K/S Victoria Street v House of Fraser (Stores Management) Ltd and Others
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE MANN,Mr Justice Mann |
| Judgment Date | 17 December 2010 |
| Neutral Citation | [2010] EWHC 3344 (Ch) |
| Docket Number | Case No: HC10C01511 |
| Court | Chancery Division |
| Date | 17 December 2010 |
[2010] EWHC 3344 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Mann
Case No: HC10C01511
Mr Anthony Speaight QC (instructed by Stockler Brunton) for the Claimant
Mr Nicholas Taggart (instructed by Slaughter & May) for the Defendants
Hearing dates: 1 st & 2 nd December 2010
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This hearing is the determination of certain preliminary issues ordered by Mr John Randall QC sitting as a deputy judge of this division on 1 st November 2010. Those issues concern the true construction of the restrictions on alienation contained in a lease dated 26 th January 2006 between the claimant as landlord, the first defendant ("Stores Management") as tenant, and the third defendant ("PLC") as surety. At the time the third defendant was known as House of Fraser PLC. Since that date it has changed ownership and changed its name to House of Fraser Limited. For consistency I shall continue to refer to it as PLC. The second defendant ("Stores") is another company in the House of Fraser Group and a company to which the claimant is apparently, under the terms of a sale agreement of the same date as the lease, entitled to have the lease assigned. This case is all about enforcement of the obligation to assign.
Background facts and the transactional documents
In 2005, before the current global financial crisis struck, the House of Fraser group bought a company known as James Beattie Limited, another company operating various shops, for a substantial sum. That company owned a store known as Beatties Department Store in Victoria Street, Wolverhampton. For various commercial reasons, House of Fraser preferred to rent rather than to own the store and wished to enter into an external sale and leaseback transaction. That could not be arranged immediately, so the store was acquired by Stores Management. This was a previously dormant company owned by PLC. In due course a sale and leaseback arrangement was reached with the claimant – Stores Management sold the property to the claimant (a Danish limited partnership) and agreed to take, and did take, a leaseback.
At the time this was happening Stores was the operating company within the group (or at least the relevant operating company) and was in good financial shape. PLC was the holding company, and had a similarly healthy balance sheet. Those are facts which it was common ground I should be entitled to take into account in dealing with the constructions points which arise on the trial of these preliminary issues. As will appear, that position has changed.
On 26 th January 2006 all the parties to this action entered into an agreement for the sale and lease of the department store. Stores Management was the seller and was to be the tenant; the claimant was to be the purchaser; PLC was the "Surety". Stores was also a party, probably because of the provisions of clause 3.5.
The agreement provided that Stores Management would sell the property to the claimant for £46 million. On the completion date the claimant was to let the property back to Stores Management under the terms of an agreed lease at a rent of £2.25 million per annum, subject to five-yearly reviews. PLC agreed to act as surety to the lease and promised to execute it on or before the completion date.
Although the lease was to be granted to Stores Management, it was apparently the intention of the parties that it should be conveyed to another company in the group on or before 26 th April 2006. I was told by Mr Taggart (Counsel for the defendants) without objection from Mr Speaight QC (who appeared for the claimant) that the reason that the property was originally let to an otherwise dormant and asset-less company was some fiscal purpose. I know no more than that. An obligation to convey it away from there (which presumably was intended to be for the benefit of the claimant, so that the worth of the covenant could be improved) was contained in clause 3.5 of the sale agreement:
"3.5 The Seller agrees to assign the Lease to an assignee (being a Group Company of the Surety being of equal or greater covenant strength to James Beattie Limited and 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 the Surety agrees to enter into a deed of guarantee of that assignee's liability as Surety in the form set out in Schedule 3 of the Lease."
Completion took place on the same day as the sale agreement and accordingly the leaseback was between the claimant as landlord, Stores Management as tenant and PLC as Surety. In the definition section "Landlord" and "Tenant" were each defined so as to include successors in title. The expression "Surety" was defined to mean only PLC, that is to say it was not defined so as to mean any person who in the future might act as guarantor to a future tenant.
Restrictions governing alienation are contained in clause 3.15 of the lease. It runs from subclauses (A) to (N), but I need only set out those running up to and including subclause (F):
" Alienation
(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 Landlord and Tenant (Covenants) Act 1995 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 and (in the event of this Lease being forfeited or disclaimed under any statutory or other power) if so required by the Landlord by written notice to the surety within three months after such forfeiture or disclaimer at its own expense to accept and execute a counterpart of a new lease of the Premises for the residue of the term then outstanding at the same rents and upon the same terms as this Lease.
(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 the Surety taken together.
(F) Notwithstanding the provisions of this clause where the Tenant is House of Fraser (Stores Management) Limited or any other Group Company of House of Fraser Plc consent shall not be required to an assignment of the whole to another Group Company of House of Fraser Plc provided House of Fraser Plc acts as surety to the assignee Group Company."
From now on in this judgment if I wish to refer to various subclauses in that provision I shall do so simply by referring to them by their letter, without preceding the letter with the words "subclause" or any further amplification.
The House of Fraser Group did not arrange for the assignment of the lease to any other company by 26 th April 2006. There was then a change of ownership of the House of Fraser group when it was bought by Icelandic purchasers, followed by the global financial crisis. The group removed the PLC status of PLC and changed some of the internal group arrangements. The result of that and the economic crisis has been to bring about a situation in which Stores is still a valuable company with a good balance sheet, but PLC is not – it has a negative balance sheet. Consequently, Stores' covenant is worth having, but PLC's apparently is not. Stores Management's never was.
In due course the claimant demanded that House of Fraser bring about the assignment required by clause 3.5 of the sale agreement, but the group failed to do that. Eventually that led to the current proceedings which, in form, is a claim for specific performance of clause 3.5. A number of defences have been raised to that claim, including one which is described as "futility". It was said that there was no point in ordering specific performance because, under the provisions of clause 3.15 (namely F) Stores would be entitled to assign it straight back again. The defendants went further than that – they actually threatened to effect the assignment and reassignment. They are currently prevented from doing that by interim injunctive relief. The assignment back to...
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