ON APPEAL FROM THE HIGH COURT OF JUSTICE
Mr John Randall QC
The Hon Mr Justice Mann
Claim No HC10C01511
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE THOMAS
LORD JUSTICE ETHERTON
| K/S VICTORIA STREET (a Danish Partnership)
|- and -
|(1) HOUSE OF FRASER (STORES MANAGEMENT) LIMITED
(2) HOUSE OF FRASER (STORES) LIMITED
(3) HOUSE OF FRASER LIMITED
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7404 1424
Official Shorthand Writers to the Court)
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
Crown Copyright ©
The Master of the Rolls:
The factual and procedural history
"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."
"(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.
The background, and the relevant provisions of the 1995 Act
"The mischief at which the Commission's recommendations were aimed was the continuation of a liability long after the parties had parted with their interests in the property to which it related."
"(a) by virtue of this Act a tenant is released from a tenant covenant of a tenancy, and
(b) immediately before the release another person is bound by a covenant of the tenancy imposing any liability or penalty in the event of a failure to comply with that tenant covenant,
then, as from the release of the tenant, that other person is released from the covenant mentioned in paragraph (b) to the same extent as the tenant is released from that tenant covenant … ."
The expression "tenant covenant" is defined in section 28(1) as "a covenant falling to be complied with by the tenant of premises demised by the tenancy".
"(1) Any agreement relating to a tenancy is void to the extent that–
(a) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act, or
(b) it provides for–
(i) the termination or surrender of the tenancy, or
(ii) the imposition on the tenant of any penalty, disability or liability,
in the event of the operation of any provision of this Act, or
(c) it provides for any of the matters referred to in paragraph (b)(i) or (ii) and does so (whether expressly or otherwise) in connection with, or in consequence of, the operation of any provision of this Act.
(2) To the extent that an agreement relating to a tenancy constitutes a covenant (whether absolute or qualified) against the assignment, or parting with the possession, of the premises demised by the tenancy or any part of them–
(a) the agreement is not void by virtue of subsection (1) by reason only of the fact that as such the covenant prohibits or restricts any such assignment or parting with possession; but
(b) paragraph (a) does not otherwise affect the operation of that subsection in relation to the agreement (and in particular does not preclude its application to the agreement to the extent that it purports to regulate the giving of, or the making of any application for, consent to any such assignment or parting with possession).
(3) In accordance with section 16(1) nothing in this section applies to any agreement to the extent that it is an authorised guarantee agreement; but (without prejudice to the generality of subsection (1) above) an agreement is void to the extent that it is one falling within section 16(4)(a) or (b).
(4) This section applies to an agreement relating to a tenancy whether or not the agreement is–
(a) contained in the instrument creating the tenancy; or
(b) made before the creation of the tenancy."
"(1) Where on an assignment a tenant is to any extent released from a tenant covenant of a tenancy by virtue of this Act …, nothing in this Act shall preclude him from entering into an authorised guarantee agreement with respect to the performance of that covenant by the assignee.
(2) For the purposes of this section an agreement is an authorised guarantee agreement if–
(a) under it the tenant guarantees the performance of the relevant covenant to any extent by the assignee; and
(b) it is entered into in the circumstances set out in subsection (3); and
(c) its provisions conform with subsections (4) and (5).
(3) Those circumstances are as follows–
(a) by virtue of a covenant against assignment (whether absolute or qualified) the assignment cannot be effected without the consent of the landlord under the tenancy or some other person;
(b) any such consent is given subject to a condition (lawfully imposed) that the tenant is to enter into an agreement guaranteeing the performance of the covenant by the assignee; and
(c) the agreement is entered into by the tenant in pursuance of that condition.
The validity of clause 3.5(iii): the effect of section 25(1) of the 1995 Act
Section 25(1): clause 3.15(F) and the decision in Good Harvest  Ch 426
i) an existing or contracting guarantor of a tenant cannot validly be required to commit himself in advance to guarantee the liability of a future assignee,
ii) subject to (iii) and (iv), a guarantor of an assignor cannot validly guarantee the liability of the assignor's assignee,
iii) such a guarantor can validly do so by being party to an AGA which otherwise complies with section 16, and
iv) such a guarantor can in any event validly guarantee the liability of an assignee on a further assignment.
We would hope that those responsible for drafting leases are aware of these conclusions, and that, as a result, the 1995 Act should not lead to many practical difficulties of the sort discussed above.
The interpretation of clause 3.15(F)