Strand, London, WC2A 2LL
B e f o r e :
| GOOD HARVEST PARTNERSHIP LLP
|- and -
|CENTAUR SERVICES LIMITED
Mr David Holland (instructed by Osborne Clarke) for the Defendant
Hearing dates: 19 and 20 January 2010
Crown Copyright ©
Mr Justice Newey:
i) Clause 5.9.3
By clause 5.9.3, the tenant covenanted "Not to assign … the whole of the Premises … without the prior consent of the Landlord such consent not to be unreasonably withheld or delayed."
ii) Clause 5.9.6
Clause 5.9.6 stated that the landlord was entitled to impose any or all of certain conditions on giving any licence for an assignment of the whole premises. Those conditions included these:
a) Clause 220.127.116.11
"upon or before any assignment … the Tenant making the application for licence to assign and its guarantor (if any but not someone who has already given an authorised guarantee agreement) shall enter into an authorised guarantee agreement in a form permitted by Law and agreed between the parties"
b) Clause 18.104.22.168
"prior to any permitted assignment to procure that the assignee enters into direct covenants with the Landlord to perform and observe all the Tenant's covenants and all other provisions during the residue of the Term so far as permitted by law"
c) Clause 22.214.171.124
"the Tenant to procure that any … security for the Tenant's obligations under this Lease which the Landlord holds immediately before the assignment is continued or renewed in each case on terms as the Landlord may reasonably require in respect of the Tenant's liability under the authorised guarantee agreement referred to in clause 126.96.36.199"
d) Clause 188.8.131.52
"the prospective assignee to provide a guarantor or guarantors approved by the Landlord (such approval not to be unreasonably withheld or delayed) where having regard to the financial standing of the prospective assignee it is reasonable for the Landlord to require its obligations under this Lease to be guaranteed"
The Covenants Act point
The Covenants 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."
i) Section 5
"(1) This section applies where a tenant assigns premises demised to him under a tenancy.
(2) If the tenant assigns the whole of the premises demised to him, he–
(a) is released from the tenant covenants of the tenancy, and
(b) ceases to be entitled to the benefit of the landlord covenants of the tenancy,
as from the assignment… ."
ii) Section 24
"(1) Any release of a person from a covenant by virtue of this Act does not affect any liability of his arising from a breach of the covenant occurring before the release.
(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 … ."
"a covenant falling to be complied with by the tenant of premises demised by the tenancy"
A covenant on the part of a tenant to pay rent will thus be a "tenant covenant".
"(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 ('the relevant covenant'), 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.
(4) An agreement is not an authorised guarantee agreement to the extent that it purports–
(a) to impose on the tenant any requirement to guarantee in any way the performance of the relevant covenant by any person other than the assignee; or
(b) to impose on the tenant any liability, restriction or other requirement (of whatever nature) in relation to any time after the assignee is released from that covenant by virtue of this Act.
(5) Subject to subsection (4), an authorised guarantee agreement may–
(a) impose on the tenant any liability as sole or principal debtor in respect of any obligation owed by the assignee under the relevant covenant;
(b) impose on the tenant liabilities as guarantor in respect of the assignee's performance of that covenant which are no more onerous than those to which he would be subject in the event of his being liable as sole or principal debtor in respect of any obligation owed by the assignee under that covenant;
(c) require the tenant, in the event of the tenancy assigned by him being disclaimed, to enter into a new tenancy of the premises comprised in the assignment–
(i) whose term expires not later than the term of the tenancy assigned by the tenant, and
(ii) whose tenant covenants are no more onerous than those of that tenancy;
(d) make provision incidental or supplementary to any provision made by virtue of any of paragraphs (a) to (c).
(6) Where a person ('the former tenant') is to any extent released from a covenant of a tenancy by virtue of section 11(2) as from an assignment and the assignor under the assignment with the landlord with respect to the performance of that covenant by the assignee under the assignment–
(a) the landlord may require the former tenant to enter into an agreement under which he guarantees, on terms corresponding to those of that authorised guarantee agreement, the performance of that covenant by the assignee under the assignment; and
(b) if its provisions conform with subsections (4) and (5), any such agreement shall be an authorised guarantee agreement for the purposes of this section; and
(c) in the application of this section in relation to any such agreement–
(i) subsections (2)(b) and (c) and (3) shall be omitted, and
(ii) any reference to the tenant or to the assignee shall be read as a reference to the former tenant or to the assignee under the assignment.
(7) For the purposes of subsection (1) it is immaterial that–
(a) the tenant has already made an authorised guarantee agreement in respect of a previous assignment by him of the tenancy referred to in that subsection, it having been subsequently revested by him following a disclaimer on behalf of the previous assignee, or
(b) the tenancy referred to in that subsection is a new tenancy entered into by the tenant in pursuance of an authorised guarantee agreement;
and in any such case subsections (2) to (5) shall apply accordingly.
(8) It is hereby declared that the rules of law relating to guarantees (and in particular those relating to the release of sureties) are, subject to its terms, applicable in relation to any authorised guarantee agreement as in relation to any other guarantee agreement."
The parties' submissions in outline
i) Section 24 of the Act was meant to ensure that any obligations undertaken by a person as guarantor for a tenant should come to an end on the assignment of the lease. Mr Tager suggested that the guarantor's obligations would in any event have terminated under the general law relating to guarantees when section 5 of the Act released the tenant from liability. However, I do not think it matters for present purposes whether Mr Tager is right about this. The important point is that Parliament intended section 24 to relieve the guarantor of any liability he might otherwise have had in respect of the guarantee he had given;
ii) If the guarantor is required to enter into a further guarantee when the lease is assigned, it seems to me that the guarantee can, as a matter of language, fairly be said to "frustrate the operation of any provision of [the] Act" (to quote from section 25(1)(a)), in that it would, if valid, impose on the guarantor obligations equivalent to those from which section 24 was designed to secure his release. This conclusion is reinforced by the fact that section 25 is, as noted above, "to be interpreted generously";
iii) Mr Tager argued otherwise on the basis that the guarantor would be undertaking new obligations, not reviving old ones. A tenant who gave a guarantee for an assignee could, however, similarly be said to be undertaking new obligations, yet it is abundantly clear that Parliament intended a tenant to be able to give no guarantee other than an AGA. As I see it, a premise underlying section 16, which provides for AGAs, is that a tenant could not otherwise give any guarantee: in other words, that section 16 represents an exception to a general prohibition. If (subject to section 16) the Act precludes tenants from giving guarantees for assignees, it is difficult to see why guarantors should not likewise be barred from giving such guarantees;
iv) Had Parliament intended a tenant's guarantor to be able to guarantee obligations of an assignee, it could have been expected to say so explicitly, particularly since guarantors are mentioned expressly in the Act more than once (see sections 12(1)(b), 17(3) and 18(3)). It has not done so, however;
v) Section 16 addresses the circumstances in which a tenant can give a guarantee for an assignee, but there is no equivalent provision dealing with guarantors. Nor does section 16 itself contain any reference to guarantors. There is no indication in the section that an AGA can include a guarantee from anyone other than the tenant;
vi) Were it the case that a tenant's guarantor could be required to give a guarantee for an assignee of the tenant, there would seem to be nothing to limit the guarantor's exposure to the period before that first assignee himself assigned. Liability under an AGA given by a tenant has to come to an end when the tenant's assignee assigns: see section 16(4). Since, however, section 16 makes no reference to guarantors, there would be no similar restriction on how long such a guarantor's liability could continue. Yet for a landlord to be able to call on a tenant's guarantor to give a guarantee for assignees other than the first could drive the proverbial "coach and horse" through the legislation. Take a case in which, as must be common, a parent company or a director gives a guarantee for a tenant. If the guarantor could be required to guarantee obligations of assignees other than the particular assignee to whom the tenant assigned, it might mean little that the liability of the tenant itself had to come to an end by the time the assignee assigned on: the parent company or director would remain liable. The effectiveness of the Act could thus be seriously undermined;
vii) I do not think it is by any means clear that the Covenants Act permits a guarantor to sub-guarantee a tenant's obligations under an AGA. Mr Tager suggested that it could be seen from sections 17 and 18 that a guarantor could give such a sub-guarantee. In this connection, Mr Tager drew attention to the fact that section 17(3) envisages a person guaranteeing "the performance by the former tenant of such a covenant as is mentioned in subsection (1)", and he said that section 17(3) would thus relate to a guarantor of a tenant's obligations under an AGA; he made, moreover, a similar point about section 18(3). However, I agree with Mr Holland that sections 17(3) and 18(3) do not obviously refer to guarantees of tenants' obligations under AGAs. So far as section 17(3) is concerned, the words "such a covenant as is mentioned in subsection (1)" appear to relate to "a tenant covenant of the tenancy under which any fixed charge is payable", and section 18(3) speaks of someone guaranteeing the performance "by the former tenant of a tenant covenant of the tenancy". In each case, therefore, Parliament seems to have in mind a guarantee of the performance by a former tenant of a tenant covenant. Under an AGA, however, a former tenant is not himself under any obligation to perform tenant covenants; his obligation, as section 17(1)(a) recognises, is to guarantee the performance by his assignee of tenant covenants. Section 17(3) is thus more obviously applicable to pre-Act tenancies, under which a tenant can remain liable on tenant covenants notwithstanding assignment, than to AGAs given in connection with what the Act terms "new tenancies". In any case, even if a guarantor could sub-guarantee a tenant's obligations under an AGA, it would not necessarily follow that he should be able to give a direct guarantee for an assignee. In short, I do not think it helps to try to answer the question whether a guarantor can give a sub-guarantee;
viii) It is fair to say that, if the Covenants Act serves to bar a guarantor from giving a guarantee for an assignee, that involves a restriction on freedom of contract. However, the Act is plainly designed to impose restrictions on freedom of contract. The question is how far those restrictions go;
ix) It is fair to say, too, that, if the Act is to be construed as Mr Holland suggests, it will be capable of operating in ways that look arbitrary. Mr Tager took, for example, the case of a parent company guaranteeing a subsidiary's obligations under a tenancy. If it proved desirable to transfer the lease to another subsidiary, why, asked Mr Tager, should the parent company be unable to act as guarantor? However, it appears to me that the Act could sometimes operate in apparently arbitrary (or at least uncommercial) ways even if I accepted Mr Tager's submissions. Suppose, for example, that a company entered into a lease and that the lease was subsequently, as a result of successive group reorganisations, assigned first to one subsidiary and then to another. The Covenants Act would, even on Mr Tager's case, prevent the parent company from giving any guarantee for the second subsidiary however much it wished to and however commercially desirable that was;
x) In the present case, it is apparent that Centaur was required to enter into a further guarantee when the Underlease was assigned to THED. The recitals to the Guarantee Agreement confirm that Gladman Homes made it a condition of the grant of the necessary licence to assign that Centaur should enter into the Guarantee Agreement;
xi) Accordingly, the Guarantee Agreement is invalidated by section 25 of the Act in so far as it purports to impose liability on Centaur.
The surrender/further assignment point
i) In the autumn of 2006 THED's parent company was acquired by the Woolworths Group;
ii) In May 2007 Good Harvest was informed that the THED operation was to cease and merge with Entertainment UK Limited, another wholly-owned subsidiary of Woolworths. In the following months employees of THED were made redundant and the company vacated the Premises;
iii) In August 2007 THED applied to Good Harvest for consent to assign the Underlease to Woolworths plc;
iv) In February 2008 the entire assets and undertaking of the company were sold, for the most part to Entertainment UK Limited;
v) From about the spring of 2008 the Premises were being occupied by Wincanton under some form of service agreement for another Woolworths company called "MCR" or "Multi Channel Retail";
vi) During 2008 several invoices for rent were addressed to "Entertainment Distribution Limited", and that two such invoices, in respect of the rent due on the June and September quarter days, were paid by Entertainment UK Limited rather than THED.