Tindall Cobham 1 Ltd and others v Adda Hotels (an unlimited company) and others

[2014] EWHC 2637 (Ch)

Chancery Division

Mr Justice Peter Smith

29 July 2014

APPROVED JUDGMENT

               I DIRECT THAT PURSUANT TO CPR PD 39A PARA 6.1 NO OFFICIAL SHORTHAND NOTE SHALL BE TAKEN OF THIS JUDGMENT AND THAT COPIES OF THIS VERSION AS HANDED DOWN MAY BE TREATED AS AUTHENTIC.             

               MR JUSTICE PETER SMITH:             

               INTRODUCTION             

1. On 14 July 2014 while sitting as the Interims Judge I received an application by the Claimants for permission to apply for summary judgment prior to filing of the acknowledgement of service by the Defendants, and an order for expedition of the application for summary judgment so that it could be heard and determined on an expedited basis no later than 31 July 2014, with consequential directions giving a timetable for filing and service of evidence and skeleton arguments consistent with the urgent hearing.

2. The application was opposed.

3. However, for reasons set out in a judgment I delivered on the day, I directed that the Claimants should have permission to apply for summary judgment as sought for the Declaratory Relief claimed at paragraphs a to d, of paragraph 10.1 of the Claim Form to be listed before me on Thursday 17 July 2014 with an estimate of one day. Directions were given for that hearing. In the events that happened, despite the protests of the Defendants and the proximity of the hearing, the case was heard in Court for half a day. I reserved judgment and this judgment arises out of that case.

               BACKGROUND             

4. This application raises a short issue of construction of leases of ten separate hotels across England and Wales. The hotels are situated in Cobham, Croydon, East Midlands airport, Leeds, London Kensington, Northampton, Nottingham, Tewkesbury, Watford and York.

5. The Claimant companies own the hotels in the pairings indicated by their names. Thus the Claimant companies which own the first hotel are the first Claimant "Tindall Cobham 1 Limited" and the second Claimant "Tindall Cobham 2 Limited".

6. Associated with the Cobham Hotel and Tewkesbury Hotel are buildings provided for use as staff accommodation. The first and second Claimants are the freehold owners of Wood Court Lodge, 7 Hills Road, Cobham ("the Cobham Gatehouse") and the seventeenth and eighteenth Claimants are the freehold owners of bungalows 1, 4 and 5 Puckrup Hall, Tewkesbury ("the Tewkesbury Bungalows").

7. In addition the thirteenth and fourteenth Claimants are also the owners of the leasehold title to a car park and sub station adjacent to the Nottingham Hotel ("the Nottingham Car Park" and "the Nottingham Car Park Head Lease").

8. The issue relates to the ability of the Defendant lessees to assign their leasehold interests without the consent of the freeholders.

               The Leases             

9. Each of the hotels is subject to a lease granted on the 30th August 2002 by predecessors in title to the Claimants. All lessees are members of the Hilton Group of companies (collectively the "Hotel Leases" and individually "the Cobham lease" and so on).

10. Nine of the ten hotel leases were granted to the First Defendant ("Adda"). The hotel lease of the tenth hotel ("The Tewkesbury Hotel") was granted to the Second Defendant ("Puckrup"). Both Adda and Puckrup are members of the Hilton Group of companies. The hotel leases were all granted in substantially the same terms. Each lease demised the hotel for a term of years commencing 30 August 2002 and expiring 31 December 2029, in consideration of payment of a significant base rent and a Turnover Rent.

11. For example the Cobham lease, which was used as a specimen lease for the purposes of the hearing, provides for payment of a Turnover Rent calculated in accordance with paragraph 1.6 of the Second Schedule, being the greater of 28.2% of the Gross Turnover and the Base Rent, meaning in the case of the Cobham hotel, the sum of £1,410,750 per annum, as increased in respect of each Financial Year pursuant to the provisions of the Third Schedule.

               EVENTS             

12. The present litigation has arisen out of the assignment by Adda and Puckrup of the various leases to the UK leasing companies joined as the fourth to twelfth Defendants without seeking or obtaining the Claimants' consent. There is also a challenge to the assignment of each of the Tewkesbury Bungalows and the Cobham Gatehouse, effective at the same time, by Puckrup and Adda.

13. Consequently the Claimants contend that the various assignments are "excluded assignments" within the meaning of s. 11 of the Landlord and Tenants (Covenants) Act 1995 ("the 1995 Act") with the consequence that Adda, Puckrup and the Third Defendant ("Hilton Worldwide") remain liable on their respective covenants contained in the leases.

14. The presence of Hilton Worldwide is significant. It is the ultimate parent company of the Hilton Group and it has the financial strength. It stands as surety under the present leases.

15. The assignees are £1 subsidiary companies in the Hilton Group formed for the purposes of taking each separate assignment in respect of each separate hotel.

16. The Claimants were given notice of assignment dated 1 July 2014 from Adda and Puckrup, but received on 4 July 2014. The notices of assignment were in respect of all the hotels (except for the Nottingham Hotel) and the Tewkesbury Bungalows and the Cobham Gatehouse. On giving each notice of assignment, in the covering letter the Defendants informed the Claimants that this was a corporate restructuring with the result that a substantial portion of the Hilton Group's foreign assets held by US entities were transferred into a non-US subsidiary company and that this assignment was a part of that corporate realignment.

17. Consequently, the Defendants contend that the assignments put an end to the guarantee given by Hilton Worldwide and it is not liable to guarantee the obligations of the assignees which are worthless companies, as regards the obligations of the assignees (which are worthless companies) which arise under the various leases.

18. Further, the Defendants contend, they could effect all of these assignments without requiring the permission of the landlords. Indeed, Mr John McGhee QC who, with Miss Philomena Harrison, appears for the Defendants, in the course of his attractive submissions submitted in fact the Defendants could have carried out this rearrangement the day after the leases were entered into. Thus the consequence of his submissions is that the landlord could have granted the leases on the strength of the Third Defendant's covenant, only to be presented with the fait accompli the next day which removed the strength of the Third Defendant covenant from the value of the leases.

               THE CLAIMANTS' DIFFICULTIES             

19. These transactions, carried out without warning, occurred when the Claimants were refinancing the group's hotel business (as the Defendants knew). The commercial details are confidential and commercially sensitive, and have not been put before the Court. However, the Claimants and other entities within the Tindall group, entered into an arrangement with loan facilities on the 19th July 2007, and the amount of the debt advanced is not given for commercial reasons, but it is described in Mr Cohen's second witness statement as being "some hundreds of millions of pounds sterling".

20. The hotels have recently been valued at a discount to the amount of the facility on the market value basis pursuant to a Red Book valuation. I understand that valuation took place before the restructuring took place, with the result the security is now worth less than the loan itself. The loan was originally due for repayment on 10 July 2014. The terms were agreed on the basis that the covenant of the Third Defendant, and not just the tenant, was available to the Claimants and the new refinancing is being negotiated on the same basis. It is self-evident that the existence of the Third Defendant's guarantee is highly material when assessing the value of the leases as a security for the Tindall Group's debts. The sensitivity and timing of the Claimants' refinancing, in my view, plainly justified the decision to have a speedy trial of this issue in a sitting period when I had unexpectedly become available and thus utilised my available time without disadvantaging the courts generally and any other litigants.

21. The issue involves a short point of construction of the terms of the lease. There is no issue that requires going beyond construing the terms of the lease. Thus no evidence was led beyond that of Mr Cohen and witness statements from Michelle Duncan on behalf of the Defendants, which merely set out the facts appertaining to the various actions that the parties had taken in respect of the documents.

               THE ISSUE             

22. The issue turns on the construction of the lease and in particular the assignment provisions in it.

               PROVISIONS OF LEASE             

23. In the definitions section there are a number of provisions which are important.

24. First "Guarantor" means the Third Defendant, in effect.

25. "Tenant" means, in effect the Lessee and "includes the Tenant's successors in title and assigns in whom this Lease may for the time being be vested".

26. That, in my view, is unfortunate, because it means that "Tenant" can cover an Assignor and/or an Assignee and possibly in the same clause at the same time. Thus it is quite possible, as we shall see when we examine the covenant against assignment, that within the same clause "Tenant" means at one point Assignor and at another point Assignee.

27. The guarantee provisions are found in the Sixth Schedule. First, under 1.1 the Guarantor, as defined, guarantees to perform the obligations of the Tenant and that liability remains in force for so long and to the extent that the Tenant is not released from liability for the Tenant's covenants in the lease, pursuant to the 1995 Act, under 1.2.

28. There are two points which arise out of that clause (1.2). First, the draftsman of the Lease was alive to the provisions of the 1995 Act which can (as both parties agree) release the Guarantor from its guarantee upon the assignment of the lease to a new Assignee/Tenant. Second, the draftsman was also aware of the impact of the 1995 Act in releasing a guarantor when the Tenant was released.

29. We see then, by reason of the definition, the provisions only apply to the Third Defendant which is the identified Guarantor and the definition does not extend to any subsequent guarantor of any obligation of any assignor or assignee. That too is unfortunate.

30. Under Schedule 6 para. 4.6, it is provided "if any term of this guarantee and indemnity or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable the same shall be severable and the remainder of this guarantee and indemnity or the application of such term to persons or circumstances other than those to which it is held invalid or unenforceable shall not be affected thereby and each term and provision of this guarantee and indemnity shall be valid and be enforced to the fullest extent permitted by law".

               ASSIGNMENT PROVISIONS             

31. These are the crucial provisions to be found in clause 3.14 of the lease, as follows:-

  	"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 Tenant without the prior consent of the Landlord Provided Always that for the purposes of Section 19(1A) of the Landlord Tenant Covenants Act 1995, the Landlord shall be entitled to impose any or all of the following conditions set out in sub clauses (a) and (b) below :

  	(a) that the Tenant shall provide the Landlord with notice of any such assignment within 10 Working Days of completion of the same;

  	(b) that on any such assignment, 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 at the Tenant's sole cost

  	and subject to the Tenant's compliance with such conditions the Landlords consent shall be given

  	                       3.14.7 Any dispute between the Landlord and the Tenant as to whether a proposed assignee satisfies the requirements of Clause 3.14.4 shall be determined by an independent expert in accordance with the provisions of Clause 9.

  	                       3.14.8 Except as expressly permitted under this Clause not to underlet hold in trust part with or share possession or part with or share occupation of the Hotel except that the staying of guests and the occupation of staff (subject to the provisions of clause 3.9.3) shall not be a breach of this sub-clause 3.14.8."

32. Unsurprisingly, this clause was extensively examined in the course of argument.

33. The basic structure is that assignments are limited to the whole, which is unsurprising, subject to licence. Dividing up the relevant Hotel is absolutely prohibited.

34. The first part of the clause (13.14.3) sets out a primary requirement that there should be no assignment without the prior written consent of the Landlord, such consent not to be unreasonably withheld.

35. Clause 3.14.3 provides that the assignment of the whole requires the prior written consent of the Landlord, not to be unreasonably withheld but for the purpose of section 19(1A) of the 1995 Act, the Landlord is entitled to refuse consent in accordance with clause 3.14.4 and impose conditions set out in 3.14.5.

36. The parties agree that the reference to the Act in that section is erroneous and that the correct reference should be the Landlord and Tenant Act 1927.

37. That provision is as follows :-

  	"Section 19(1A):- Where the landlord and tenant under a qualifying lease have entered into an agreement specifying for the purposes of this subsection -

  	                       a) any circumstances in which the landlord may withhold his licence or consent to an assignment of the demised premises or any part of them, or                     

  	                       b) any conditions subject to which any such licence or consent may be granted, then the landlord -                     

  	                           (i) shall not be regarded as unreasonably withholding his licence or consent to any such assignment if he withholds it on the ground (and it is the case) that any such circumstances exist, and                         

  	                           (ii) if he gives any such licence or consent subject to any conditions, shall not be regarded as giving it subject to unreasonable conditions;                         

  	                       and section 1 of the Landlord and Tenant Act 1988 (qualified duty to consent to assignment etc.) shall have effect subject to the provisions of this subsection.                     

38. The specified circumstances for the purposes of section 19(1A) are 3.14.4 and 3.14.5. The form of those sets out criteria as to the financial standing of the prospective assignee. The requirements are quite onerous. First, there is a high credit rating standing. Second, the assignee must operate at least 2000 hotel rooms in the United Kingdom and Eire. Third, the hotels are required to be operated to the requisite standard for a period of three years from the date of the assignment.

39. It is agreed between the parties that none of the assignees would satisfy any of those criteria.

40. The next important provision (and the one which attracted almost all of the debate) is 3.14.6, which deals with assignments to Associated Companies of the Tenant. All of the assignees are Associated Companies of the Tenant. This clause provides as a primary restriction that the Tenant shall not assign to any Associated Company without prior consent of the Landlord. The proviso then says, for the purposes of section 19(1A) of the [1927 Act], the Landlord shall be entitled to impose any or all of the following conditions, set out in the sub clauses.

41. The first of those (a) is that the Tenant shall provide the Landlord with notice of any such assignment within ten working days of completion of the same. That notice was given within the ten days but consent to assign was never sought. It is the Defendant's case that they did not need consent to assign.

42. The second sub clause ((b)) is the one which causes all the difficulties. It is a condition which, according to the preamble of the proviso, the Landlord is entitled to impose but is not obligated to impose and it is:-

  	                       "that on any such assignment, 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 at the Tenant's sole cost                     

  	                       and subject to the Tenant's compliance with such conditions, the Landlord's consent shall be given."

43. The Guarantor is the Third Defendant and it of course is the Guarantor of the obligations of the original Tenant (the Assignor).

44. Both parties agree that the Tenant cannot procure that the Guarantor assumes a liability as guarantor of the assignee because that infringes section 25(2) of the 1995 Act.

45. The scheme of the 1995 Act is as follows. First, pursuant to section 5, if a tenant assigns the whole of the premises he is released from the tenant covenants of the tenancy.

46. Second, section 11 provides that where an assignment takes place in breach of a covenant in the tenancy ("excluded assignment") then the protections of section 5 shall not apply but shall have effect as from the next assignment (if any) of the premises assigned by him, which is not an excluded assignment.

47. Under section 24 (2) it is provided that where a Tenant is released from a tenant covenant, and immediately before the release, another person was bound by a covenant of the tenancy imposing any liability or penalty in the event of a failure to comply with a tenant covenant, then as from the release of the tenant, that other person is released from the covenant to the same extent as the tenant is released.

48. Finally, section 25 provides that 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 the 1995 Act and (subsection 2) a covenant against assigning is not simply by that reason a covenant that is caught by the provisions of section 25.

49. Both parties accept therefore, that the Guarantor is released upon a valid assignment and cannot be required to enter into a guarantee in respect of the obligations of the new tenant (i.e. the Assignee).

50. This is the effect of the Court of Appeal decision in K/S Victoria Street v House of Fraser [2012] Ch 497.

51. In particular, the Claimants accept that they cannot, by virtue of clause 3.14.6(b), require the Guarantor to guarantee the Assignee's obligations.

52. As I said at the start of this judgment, the Defendants' case is that they could have carried out these transactions as soon as the original lease was executed and thus remove the Third Defendant as a Guarantor of the obligations of the Tenant. I cannot believe that the parties intended for the Defendants to have such an ability. Further, the consequence of the Defendants' submission is that they contend that the Claimants cannot require the Guarantor to guarantee the assignee's obligations because of the infringement of the 1995 Act above. However, if the assignee wishes to assign on (subject to all the other requirements in clause 3.14) the Guarantor can then be required to guarantee the liability of the second assignee because it is not at that time the Guarantor of the first assignee, the prospective second assignor. On the next assignment the same restriction applies as applied to the first assignment, namely that the Guarantor cannot be required to guarantee the obligations of the next assignee but can, when that assignee assigns on. All of this is topsy turvy, and cannot have been the intention of the parties. Given the size of the rental obligations, it cannot have been within the contemplation of the parties that the Defendants would be able to organise their affairs so that the Claimants would only have recourse against £1 companies.

53. In the course of argument, I suggested to Mr Reynolds QC, who appears for the Claimants with Mr Julian Greenhill, that the difference between clause 3.14.3 and 3.14.6 was that the latter really were merely administrative provisions, in this sense. The Landlord had already done its investigation as to the financial standing of the group of which the Tenant was part, and was content to obtain a guarantee from the Guarantor. Therefore if, internally, for reasons that are only of concern to the Tenant group, they wished to transfer the legal title to some other company within the group, the financial standing of that prospective assignee is irrelevant to the Claimant because, under the terms of clause 3.14.6 it continues to retain the benefit of the covenant from the Guarantor.

54. That is undermined by the operation of the 1995 Act. It is also contrasted with the onerous requirements of any other assignee in 3.14.3 et seq.

               THE DEFENDANTS' SUBMISSIONS             

55. The Defendants' submissions were as follows.

56. First, the guarantee under Schedule 6 is not an authorised guarantee agreement ("AGA") under section 16 of the 1995 Act. That is accepted by the Claimants.

57. Second, the Guarantor means the Third Defendant and it is submitted that the words "and any other guarantor of the Tenant" refer to any other person than the Guarantor which, subsequently to the grant of the Lease, enters into a guarantee of the Tenant covenants in the Lease.

58. Third, consequently any guarantee pursuant to that clause will be unenforceable on the first intra-group assignment.

59. Fourth, there is no objection to the Guarantor and any other guarantors guaranteeing the obligations of the Tenant on the second assignment.

60. Thus, it is cumulatively submitted that clause 3.14.6 (b) is not necessarily invalid. It is only invalid to the extent that the Landlord chooses to impose the requirement and to the extent that the Guarantor is an existing guarantor of the Tenant.

61. Although it is submitted that, given the numerous references to the 1995 Act, the parties were aware of that Act, they must be taken therefore to have accepted the Landlord was entitled to impose a requirement for a guarantee only if and insofar as it was lawful to do so. Further, the provision is not entirely invalidated, it is only void "to that extent". Thus, the Defendants contend that the clause is not struck down; it is merely invalid insofar as the Claimants seek that the Guarantor guarantees the obligations of the assignee.

62. Further, the last sentence of the clause provides that the Landlord's consent shall be given subject to the Tenant's compliance with such conditions. On this analysis, the Defendants contend there is no need to strike out the whole or part of clause 3.14.6 for all purposes.

               ALTERNATIVE SUBMISSION TO STRIKE OUT OFFENDING CLAUSES             

63. The Defendants contend that if, contrary to the primary submission above, it is necessary to excise the offending provision, the principles are summarised in Francotyp-Postalia v Whitehead [2011] EWHC 367 (Ch). There are three requirements:-

  	(a) The unenforceable provision is capable of being removed without the necessity of adding to or modifying the words that remain.

  	(b) The remaining terms continue to be supported by adequate consideration

  	(c) The removal of the unenforceable provision does not so change the character of the contract that it becomes "not the sort of contract the parties entered into at all".

64. The Defendants contend that those requirements are satisfied simply by the deletion of the words in sub-clause (b) of clause 3.14.6.

65. I do not agree. It cannot be argued on the part of the Claimants that without this provision they would not have entered into the arrangement (see Marshall v NM Financial Management Limited [1997] 1 WLR 1527 at page 1532C, observing the observations of Dillon LJ in Alec Lobb (Garages) Limited v Total Oil (Great Britain) Limited [1985] 1 WLR 173, 181). However, the question must be asked as to whether or not the removal of the unenforceable provision does not so change the character of the contract, it becomes "not the sort of contract the parties entered into at all".

66. It seems to me obvious that the regime of the creation of the Lease with a nominal company with a guarantee backed up by the Third Defendant, coupled with the provisions of detailed financial requirements on assignment, means that the structure of the Lease was that always the Claimants would be entitled to have a either a Tenant who was of sufficient standing to meet the burdens of the Lease or a Tenant not of sufficient standing supported by a guarantor who could meet those burdens. The effect of the Defendants' excision of sub-paragraph (b) means that in reality the Claimants have exactly the opposite. As I said, the Defendants contend that they could have entered into these arrangements as soon as the Leases were executed. If there are no subsequent assignments (which itself causes problems, because of the presence of the Guarantor obligation) the Hilton Group will have the advantage of having a whole series of lease of valuable properties which they can operate but if the rents are not paid or there are other breaches, the Claimants will have nobody against whom they can have effective recourse. It is difficult to see a more radical variation of the Lease.

67. By way of contrast, the Claimants contend that sub-clause (b) should be read as meaning "any other guarantor of the Tenant [obligations in the Hotel Lease]" or possibly "any other guarantor [procured by] the Tenant".

68. The former of those requires the word "Tenant" to mean the assignee who becomes the Tenant upon taking the assignment. The latter one does not, because it is there the assignor who is "Tenant" who is procuring any other guarantor.

69. This seems to me to be the more sensible construction when one has regard to the consequence of the infringement of the 1995 Act by the introduction of the Guarantor as a guarantor for the Assignee.

70. In my view this would lead to a commercially sensible result, whereas the Defendants' residual proposal does not.

71. Equally, I accept that it requires the interpretation of "and" to mean "or". However, that is better than having a clause which radically alters the commercial common sense and the common understanding of all the parties.

72. When a provision is struck down as being void, the courts should strive, to construe a contractual term so as to validate the provision so far as possible. See, for example, Pavilion Property Trustees Limited v Permira Advisors LLP [2014] 1 P&CR 21 at [20] per Morgan J.

73. By way of contrast, the Defendants' contentions enable the Hilton Group to pirouette out of freely entered into obligations, which involve having a company of worth that would be responsible for complying with the obligations under the leases.

74. I accept that in the K/S Victoria case, the Court of Appeal struck down a covenant on assignment, insofar as it required a guarantor of the lessee to become a guarantor of the assignee. The Court accepted that this would appear to produce "a rather propitious effect if it was invoked to effect an assignment between companies of the same group". Be that as it may. However, one has to be careful when construing documents to take into account a construction of a different document by a different court in different circumstances. There appears to have been no argument there for an alternative effect, unlike the argument for the Claimants in this case.

75. It seems to me, that if two possible constructions are available (whether by applying the principles summarised in the Francotyp case, or just as a matter of reading the clause) one of which leads to absurd commercial results which the parties can never have contemplated, whereas the other leads to a result which was within the commercial contemplation of the parties, then the courts should unhesitatingly give effect to the latter construction.

76. This seems to me to maintain the checks and balances, as between the Landlord and Tenant, provided by clause 3.14.6, where there is a proposal to transfer internally within the group of which the Tenant is part. The clause primarily reinforces the need for licence to assign, but then the proviso waters that requirement down where the requirements of sub-paragraph (a) and (b) are satisfied. The wording of the proviso is somewhat difficult. It is a common provision in commercial leases to dispense with a requirement for licence to assign in respect of companies within a group. The provision is, therefore, for the benefit of the Tenant in that he does not have to satisfy the onerous requirements as set out in paragraph 3.14.3 and following, for example. This is on the basis that the Claimant has already done its homework as to the financial standing of the group when the lease was granted. However, the clause is not phrased as if it is conferring a right on the Tenant, because it starts with the Landlord beingentitled to impose the conditions. However, the Landlord, once it has imposed those conditions, then the final sentence shows that if the tenant complies with those conditions, the Landlord's consent shall be given. Much was said about this part of the proviso in debate, but it seems to me clear that that part of the sentence is not really saying anything beyond the fact that where those two conditions are sought to be imposed, and are complied with, then consent must be given. However, as I have said, there appears to be no obligation on the part of the Landlord to impose the conditions, as it is a provision granting entitlement, as opposed to an obligation.

77. What if it does not seek to impose those conditions? Can it then rely on the major part of the section which prohibits assignment without consent? Mr McGhee QC said no. Mr Reynolds QC did not exhibit any great enthusiasm for such a proposition.

78. In my view, the first part of the clause is important, because it demonstrates the fundamental proposition that on assignments, the consent of the landlord is required. If the proviso falls in whole, then that clause will bite fully. If it falls in part, by reason of the application of the 1995 Act, then we must look at the proviso with any variations that are required to give effect to the 1995 Act. If the primary construction contended for by the Claimants, as set out above, is not correct, then in my view the effect will be to excise sub-paragraph (b) but enable the landlords to require licence to assign in accordance with the opening part of the paragraph. This gives effect to the commercial understanding that plainly applied at the time of the commencement of the Lease.

               LANDLORD'S ALTERNATIVE ARGUMENTS             

79. I should refer to two further arguments raised by Mr Reynolds QC, to support the Claimants' case. First, he submitted that clause 3.14.6 was made up of three parts. First, there is the negative part, namely not to assign without licence. Second, there is the statutorily implied proviso under section 19(1) of the 1927 Act, that such consent cannot be unreasonably withheld, and third an express proviso "provided always..." that the Landlord should be entitled to impose the conditions for the purposes of section 19(1A) of the 1927 Act.

80. Mr Reynolds QC accordingly submits that sub clause (b) is not an agreement that falls within the meaning of section 25(1) of the 1995 Act. He accepts that section 25(1) invalidates an agreement by the Guarantor to provide a further guarantee in the light of the K/S Victoria case, but he submits that sub clause (b) is not agreement by the Guarantor at all. The Guarantor is not a party to the clause, and it is not an agreement by the Tenant to procure such a guarantee. The clause, he submits, is simply a precondition which the Tenant must fulfil if it wishes to rely on clause 3.14.6. If the Tenant cannot fulfil the condition, it cannot claim the benefit of the express proviso. In that eventuality, he would need to seek licence to assign in the usual way, and subject to financial requirements which, of course, the assignees cannot meet.

81. Mr Reynolds QC said this is analogous to the decision of Megarry VC in Allnatt London Properties Limited v Newton [1981] 41 P&CR 11. That was a case under a similar anti-avoidance provision in section 38 Landlord and Tenant Act 1954 which struck down any provision which had the effect of precluding the tenant from making an application or request under Part II of that Act for a new tenancy.

82. The offending provision was an obligation that, if a tenant wished to assign, he had to first make an offer in writing to the landlord to surrender the lease, and could only assign if the landlord refused the offer.

83. Megarry VC held that the provision was void under section 38 of the 1954 Act. However, echoing the words of Mr Reynolds QC in argument, the decision was a Pyrrhic one, because he also held that the avoidance of an agreement to surrender did not lead to the conclusion that the Tenant was thereby freed of the obligation to offer to surrender before assigning his lease. His conclusion was that section 38 did not bite on an obligation to make an offer; it bit on the agreement concluded if that offer was accepted. Further, he observed that the sub clause represented a bargain, in which the rights of the parties depended on the balance of advantages and disadvantages, and that if statute declared void part of it, he would hesitate to then declare that the other party could obtain a benefit from the rest of the clause without suffering the burden of what had been declared void, unless the provisions were clearly severable. However, the decision he made was somewhat tentative, see page 18 ("however, none of this was argued before me and I hesitate to reach a firm conclusion on it. For the reasons that I have given, I base my decision on a sub section not having any application to the sub clause..."). Further, the fact that it was part of a bargain entered into between the parties is, with respect, irrelevant. All agreements that are affected by anti avoidance provisions are "freely" entered into. It is just as irrelevant as the submission that a party could not be contracted if it knew the clause will have been struck down.

84. This, in my view, is a difficult case for Mr Reynolds QC to rely on. First, it is under a different statutory provision. Second, it is under a radically different clause. Third, the observations of the Vice Chancellor (to which great attention will always be given) were without the benefit of argument. It has not been, therefore, subjected to the tough experience of legal argument.

85. I do not accept Mr Reynolds QC's argument. It seems that if his argument is correct when applied to the present clause, it would totally undo the purpose of the 1995 Act, which is to remove fetters on assignment which prolong obligations on the part of the Tenant and any guarantor of the tenant after such tenant no longer has any interest in the premises. I do not therefore accept Mr Reynolds QC's argument on this point.

86. Equally ingenious, but equally ineffective, in my view was Mr Reynolds QC's third argument. In this line of argument, he submits the position is similar to cases where consent is required under a covenant for certain activities, by the covenantor, where the covenantee has ceased to exist. There are a number of cases on this: see (for example) Seymour Road (Southampton) Limited v Robin Williams [2010] EWHC 1111 at [38]. However, I do not see that those cases provide me with any assistance except to emphasise the need for the courts to give effect to the statutory provisions but to ensure that the remainder of any agreements have some commercial sense in the context of the arrangements that were agreed between the parties.

               FAILURE TO APPLY FOR LICENCE             

87. The Defendants contend that they did not need to apply for licence to assign. As regards the provisions of sub paragraph (b), I have rejected those submissions, as set out above.

88. There remains, of course, sub paragraph (a), which is one of the conditions which the Landlord is entitled to impose, namely the Tenant gives notice of the assignment within ten working days of completion. The Defendants have given such notice, but never applied for licence to assign.

89. The Defendants dealt with this very shortly in their submissions. They submit that although sub paragraph (a) is expressed as a condition precedent to the Landlord giving consent, in reality it is a condition subsequent as it can be complied with only once the assignment has taken place.

90. I do not accept that is a correct analysis. The landlords are correct that the true analysis is that the Defendants cannot assign without approaching the landlords for licence. That is what the clause says. It might be that it is a formality, but it has to be sought. This was established as long ago as 1890 see Barrow v Isaacs and Sons [1891] 1 QB 417.

91. I cannot see, whatever the arguments the Defendants have about sub paragraph (b), that that can affect the overall structure. Clause 3.14.6 prohibits them from assigning without licence. The proviso gives them benefits but it is triggered by an application for a licence to assign. When the Landlord receives such a request, it might not want to have recourse to the proviso, with the result that the Landlord would simply give consent. Alternatively, it could insist on those two conditions and if the Tenant complies with those conditions, the Landlord cannot refuse licence to assign. However, in this case it has been deprived of the option to impose those conditions. That deprivation has occurred because of the Tenant's failure to ask for licence to assign.

92. I do not regard this breach as being trivial. If the Tenants had considered the position and given the Landlord's notice, no doubt the Tenants would have asserted that the Guarantor will go and no other guarantor can be required i.e. their construction of sub paragraph (b), which I have rejected in this judgment. The Landlords would be in a position to litigate it (and perhaps seeking injunctive relief preventing the assignment). Instead, the Defendants made a deliberate decision not to seek licence to assign (and presented the Claimants with a fait accompli at the most potentially disastrous time, from their point of view). None of that would have happened, had they applied for licence; the Claimants could have protected their position in the interim, as opposed to being presented with the assignments (which have now been registered).

93. The consequence of this is that, as the Defendants are in breach, they cannot pray in aid the provisions of the 1995 Act, because it is an "excluded assignment" for the purpose of section 11 of that Act.

               CONCLUSION             

94. For all of those reasons, I therefore determine that the Claimants are entitled to the declaratory relief set out in paragraph 10 (1) of the Claim form.

95. The assignment of the staff accommodation stands or falls with the validity of the assignments of the hotels. As those assignments are ineffective, the Defendants cannot properly assign the staff accommodation either.

96. I am grateful to counsel for their succinct and helpful arguments.