K/S Victoria Street v House of Fraser Ltd and Others
| Jurisdiction | England & Wales |
| Judge | The Master of the Rolls |
| Judgment Date | 27 July 2011 |
| Neutral Citation | [2011] EWCA Civ 904 |
| Docket Number | Case No: A3/2011/0012 & 0039 |
| Court | Court of Appeal (Civil Division) |
| Date | 27 July 2011 |
[2011] EWCA Civ 904
Master of the Rolls
Lord Justice Thomas
and
Lord Justice Etherton
Case No: A3/2011/0012 & 0039
Claim No HC10C01511
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr John Randall QC
The Hon Mr Justice Mann
Royal Courts of Justice
Strand, London, WC2A 2LL
Anthony Speaight QC (instructed by Stockler Brunton) for the Claimant (the appellant in the first appeal and the respondent in the second appeal)
Jonathan Seitler QC and Nicholas Taggart (instructed by Lawrence Graham LLP) for the Defendants (the respondents in the first appeal, and appellants in the second appeal)
Hearing date: 14 June 2011
This is the judgment of the court, to which all members have made substantial contributions.
The judgment relates to two appeals, each of which raises an issue arising out of an agreement made on 26 January 2006 ("the Agreement"). The Agreement provided for the sale of the freehold of a property on terms that it was immediately leased back by the buyer to the seller. In due course, the sale was completed and the lease ("the Lease") was granted.
The first issue is whether (as Mr John Randall QC, sitting as a Deputy High Court Judge, held) part of clause 3.5 of the Agreement ("clause 3.5"), which stipulated that the Lease should be assigned to a specific assignee on terms which required the guarantor of the tenant's liability to guarantee the liability of the assignee, is invalid. The second issue is whether, if the Lease was assigned in accordance with clause 3.5, it could (contrary to what Mann J subsequently held) be freely assigned back to the tenant.
The first issue touches on a question of some general significance in the law of leases, namely the ambit of section 25(1) of the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act"), and whether the reasoning of Newey J in Good Harvest Partnership LLP v Centaur Services Limited [2010] EWHC 330 (Ch), [2010] Ch 426 is correct. The second issue is rather more specific to the facts and documents in this case, and turns on the interpretation of clause 3.15 of the Lease ("clause 3.15"). Before turning to those issues, it is necessary to set out the relevant factual and procedural history, and the background and relevant sections of the 1995 Act. All references hereafter to sections are to sections of that Act.
The factual and procedural history
By the Agreement, a Danish partnership, K/S Victoria Street ("Victoria"), agreed to purchase the freehold of a large department store in Wolverhampton ("the premises") from the then freehold owner. That freehold owner was a subsidiary of House of Fraser plc ("HoF", which later that year ceased to be a publicly listed company, and became House of Fraser Ltd). The subsidiary was called House of Fraser (Stores Management) Ltd ("Management"), and it had recently acquired the premises from another subsidiary of HoF, James Beattie Ltd ("Beatties"). The price payable for the freehold under the Agreement was £46m.
The Agreement provided that, immediately upon completion of the purchase, Victoria would grant, and Management would accept, the Lease, with HoF acting as guarantor of Management's liabilities, in accordance with the provisions of schedule 3 to the Lease. The term of the Lease was to be 35 years and the rent was to be £2.25m per annum, subject to upward only reviews every five years.
HoF had selected Management from among its subsidiaries, to be the seller under the Agreement and the initial tenant under the Lease, for tax reasons. However, in the light of Management's financial situation, it was not a satisfactory tenant so far as Victoria was concerned. Accordingly, the parties agreed that, within three months, the Lease would be assigned to an another company within the HoF group, failing which it would be assigned to a specific HoF subsidiary, namely House of Fraser (Stores) Ltd ("Stores"), a company with a healthy balance sheet. To reflect this arrangement, clause 3.5 of the Agreement, provided as follows (the division of the clause into three paragraphs being added for convenience):
"3.5 (i) [Management] agrees to assign the Lease to an assignee (being a Group Company of [HoF] being of equal or greater covenant strength to [Beatties], and
(ii) if a company is not chosen by 20 April 2006 then the assignee shall be Stores and Stores agrees to take that assignment by no later than 26 April 2006, and
(iii) [HoF] agrees to enter into a deed of guarantee of that assignee's liabilities as surety in the form set out in schedule 3 to the Lease."
The Agreement was completed, and, in accordance with its terms, the Lease was granted by Victoria to Management, with HoF acting as Management's guarantor.
The only provision of the Lease which is relevant for present purposes is clause 3.15, which contained the tenant's obligations in relation to "alienation". The first six paragraphs of the clause were concerned with assignment, and were in these terms:
"(A) Not to assign, charge, underlet, hold upon trust for another or part with or share possession or occupation of the whole or any part of the Premises except as provided in this sub-clause.
(B) Not to assign the Premises nor to underlet the whole or any part to a person entitled to claim diplomatic or Sovereign immunity.
(C) Not to assign the whole of the Premises unless either:
(i) the Tenant demonstrates that the Net Profits of the assignee in each of the three Accounting Periods ending immediately before the date of the assignment exceed in each of those Accounting Periods the figure equal to three times the principal yearly rent; or
(ii) on or before completion of the assignment the Tenant enters into an authorised guarantee agreement with the Landlord in accordance with section 16 of the [1995 Act] in such form as the Landlord may lawfully require and any surety of the Tenant guarantees in such form as the Landlord reasonably requires the Tenant's obligations under such authorised guarantee agreement.
(D) Not to assign the whole of the Premises without first:
(i) obtaining the consent of the Landlord (such consent not to be unreasonably withheld);
(ii) procuring that such sureties as the Landlord reasonably requires covenant by deed directly with the Landlord as principal debtors or covenantors in such form as the Landlord reasonably requires to pay to the Landlord all losses, costs and expenses arising out of or incidental to any failure by such assignee to comply with its obligations to the Landlord from time to time…..
(E) Not to assign the whole of the Premises to a Group Company of the Tenant unless the Group Company is of the same or better financial standing than the Tenant or has offered a guarantor or guarantors which when considered with the Group Company are of the same or better financial standing than the Tenant and [HoF] taken together.
(F) Notwithstanding the provisions of this clause where the Tenant is [Management] or any other Group Company of [HoF] consent shall not be required to an assignment of the whole to another Group Company of [HoF] provided [HoF] acts as surety to the assignee Group Company."
The remaining paragraphs of clause 3.15 of the Lease were concerned with underletting or parting with possession and occupation.
Subsequently, the Lease was not assigned in accordance with clause 3.5(i), and it remains vested in Management. Victoria contended that it should be assigned to Stores in accordance with clause 3.5(ii), with HoF renewing its guarantee pursuant to its apparent obligation to do so under clause 3.5(iii). Management and HoF contended that clause 3.5(iii) was unenforceable, and refused to effect the assignment to Stores. Accordingly, Victoria began these proceedings, seeking an order that the Lease be assigned to Stores with HoF as guarantor of Stores' liability. This was resisted by Stores, Management and HoF ("the HoF defendants") on various grounds, and the matter came before Mr Randall.
A number of issues were canvassed before him, but the only relevant issues for present purposes were (a) whether clause 3.5(iii) of the Agreement was void because of the provisions of the 1995 Act, and, if so, (b) whether clause 3.5(i) and (ii) were nonetheless enforceable. Mr Randall decided that (a) clause 3.5(iii) was void, but (b) it was severable from the rest of clause 3.5, so that clause 3.5(i) and (ii) were, at least in principle enforceable – see [2010] EWHC 3006 (Ch).
The HoF defendants then raised a new argument, namely that it would be pointless to order specific performance of clause 3.5, because, in the light of clause 3.15(F) of the Lease, if it was assigned by Management to Stores, Stores could immediately assign it back to Management without any guarantee other than that of HoF, which was insolvent on a balance sheet basis. At a further hearing, Mann J rejected that contention – see [2010] EWHC 3344 (Ch).
Victoria appeals against Mr Randall's decision that clause 3.5(iii) of the Agreement is void (but not against his conclusion that, if it is void, the remainder of the clause is nonetheless enforceable), and the HoF defendants appeal against Mann J's decision that, if the Lease were assigned to Stores, it could not immediately be assigned back to Management.
The background, and the relevant provisions of the 1995 Act
According to well-established common law principles, an original tenant was bound by all the...
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