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Wednesday, 17 September 2014

Group Reorganisations - Is the 1995 Act Fit For Purpose?



A decision of the Court of Appeal on 5 September 2014* has highlighted how difficult it can be for subsidiary companies to assign their lease to another company in the same group.

First some background.

When leases are granted to subsidiary companies - especially SPVs -  the chances are the landlord is only willing to do so in return for a guarantee from the parent company, as the subsidiary may have comparatively little value on its own.

If the subsidiary wants to assign the lease, the landlord will want the parent company to stay on the hook and guarantee the obligations of the new assignee subsidiary.

In 2010/11, a couple of decisions** by the High Court and the Court of Appeal respectively interpreted the Landlord and Tenant (Covenants) Act 1995 in a way that means the landlord is only able to achieve this in part (a sub-guarantee) and by drafting the lease in a particular way, and many leases granted before those decisions do not comply.

The 1995 Act provides that a tenant is released from its obligations following an assignment unless it has given the landlord an authorised guarantee agreement (AGA) guaranteeing the obligations of its immediate assignee.

It's normal for leases to require an AGA.

The 2010/11 decisions also confirmed that it's possible to draft a lease so as to require the tenant's guarantor (in this scenario the parent company) to guarantee the tenant's obligations in the AGA, sometimes called a sub-guarantee.

Here, the guarantor is not guaranteeing the assignee directly, but is instead standing behind the tenant's guarantee of the assignee in the AGA.

What surprises many people however is that any requirement in the lease for a guarantor to enter into a new guarantee directly guaranteeing the assignee's obligations is void.

The guarantor cannot even agree to give a direct guarantee of the assignee voluntarily, although if the first assignee subsequently assigns again, the original guarantor can step back in and guarantee the second assignee.

This complexity has made group reorganisations more difficult.

This month's decision* is the first time the Court of Appeal has had to look at this since 2011.

In the recent case, leases were granted to hotel companies, guaranteed by a substantial parent company.

The leases allowed the hotel tenants to assign within the group without the landlord being able to refuse consent if (a) the tenant gave notice of assignment and (b) the guarantor stood as guarantor of the incoming tenant.

The tenant companies believed that because the second requirement was void, following the 2010/11 decisions, they only needed to satisfy the first requirement which they did following their assignment of all the leases to shell companies without a guarantor.

If the tenant companies' interpretation prevailed, the parent company would be off the hook, leaving the landlord in each case with the subsidiary alone - a much weaker covenant.

The Court of Appeal disagreed with this outcome and took a commercial approach, deciding that the whole condition in the leases allowing intra-group assignment only if the tenant provided a guarantor was void under the1995 Act.

This meant the clause in the leases dealing with assignment became a simple qualified covenant - that the tenant could assign subject to obtaining the landlord's consent, not to be unreasonably withheld.

If the tenant couldn't offer an assignee of sufficient covenant strength or an alternative guarantor, the landlord could refuse consent provided it was acting reasonably.

The Court decided this was the fairest approach and one which continued to give commercial effect to the leases - the landlord still had its security, and the tenant could assign if it came up with an adequate guarantee.

Comforting to landlords, but the difficulty for corporate groups however is that it might be impossible to come up with an adequate alternative to the parent company to act as a guarantor.

The law in this area seems unsatisfactory - surely as a matter of policy it ought to be acceptable for parent guarantees to be repeated if that's what everyone wants.

This is more likely to be a problem for leases drafted before the 2010/11 decisions, as most leases would now require a guarantor to underwrite the AGA -  but there are practical reasons why that's less valuable than a direct guarantee.

Time to reform the 1995 Act?


*Tindall Cobham 1 Limited & Others v. Adda Hotels and Others [2014] EWCA Civ 1215

Monday, 21 July 2014

Down...But Not Out!

I shall be taking a break from Digging the Dirt for a few weeks.

I've been running this blog for three and a half years now, and I'm most grateful to all who have read it and found it useful. With an upturn in fee-earning work, this has inevitably led to less frequent posting over the last year or so and, with the plethora of blogs and other updates now offered  by law firms on their websites, it's become a much more crowded, and better managed, market than when I began doing this - for which I take no credit!

I shall endeavour to keep the blog going in some capacity when I return though (even if it does mean less frequent posting), and I anticipate firing up the blogging engine again in September.

I hope you all have an enjoyable summer.

Friday, 18 July 2014

Will Chancel Repair Liability be Abolished After All?



A Private Members' Bill has been tabled by Liberal Democrat peer Lord Avebury this week, following discussions with the National Secular Society,  to abolish chancel repair liability – the ancient law that can force homeowners to pay for some ancient Anglican parish church repairs.

Chancel repair liability has been an ongoing legal saga for some time now.

Removing the status of overriding interest hasn't really had the effect desired by opponents of this liability.

Where the Church has registered its interest, properties are blighted forever.

Where the Church hasn't registered its interest, the risk remains even after a transfer for value until you're actually registered as the new owner at the Land Registry - which has kept the chancel repair liability insurance industry going.

The Chancel Repairs Bill, which received its first reading this week, seeks to remove the liability.

Lord Avebury said: "Thousands of landowners' titles are still today blighted by chancel repair liability, a relic of mediaeval ecclesiastical law. Titles that have been registered by the Church with the Land Registry are those most likely to be adversely affected. This generally leads to a distressing reduction in value and even an impairment of saleability, despite the Church rarely enforcing the liability.

"The Law Commission and Law Society have recommended abolition, the latter by phasing out. The Church's Synod supported abolition, albeit in 1982, and has not reversed its decision. Accordingly, I have invited the Church to support this Bill."

A date for the second reading, where the Bill will be debated, is yet to be scheduled.
Explanatory Notes for the Bill have been published on Parliament's website.

Whether Lord Avebury succeeds remains to be seen - I don't see the Church supporting it, but I could be wrong of course.

Monday, 7 July 2014

My Name Is...My Name Is... Not Heron Tower



A row has been going on over plans to change the name of London skyscraper, Heron Tower, to the rather less evocative Salesforce Tower, after a US software firm that's a major tenant. 

Salesforce recently agreed to take an additional 50,000 sq ft of offices over 6 floors within the 46-storey tower, which will see them occupy 17% of the building.

Changing the name was apparently part of the deal.

Other tenants are reportedly unhappy - CMS reports the name change has now been referred to the City of London Corporation, with a committee decision expected on 17 July.

Generally, unless the leases say otherwise, a landlord can call its building what it likes so long as it gets local authority permission.

The naming of a building can be significant, not just for football stadia.

You might be a tenant occupying a relatively small amount of space in a landmark building, but that will still come at a hefty price in terms of rent and service charge.

The only way to prevent your landlord from suddenly deciding to rename the building after your competitor who's moved in upstairs or perhaps some organisation you'd rather not be associated with is to say something about the naming of the building in your lease.

You're unlikely to get the naming rights yourself, unless you're going to be the main tenant, but you might be able to get an obligation for the landlord to consult with you on a name change, or for the landlord to agree to call the building something generic.

New tenants agreeing leases within the Cheesegrater or Walkie-talkie might want to take note.

Heron Tower was of course named after the building's developer, Heron International.

Tenants will presumably be using 110 Bishposgate on their notepaper from now on.

They should have asked the fish.

Friday, 13 June 2014

Holiday Let Your London Home...Legally



Soon you'll be able to let out your London Home for short term holiday letting without having to apply for planning permission.

It'll probably come as news to most Londoners (I have to confess it did to me, but then we don't let out our home) that you can't do this already.

However, under the Greater London Council (General Powers) Act 1973, Londoners who want to rent out their homes for less than three months, technically, have to apply for planning permission from their borough council.

It's something that doesn’t apply anywhere else in the country.

New measures announced this week by Communities Secretary Eric Pickles will end this anomaly.

The rules apparently caused some controversy during the 2012 Olympics. Many also rent out homes during Wimbledon.

The rules are inconsistently enforced by different London boroughs, leading to confusion.

There were nearly 5 million overseas visitors to the capital between July and September last year alone, and thousands of properties available as holiday lets on travel websites.

Globally, there are now many websites such as airbnb, that allow homeowners to offer their homes for rent to visitors when they themselves are away.

The changes will include measures to prevent abuse of the reforms or the permanent loss of residential accommodation.

It won't be possible to turn homes into hotels or hostels under the new rules.

This would still require "change of use" planning permission.

There's no reason why Londoners should be treated differently to anyone else, but it will be interesting to see what the anti-abuse measures amount to.

If people start buying up places in London specifically for holiday accommodation or other short-term lets, it will only make the housing shortage in London - which is more dire than anywhere else -  even worse.

The photo is of a fisherman's hut in Southwold. Transfer that to Kensington and it'd be worth millions.

Wednesday, 4 June 2014

Queen's Speech Signals Fracking Reform of Trespass



The government today confirmed, via The Queen, its intention to change the law of trespass to make it easier for companies to frack for gas and exploit geothermal energy under private land without the landowner's permission.

Fracking is shorthand for  hydraulic fracturing, the process of blasting of water, chemicals and sand at high velocity into a shaft to crack rock and release the shale gas.

Unlike in the US, where the gas is owned by the landowners, in the UK the Petroleum Act 1998 vests all rights to the nation's petroleum resources (which includes shale gas) in the Crown, but the government can grant licences that confer exclusive rights to "search and bore for and get petroleum" - over a limited area for a limited time.

Those licences do not include any rights of access.

The owner of land owns everything up to the sky and down to the centre of the earth, or more poetically, “for whoever owns the soil, it is theirs up to heaven and down to hell" - a presumption that's been criticised over the years, but is generally accepted.

Therefore, as the law currently stands, anyone wanting to mine for the gas requires the landowner's permission (and must also navigate its way through  a complex web of planning and regulatory consents).

Today's announced reform wasn't included in the Infrastructure Bill as expected.

Instead, ministers will wait for the result of a 12-week consultation published on 23 May 2014 before pressing ahead with legislation.

The official briefing notes accompanying the Queen's speech said:

"Subject to consultation, this bill would support the development of gas and oil from shale and geothermal energy by clarifying and streamlining the underground access regime. The government is currently running a full consultation on this policy and the legislation is entirely dependent on the outcome of that consultation."

It will be interesting to see what responses are made to this consultation, given that what is being proposed is the taking away of people's property rights.

The photo at the top of this post has nothing to do with fracking - it's just a sign I spotted at the weekend - I'm guessing it's the new Lib Dem slogan.