Strand, London, WC2A 2LL
B e f o r e :
| K/S Victoria Street
|- and -
|(1) House of Fraser (Stores Management) Limited
(2) House of Fraser (Stores) Limited
(3) House of Fraser Limited
Mr Nicholas Taggart (instructed by Slaughter & May) for the Defendants
Hearing dates: 1st & 2nd December 2010
Crown Copyright ©
Mr Justice Mann :
Background facts and the transactional documents
"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."
(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."
"The issues as to the true construction of Clause 3.15 of the lease made between the parties on 26th January 2006, as is set out in paragraphs 6B to 6C and the issue in 6D of the Amended Particulars of Claim shall be determined as a preliminary issue before a judge."
"6B. The following circumstances are material to whether such assignment back would be in compliance with provisions of the said lease:-
(i) The First Defendant is of worse financial standing than the Second Defendant.
(ii) The net profits of the First Defendant in each of its last 3 accounting periods were less than 3 times the principal rent under the said lease of £2,250,000 per annum.
(iii) Therefore, the combined value of the covenant of the First and Third Defendants is less than that of the Second and Third Defendants.
(iv) The First Defendant has not offered any guarantor in addition to the proposed guarantee from the Third Defendant.
6C. Therefore, the threatened assignment back by the Second Defendant would be in breach of the following covenants of the said lease:-
(1) The covenant in clause 3.15(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 the 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."
(2) The covenant in clause 3.15(E):
"Not to assign the whole of the premises to a Group Company of the Tenant unless the Group Company is of the same of 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."
6D. Further or alternatively, the threatened assignment and immediate re-assignment would leave the Defendants in breach of the said clause 3.5 since there would be non-compliance with the obligation to assign when the effect of the complete transactional activity negated rather than accomplished such assignment."
The issues elaborated
The clause 3.15 point
Resolution of the clause 3.15 point
"(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 …"
"(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 …"
"21. As already mentioned, the interpretation of the provision in the commercial contract is not to be assessed purely by reference to the words the parties have used within the four corners of the contract, but must be construed also by reference to the factual circumstances of commercial common sense. However, it seems to me right to emphasise that the surrounding circumstances and commercial common sense do not represent a licence to the court to re-write a contract merely because its terms seem somewhat unexpected, a little unreasonable, or not commercially very wise. The contract will contain the words which the parties have chosen to use in order to identify their contractual rights and obligations. At least between them, they have control over the words they use and what they agree, and in that respect the words of the written contract are different from the surrounding circumstances or commercial common sense which the parties cannot control, at least to the same extent.
22. Particularly in these circumstances, it seems to me that the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may must or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood. Of course, in many cases, the commercial common sense of a particular interpretation, either because of the peculiar circumstances of the case or because of more general considerations, is clear. Furthermore, sometimes it is plainly justified to depart from the primary meaning of words and given them what might, on the face of it, appear to be a strained meaning, for instance where the primary meaning of the words leads to a plainly ridiculous or unreasonable result."
The claimant's alternative arguments
"If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series of combination which may be regarded. "