Tindall Cobham 1 Ltd & Others v Adda Hotels (an Unlimited Company) and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Ryder,Lord Justice Longmore |
| Judgment Date | 05 September 2014 |
| Neutral Citation | [2014] EWCA Civ 1215 |
| Docket Number | Case No: A3/2014/2549 |
| Court | Court of Appeal (Civil Division) |
| Date | 05 September 2014 |
[2014] EWCA Civ 1215
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Peter Smith J: [2014] EWHC 2637 (Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Longmore
Lord Justice Patten
and
Lord Justice Ryder
Case No: A3/2014/2549
John McGhee QC and James Ballance (instructed by Paul Hastings (Europe) LLP) for the Appellants
Kirk Reynolds QC and Julian Greenhill (instructed by Berwin Leighton Paisner LLP) for the Respondents
Hearing dates: 27 and 28 August 2014
Introduction
The defendant companies are all associated companies in the Hilton Group ("the Group"). Hilton Worldwide Inc. is a Delaware corporation and a parent company in the Group. Adda Hotels ("Adda") and Puckrup Hall Hotel Limited ("Puckrup") were the original lessees of ten hotels in the UK under separate leases granted on 30 August 2002 by the claimants' predecessors in title for terms expiring on 31 December 2029. The lease of the Tewskesbury Hotel was granted to Puckrup. The leases of the other nine hotels were granted to Adda. Each of the leases (which are in substantially the same terms) reserve significant base and turnover rents.
On 1 July 2014 Adda and Puckrup assigned each of the leases (separately) to the nine companies which have been joined as the 4 th to 12 th defendants. The name of each company indicates the location of the relevant hotels. The assignees are in each case £1 subsidiary companies in the Group which were formed for the purpose of taking the assignments.
We were told that the assignments were carried out as part of a Group re-organisation but they had the important consequence, if lawful, of releasing from further contractual liability under the various leases both Adda and Puckrup as original lessees and, more importantly, Hilton Worldwide Inc. as guarantor of those liabilities as a result of the operation of the provisions of ss. 5 and 24(2) of the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act").
Those advising Adda and Puckrup took the view that it was not necessary to obtain the prior consent of the claimant landlord companies to the assignments. It is now conceded that this was wrong and in this Court Mr McGhee QC for the Hilton companies accepts that the assignments were not lawful and that under s.11 of the 1995 Act they were therefore ineffective to release the original tenants and their guarantor from their covenants under the leases. But the issue remains for the future whether a similar assignment or assignments to other associated companies in the Group would have the effect of achieving such release and whether the claimant landlords could lawfully prevent the assignments without at least the substitution of some suitable alternative guarantee.
These issues, which turn on the construction of the covenants against assignment in the leases and their interaction with the provisions of the 1995 Act, have led to litigation instituted by the claimants in the context of their own financial re-organisation. They are currently in the process of refinancing their group hotel business and a highly material factor in the negotiations for a new loan facility is the valuation of the hotels. This will obviously be affected by the continued existence or not of the Hilton parent company guarantee or some suitable alternative security for the rents due under the hotel leases. To this end, the claimants issued proceedings in the Chancery Division seeking inter alia a declaration that the assignments which took place on 1 July were unlawful as being in breach of clause 3.14 of the relevant hotel leases; and an order for the re-assignment of the leases to Adda and Puckrup as original tenants.
The claimants were given permission to apply for summary judgment on the claim and, as a result of expedited directions, the application was heard by Peter Smith J on 17 July: [2014] EWHC 2637 (Ch). He decided that the 1 July assignments had been carried out in breach of clause 3.14 of the leases so that they were excluded assignments within the meaning of s.11 of the 1995 Act. But he also made a declaration that under clause 3.14.6 the tenants were not permitted to assign the leases without first applying for the written consent of the landlords (such consent not to be unreasonably withheld) and that the landlords were entitled, as a condition of giving consent, to require compliance with the conditions set out in sub-clauses (a) and (b) of clause 3.14.His construction of sub-clause (b) was that this entitled the landlords to require the assigning tenants to procure a new guarantor (approved by the landlords) in place of Hilton Worldwide Inc. whose own guarantee would expire on the next lawful assignment of the leases.
The Hilton companies now appeal with the leave of the judge against this part of his order. As I explained earlier, it is now common ground that a request for consent must precede any assignment of the leases. But the issue between the parties is whether the judge was right to construe clause 3.14.6 in the way that he did and, if not, what are the contractual consequences for the parties of any future lawful assignments given the operation of the 1995 Act.
The assignment provisions
It is therefore convenient to begin by setting out the material provisions of the hotel leases.
Clause 1.1 contains various definitions. The relevant ones are "Guarantor" which means Hilton Worldwide Inc. (having replaced Hilton Group plc, the original guarantor, under a deed of release dated 24 February 2006) and "Tenant" which:
"includes the Tenant's successors in title and assigns in whom this lease may for the time being be vested."
The terms of the guarantee are set out in the Sixth Schedule and include an obligation to pay the rents reserved by the lease and to perform the Tenant's covenants.
The provisions governing assignment are contained in clause 3.14 and I set them out in full:
"3.14 Alienation
3.14.1 Not to assign or charge part only of the Hotel
3.14.2 Not to charge the whole of the Hotel without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed)
3.14.3 Not to assign the whole of the Hotel without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed and which shall take the form of a formal licence) provided that for the purposes of Section 19(1A) of the Landlord and Tenant Covenants Act 1995 the Landlord shall be entitled:
3.14.3.1 To withhold its consent in any of the circumstances set out in clause 3.14.4
3.14.3.2 To impose all or any of the conditions set out in clause 3.14.5 as a condition of its consent
3.14.4 The circumstances referred to in clause 3.14.3.1 are as follows:-
3.14.4.1 In the reasonable opinion of the Landlord it has not been satisfactorily demonstrated that the proposed assignee has an investment grade rating (being in the case of Standard & Poors at the date of this Lease at least BBB+) with the Appropriate Credit Rating Agency at the time of such assignment ("the Relevant Investment Grade") unless the proposed assignee procures that a guarantor which satisfies the Relevant Investment Grade enters into a deed with the Landlord substantially in the terms set out in the Sixth Schedule
3.14.4.2 The assignee at the time of the assignment operates less than 2,000 hotel rooms in the United Kingdom and Eire
3.14.4.3 In the reasonable opinion of the Landlord the assignee has not demonstrated it has operating standards which are consistent with paragraph (b) of the definition of Operating Standards and is generally recognised by the hotel industry to have operated in accordance with such operating standards consistently for a period of three years prior to the date of the assignment
3.14.4.4 That in the case of the first assignment of this Lease to an assignee that is not an Associated Company of the Tenant or the Guarantor (and for the purposes of this Clause 3.14.4 only, "Associated Company" shall exclude the Guarantor) the assignee is anyone other than the Guarantor
3.14.5 The conditions which the Landlord may attach to giving consent to an assignment, referred to in clause 3.14.3.2 are:
3.14.5.1 The Tenant shall covenant by deed with the Landlord that after the date of assignment it will give to the Landlord such information as the Tenant would have had to supply to the Landlord under the Second Schedule in order for the Turnover Rent due up to the date of the assignment to be calculated and to pay any outstanding balance of Turnover Rent within the time limits prescribed in the Second Schedule as if all references to the end of the Financial Year in that schedule were references to the date of the assignment; and
3.14.5.2 The assignee shall provide the Landlord with such further information as the Landlord may reasonably require concerning the operating standards of the proposed assignee
3.14.5.3 The payment to the Landlord of all Rents (including for the avoidance of doubt on account payments in respect of Turnover Rent but not any Turnover Rent which has not been quantified at the date of the assignment) which fall due under this Lease prior to the date of the assignment
3.14.5.4 The Tenant shall enter into an authorised guarantee agreement as defined in section 16 of the Landlord and Tenant (Covenants) Act 1995 with the Landlord in the form set out in Schedule 4
3.14.6 The Tenant shall not assign this Lease to any Associated Company of the...
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