Tindall Cobham 1 Ltd & Ors v Adda Hotels (An Unlimited Company) & Ors

A contractual provision is void under section 25 of the Landlord and Tenant (Covenants) Act 1995 once it gives a landlord the ability to frustrate the statutory release of a tenant or guarantor. Invalidity does not arise only when the landlord exercises that ability.

The words “void to the extent that” require no more of the agreement to be invalidated than is necessary. The court may nevertheless examine its structure objectively and invalidate an entire composite proviso where removing only the offending condition would leave an unbalanced and unworkable arrangement.

Commercial construction and the principle of validating an instrument where possible cannot justify rewriting contractual language or avoiding the consequences of legislation.

The tenants held ten hotel leases guaranteed by their corporate parent. They assigned the leases to newly incorporated associated companies without obtaining the landlords’ prior consent. It was conceded on appeal that those assignments were unlawful and ineffective under section 11 of the Landlord and Tenant (Covenants) Act 1995.

On an expedited summary judgment application, Peter Smith J held that the assignments breached the leases. He also construed clause 3.14.6(b) as allowing the landlords to require a suitable replacement guarantor before consenting to a future intra-group assignment: [2014] EWHC 2637 (Ch).

The tenants appealed against that construction. The central questions were whether clause 3.14.6(b) required the procurement of a new guarantor and how section 25 of the 1995 Act affected the composite proviso governing consent to intra-group assignments.

1. Appeal dismissed, subject to variation of the order. Patten LJ, with whom Ryder and Longmore LJJ agreed, held that the judge’s construction of clause 3.14.6(b) was wrong. The order was varied by deleting subparagraphs 1(b)–(e), but otherwise remained effective.

2. The words requiring the tenant to procure that “the Guarantor and any other guarantor of the Tenant” covenant with the landlord referred to persons who were guarantors when the assignment occurred. They required a further guarantee from those persons. They did not require the tenant to procure a new guarantor. Reading such an obligation into the clause would substantially reformulate its language. Nor did the clause require a proposed guarantor to possess any specified financial standing or obtain the landlord’s approval.

3. The principle that an instrument should be validated where possible could assist in choosing between realistic constructions. It could not create a meaning which the contractual words could not bear, nor could it avoid statutory consequences. The commercially unattractive effect of the Landlord and Tenant (Covenants) Act 1995 therefore did not justify the landlords’ construction.

4. Section 25(1)(a) invalidated clause 3.14.6(b) because it gave the landlords the ability to require a continuing guarantee from an existing guarantor, thereby frustrating the statutory release effected by sections 5 and 24(2). The section applied to the agreement conferring that ability. Its operation did not await the landlord’s exercise of the right.

5. The words “void to the extent that” required a balanced, objective and common-sense assessment of the agreement’s structure. Removing condition (b) alone would dismantle a composite proviso and leave the landlords bound to consent without the principal protection for which the proviso provided. Section 25 therefore avoided the whole proviso, but not the whole of clause 3.14.6. What remained was a qualified covenant against assignment, under which consent could not be unreasonably withheld.

6. Clause 3.14.3 was general and was capable of applying to an assignment to an associated company. If clause 3.14.6 had been invalidated in its entirety, clause 3.14.3 would have continued to govern such an assignment.

• Court of Appeal (Civil Division): The appeal was dismissed, but the order was varied by deleting subparagraphs 1(b)–(e): [2014] EWCA Civ 1215.
• High Court, Chancery Division: Peter Smith J gave expedited summary judgment, declared the assignments to be in breach of the leases and construed clause 3.14.6(b) as permitting the landlords to require a suitable replacement guarantor: [2014] EWHC 2637 (Ch).