Leasehold covenants, indemnities and group reconstructions

Leases are often assigned by one company to another within a group of companies. In this article the interaction of group structure and indemnities in leasehold covenants is explored. The analysis draws heavily on two recent cases: Stanhope Pension Trust v. Registrar of Companies (Stanhope) and RHP Ltd v. Mirror Group (Holdings) Ltd and Others (RPH). Covenants which include indemnities are implied under section 77 of the Law of Property Act 1925 (unregistered land) and section 24 of the Land Registration Act 1925 (registered land). In situations where there are several assignments of a lease, each with an implied indemnity, a default can begin a chain reaction. On the default of the leaseholder, the original tenant will become liable to the landlord but will be impliedly indemnified by the next assignee who will in turn be impliedly indemnified by the next assignee, and so on. Earlier assignees are termed “upstream” and later ones “downstream” so a better metaphor may be that of a “cascade”. The cascade can, however, be halted, shielding assignees downstream of the problem or blockage and leaving the assignee immediately upstream of the problem to bear the loss. This has particular relevance within groups of companies because, if the first assignee (or the original tenant) within a group of companies can provide such a shield, it may be possible to protect the assets of all downstream assignees including other members of the group.