Pledging To Breach A Lease

Where a tenant company manages to achieve a lease provision allowing it to share occupation with other members of its corporate group, management of that group might inadvertently allow the Landlord to terminate.

Careful drafting is required for a seemingly small point because management of, for example, the group's overall finances at a later date may unintentionally affect the legal structure of the group of companies and cause a breach of the lease.

Although the recent case of Enviroco Ltd v Farstad Supply A/S (the "Asco case") deals with the pledging of shares by way of security and indemnity provisions in an oil and gas contract, it may have a much wider knock on effect in real estate transactions in both England and Scotland. We reported on it in our Law-Now of 8th January, 2010 from the perspective of corporate shareholding, but it is worth revisiting from a Scottish real estate perspective.

It is not unusual, in a lease, for the tenant to seek to obtain a sharing of occupation rights for other companies within the same group structure. This allows flexibility - perhaps in co-locating a specific company or personnel at a convenient base for a specific project.

Landlords are often persuaded to allow this formality to be documented within the lease itself, but they will want a caveat that this is permissible so long as the tenant and the other occupier(s) remain members of the same group of companies (usually stating that "member" is as defined under the companies legislation). So far so good.

Where the holding company does not own more than 50% of the voting rights, it must seek to show its control through other mechanisms. The legislation allows for it to be a member of the group if it has the right to appoint or remove a majority of its board of directors. A third control is, as with the Asco case, section 736(1)(c) Companies Act 1985, namely that "it is a member of it and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in it, or if it is a subsidiary of a company which is itself a subsidiary of that other company." Although section 736 CA 1985 has now been repealed, the substance of that section has been reproduced in section 1159 of the Companies Act 2006.

In the Asco case, it was found that Asco plc had pledged shares in Enviroco Ltd to a bank by way of security, (a process which involved the bank's details being entered into Enviroco Ltd's share register under the...