Hilton Worldwide loses court appeal over hotel leases

A Court of Appeal case which has ruled against Hilton Worldwide could have wider implications for companies operating hotels in leased properties.

Hilton Worldwide was ordered to pay costs of more than £100,000 after losing the appeal against an earlier High Court ruling that the company had breached the terms of the leases on a portfolio of 10 UK hotels, including the London Kensington Hilton.

The leases relate to properties which, in 2002, the then named Hilton Group sold and leased back from Tindall, a subsidiary of Consensus Business Group, headed by property entrepreneur Vincent Tchenguiz.

The leases were initially secured under the Hilton Group and later Hilton Worldwide, which was created in 2006. The original agreement stated that Hilton should not assign the leases to "any associated companies of the tenant".

However, on 1 July this year, the leases were assigned by the existing tenants, subsidiary companies of Hilton Worlwide: Adda Hotels and Puckrup Hall Hotel, as part of a group re-organisation, to newly incorporated shell companies without any financial standing, without the prior consent of Tindall. This was unacceptable to Tindall as the effect of the assignment was that the parent company guarantor, Hilton Worldwide, was released from its guarantee obligations under the leases.

On 17 July, the High Court ruled that the assignments were unlawful and in breach of the leases, and under the terms of the leases Tindall could require an acceptable alternative guarantee to be provided on any subsequent assignment.

Hilton appealed against this ruling, stating that the company did not have to provide any guarantee, under the terms of the Landlord and Tenant (Covenants) Act 1995. However, the Court of Appeal dismissed the case and ordered Hilton to pay Tindall's costs for both cases of more than £100,000.

A spokesperson for Hilton Worldwide said: "As it is not our practice to comment on legal proceedings, we are unfortunately unable to comment further outside of highlighting that we remain fully committed to our leased estate in the UK."

Roger Cohen, real estates disputes partner for BLP, the law firm which represented Tindall, described the outcome of the Court of Appeal case as "an important decision for parties who have entered into leases where the covenant of a guarantor is critical to the deal".