection in relation to the tenant as from that assignment, but
(b) shall have that effect as from the next assignment (if any) of the premises assigned by him which is not an excluded assignment.
(3) – (7) … "
"24 Effects of release from liability under, or loss of benefit of, covenant.
(1) Any release of a person from a covenant by virtue of this Act does not affect any liability of his arising from a breach of the covenant occurring before the release.
(a) Where— by virtue of this Act a tenant is released from a tenant covenant of a tenancy, and
(b) immediately before the release another person is bound by a covenant of the tenancy imposing any liability or penalty in the event of a failure to comply with that tenant covenant,
then, as from the release of the tenant, that other person is released from the covenant mentioned in paragraph (b) to the same extent as the tenant is released from that tenant covenant.
(2) Where a person bound by a landlord or tenant covenant of a tenancy—
(a) assigns the whole or part of his interest in the premises demised by the tenancy, but
(b) is not released by virtue of this Act from the covenant (with the result that subsection (1) does not apply),
the assignment does not affect any liability of his arising from a breach of the covenant occurring before the assignment.
(3) Where by virtue of this Act a person ceases to be entitled to the benefit of a covenant, this does not affect any rights of his arising from a breach of the covenant occurring before he ceases to be so entitled."
"25 Agreement void if it restricts operation of the Act.
(1) Any agreement relating to a tenancy is void to the extent that—
(a) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act, or
(b) it provides for—
(i) the termination or surrender of the tenancy, or
(ii) the imposition on the tenant of any penalty, disability or liability,
in the event of the operation of any provision of this Act, or
(2) it provides for any of the matters referred to in paragraph (b)(i) or (ii) and does so (whether expressly or otherwise) in connection with, or in consequence of, the operation of any provision of this Act. To the extent that an agreement relating to a tenancy constitutes a covenant (whether absolute or qualified) against the assignment, or parting with the possession, of the premises demised by the tenancy or any part of them—
(a) the agreement is not void by virtue of subsection (1) by reason only of the fact that as such the covenant prohibits or restricts any such assignment or parting with possession; but
(b) paragraph (a) above does not otherwise affect the operation of that subsection in relation to the agreement (and in particular does not preclude its application to the agreement to the extent that it purports to regulate the giving of, or the making of any application for, consent to any such assignment or parting with possession).
(3) In accordance with section 16(1) nothing in this section applies to any agreement to the extent that it is an authorised guarantee agreement; but (without prejudice to the generality of subsection (1) above) an agreement is void to the extent that it is one falling within section 16(4)(a) or (b).
(4) This section applies to an agreement relating to a tenancy whether or not the agreement is—
(a) contained in the instrument creating the tenancy; or
(b) made before the creation of the tenancy."
The application of the 1995 Act to the facts to date
(1) a term of the lease, or of an agreement relating to the lease, which stipulates in advance that a tenant's guarantor must re-assume the liability of a guarantor in relation to the assignee, as a term of an assignment by the tenant, would "frustrate" the operation of the statutory provision (section 24(2)) which would otherwise serve to release the guarantor and is therefore void under section 25(1)(a):  –  and ;
(2) the first instance decision in Good Harvest was correct;
(3) the correct interpretation of the Good Harvest decision was (subject to a later qualification) that section 25(1) invalidated any agreement which involved a guarantor of the assignor guaranteeing the assignor's assignee:  and ;
(4) this interpretation gave the 1995 Act an unattractively limiting and commercially unrealistic effect but was nonetheless the law: ;
(5) there was no distinction between a guarantee freely offered by the guarantor and a guarantee insisted upon by the landlord:  – ;
(6) there was no distinction as to the effect of the 1995 Act on an agreement to give a guarantee and a guarantee actually given: ;
(7) the qualification referred to in (3) above was that if the assignor gave an AGA in relation to the assignee, the guarantor of the assignor (whilst it was the tenant) could also give a guarantee in relation to the assignor's liability under that AGA:  – ;
(8) if a tenant assigns and the tenant and the tenant's guarantor are thereupon released, there is nothing to stop that guarantor becoming a guarantor again on a subsequent assignment: ;
(9) the proposition in (8) above applies not only where the subsequent assignee is a new party but also where the subsequent assignee is an earlier tenant whose liabilities were guaranteed by that guarantor: .
The effect of a direct re-assignment by T2 to T1 followed by a new guarantee by G
(1) T2 will be released from the tenant covenants: section 5(2)(a);
(2) T1 will be released from the tenant covenants entered into at the time the lease was granted to T1: section 11(2)(b);
(3) G will be released from the earlier guarantee which it gave: section 24(2);
(4) On the re-assignment to T1, T1 again becomes bound by the tenant covenants: section 3(2)(a).
"(b) shall have that effect as from the next assignment (if any) of the premises assigned by him to a person other than the tenant which is not an excluded assignment." [The italicised words are suggested by Mr Fancourt]
"(a) by virtue of this Act a tenant is released from a tenant covenant of a tenancy, …"
"It would also appear to mean that the lease could not be assigned to the guarantor, even where both the tenant and the guarantor wanted it."
The effect of an assignment by T2 to Newco followed by an assignment by Newco to T1 and a fresh guarantee by G
(1) on the assignment to Newco, T2 is released under section 5(2)(a);
(2) on the assignment to Newco, T1 is released under section 11(2)(b);
(3) on the assignment to Newco, G is released under section 24(2);
(4) on the assignment to Newco, Newco becomes bound by the tenant covenants under section 3(2)(a);
(5) on the assignment to T1, Newco is released under section 5(2)(a);
(6) on the assignment to T1, T1 becomes bound by the tenant covenants under section 3(2)(a).
Any other way forward