Share Manoeuvres Cause Lease Breach

A company that was part of a group recently found that it had breached its lease when a corporate reorganisation was carried out. The problem arose because the lease on the company’s premises contained a clause that the tenant company was allowed to share occupation of the premises as long as it remained a member of the same group of companies to which it belonged when the lease was executed.

In this case, the tenant’s holding company had pledged the tenant company shares to a bank as security for facilities provided by the bank. This led to the tenant ceasing to be a ‘member of the group’, as a result of which it no longer had the right to share occupation of the let premises.

Although this was a Scottish case, the principle would be the same under English law, with one crucial difference. In Scotland, in such circumstances the bank’s interest is recorded by an entry in the shareholders’ register. In England and Wales, signed share transfer forms would normally be held by the bank, but the shareholders’ register would be left alone until the bank wished to rely on its security. In that event, the group structure is undisturbed until the bank’s interest is recorded in the register of members.

The precise way this might affect a group depends on the shareholdings and their rights but, in principle, care should be taken, especially when a holding company has a majority of the shares but not voting rights in its subsidiary.