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 Although section 736 CA 1985 has now been repealed, the substance of that section has been reproduced in section 1159 of the Companies Act 2006.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 terms of a Scots law pledge of shares). The transfer was complete and all ancillary matters attended to. As can be read in our earlier Law-Now the Court of Appeal held that membership was not a right but was a 'status derived from the entry of the shareholder's name in the register of members.' On that basis, Enviroco Ltd was no longer a 'member' of the Asco group of companies.
And this is where that innocent provision in the Scottish lease makes its entrance. When the membership of the group of companies unravels in this manner, so too does the freedom to share occupancy whilst the incoming company and the tenant company are associated companies.
Granting security over shares in a subsidiary company is not an uncommon concept under Scots law. Care should be taken however when it is used in connection with a company that controls less than 50% of another company's voting rights. In England & Wales, the pledging of shares (by way of security) is carried out slightly differently than it is north of the border. For instance in England & Wales the bank's details will not typically be entered into the register of members of the subsidiary company. The bank will simply hold all necessary and relevant documentation (such as signed stock transfer forms etc) giving them the ability to enforce their rights in security if so required. In these circumstances, there is no transfer and so to that extent the risk under the Asco case would not arise. In both jurisdictions there is a practice of shares being held by a nominee and following the Asco case, this may compromise the group structure as well.
It should also be noted that the decision handed down in the Asco case will only affect a small number of companies, as the vast majority of parent-subsidiary companies are on the basis that the parent holds the majority of voting rights in the subsidiary (over 50%).
Please note that Enviroco Ltd has submitted an application to the Supreme Court for leave to appeal the Court of Appeal decision handed down in the Asco case, but no hearing date has been set.
Further reading
Enviroco Ltd v Farstad Supply A/S [2009] EWCA Civ 1399 (http://tinyurl.com/yakzt3l)
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 20/01/2010.
