K/S Victoria Street (A Danish Partnership) v House of Fraser (Stores Management) Ltd & Ors [2011] EWCA Civ 904

Case No A3/2011/0012 & 0039[2011] EWCA Civ 904
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr John Randall QC
The Hon Mr Justice Mann
Claim No HC10C01511
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 27/07/2011
Before
MASTER OF THE ROLLSLORD JUSTICE THOMASLORD JUSTICE ETHERTON
Between
K/S VICTORIA STREET (a Danish Partnership)Claimant(1) HOUSE OF FRASER (STORES MANAGEMENT) LIMITEDDefendants(2) HOUSE OF FRASER (STORES) LIMITEDDefendant(3) HOUSE OF FRASER LIMITEDDefendant- - - - - - - - - - - - - - - - - - - - -Defendant(Transcript of the Handed Down Judgment ofDefendantWordWave International LimitedDefendantA Merrill Communications CompanyDefendant165 Fleet Street, London EC4A 2DYDefendantTel No: 020 7404 1400, Fax No: 020 7404 1424DefendantOfficial Shorthand Writers to the Court)Defendant
Anthony Speaight QC (instructed by Stockler Brunton) for 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 Defendants (the respondents in the first appeal, and appellants in the second appeal)Hearing Hearing date: 14 June 2011
JudgmentThe Master of the Rolls:
[1]This is the judgment of the court, to which all members have made substantial contributions.[2]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.[3]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.[4]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

[5]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.[6]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.[7]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.”
[8]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.[9]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. (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. (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 …. .[10]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.[11]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).[12]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).[13]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

[14]According to well-established common law principles, an original tenant was bound by all the tenant’s obligations in the lease for the duration of a tenancy, even after he had assigned it (unless there was a provision to the contrary, which was very rare). In the case of many, indeed most, assignments, assignees would similarly covenant with the landlord to observe the tenant’s covenants for the duration of the tenancy. Such liability for the duration of the tenancy after, often long after, the original tenant (or an assignee) had assigned it, was perceived in many quarters as being unfair, especially in a time of inflation and after a rent review. In a Report in 1988, Landlord & Tenant Law: Privity of Contract and Estate, Law Com. No. 174, the Law Commission recommended that this state of affairs be radically changed in relation to future tenancies.[15]Parliament accepted this recommendation and enacted the 1995 Act, which implemented the proposals of the Commission with amendments. The long title of the Act describes its purpose as being that “persons bound by covenants of a tenancy … be released from such covenants on the assignment of the tenancy”. In London Diocesan Fund v Phithwa and Avonridge Property Co Ltd [2005] UKHL 70, [2005] 1 WLR 3956, para 39, Baroness Hale of Richmond said:
“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.”
[16]This aim is centrally achieved through section 5, subsection (2)(a) of which provides, in simple and clear terms, that if a “tenant assigns the whole of the premises demised to him, … he is released from the tenant covenants of the tenancy …. as from the assignment…”. Sections 6, 7 and 8 contain some rather more complex and conditional provisions for the release of a landlord on the assignment of the reversion to a tenancy. All these sections only apply to a “new tenancy”, that is, a tenancy entered into after the 1995 Act came into force, 17 July 1995[17]Section 24(2) is concerned with the position of any party, other than a tenant, who is bound by any of the tenant’s covenants in a tenancy. It states that where:
“(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”.[18]Section 25 states as follows:
“(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.” (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. (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). (a) contained in the instrument creating the tenancy; or (b) made before the creation of the tenancy.”
[19]Section 16, which is referred to in section 25(3), is concerned with “authorised guarantee agreements” or “AGAs”, and applies only to new tenancies. The section was included to mitigate the effect of section 5(2), and to confer a degree of protection on landlords when a tenancy is assigned. AGAs are agreements which a tenant can, in some circumstances, be required to enter into to guarantee the obligations of its assignee until the tenancy is assigned again. Section 16 provides as follows: “(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. ….. .” (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). (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

[20]The HoF defendants’ contention is that clause 3.5(iii) is rendered void by section 25(1)(a), as it would “frustrate the operation” of section 24(2)(b). That argument proceeds as follows. On the assignment of the Lease by Management to Stores in accordance with clause 3.5(ii), Management will be released from all further liability under the Lease, by virtue of section 5(1), so section 24(2)(a) is satisfied; and, as HoF is “another person” who is “bound by [the] covenant[s] of the [Lease]”, section 24(2)(b) also applies. Accordingly, it is the effect and intention of section 24(2) that, “as from the release of [Management]”, i.e. on the assignment to Stores, HoF should be released from its liabilities as guarantor under the Lease. Any provision such as clause 3.5(iii), which stipulates in advance that HoF must re-assume precisely that liability as a term of the assignment, would therefore “frustrate” the operation of section 24(2)(b), and it is therefore rendered void by section 25(1)(a).[21]In our judgment, this argument is correct. If a landlord could(a) when granting a tenancy, impose an obligation on the tenant’s guarantor to guarantee the liability of the assignee in the event of an assignment, and(b) on an assignment by a tenant, enforce that obligation, it would, as a matter of ordinary language, “frustrate” the operation of section 24(2). If it were otherwise, it would mean, for instance, that a landlord, when granting a tenancy, could require a guarantor of the tenant’s liabilities, on every assignment of the tenancy, to guarantee the liability of each successive assignee. Such an obligation (“a renewal obligation”) would plainly be wholly contrary to the purpose of section 24(2), as it would enable a well-advised landlord to ensure that any guarantor was in precisely the position in which it would have been before 1995 Act came into force.[22]If a renewal obligation were enforceable, in many cases, for instance where the prospective occupier of commercial property was a member of a group of companies, a landlord could also effectively avoid the effect of section 5(2) by requiring a subsidiary company in the group to take the tenancy, with the parent company acting as guarantor on terms which included a renewal obligation. Indeed, it could go further than this: as a matter of logic, if such a liability could lawfully be imposed on and enforced against a guarantor of the original tenant, it is hard to see why it could not be imposed on the original tenant itself.[23]Given the plain purpose of the 1995 Act, and the widely expressed terms of section 25(1)(a) and 25(4), any contractual arrangement contained in the tenancy (or in a prior agreement), which imposes an obligation, on an existing or prospective guarantor of the tenant’s liabilities, to guarantee the liabilities of a future assignee should be void. That conclusion is supported by what was said in Avonridge [2005] 1 WLR 3956, paras 14 and 18, by Lord Nicholls of Birkenhead. He described section 25 as “a comprehensive anti-avoidance provision”, which was “to be interpreted generously, so as to ensure that the operation of the 1995 Act is not frustrated, either directly or indirectly”.[24]For the avoidance of doubt, this conclusion would also apply to a contractual arrangement contained in a later document, for instance a renewal obligation imposed on a guarantor of an assignee’s liabilities in an assignment or a licence to assign. Subsection (4) makes it clear that section 25 applies to agreements “whether or not” they are made in, or prior to, a tenancy. Accordingly, if, as we consider, a renewal obligation imposed on a guarantor of the original tenant is void, it must follow that the imposition of a renewal obligation on the guarantor of an assignee would also be void.[25]When it comes to frustrating the effect of section 24(2), clause 3.5(iii) is a fortiori the example of a guarantor of the original tenant entering into a renewal obligation. That is because clause 3.5(iii) is not merely an undertaking by a guarantor of the liability of the original tenant, namely Management, to guarantee the liability of a future assignee, namely Stores: it is an undertaking to do so in relation to an assignment which Victoria, the landlord is entitled to insist on taking place.[26]For Victoria, Mr Speaight QC raised two arguments against this conclusion. The first was that the purpose of section 24(2) was solely to ensure that the release of the tenant under section 5(2) was effective. This was on the basis that, if the tenant’s guarantor is not released under a provision such as section 24(2), he would be able to seek through subrogation an indemnity from the tenant as the principal creditor, even though the tenant had been released from primary liability. On that basis, ran the argument, a provision such as clause 5.3(iii), or indeed a renewal obligation, does not “frustrate” the purpose of section 24(2).[27]We are by no means satisfied of the correctness of the premise of this argument, but we are prepared to assume, without deciding, that the statutory release of the tenant without releasing a guarantor would not have deprived the guarantor of its right of subrogation. However, even on that basis, we would reject Mr Speaight’s first argument, because we do not accept that section 24(2) has the limited purpose for which he contended. Its language does not suggest such a limited purpose, and the whole thrust of section 24(2), indeed of the 1995 Act itself, is that a person should not remain liable under a tenancy after the tenant with whose liability he is associated has been released from his liability. Further, paras 4.53 and 4.54 of the Law Commission Report (op cit), which were relied on by Mr Speaight, do not support the notion that the section has such a limited purpose. The former paragraph states that when the lessee’s liability ceases, “that would automatically end the responsibility of [his] guarantor”. Para 4.54 says that if a guarantor remains liable after the lessee is released, it “would undermine the thrust and purpose of [the Commission’s] recommendations”.[28]Secondly, Mr Speaight contended that, on the unusual facts of this case, section 25(1)(a) should not apply. He pointed out that neither party to the Agreement had any intention of evading the provisions of the 1995 Act, and that clause 3.5 was included as part of an arrangement intended to benefit the HoF defendants (because it was HoF who wanted the Lease granted to Management for a short initial period for tax purposes).[29]We have considerable sympathy with that argument, given that clause 3.5 was a perfectly sensible quid pro quo from the HoF defendants in return for Victoria’s agreement to accept Management as the initial tenant under the Lease for a short period to assist the HoF group’s tax affairs. However, it seems to us that it would be wrong to accede to the argument, both as a matter of principle and as a matter of practice. It would be wrong in principle, because section 25(1)(a) applies to any provision which would “have effect to … frustrate the operation of”, inter alia, section 24(2). In other words, it is the objective effect of a particular provision, and not the subjective reasons for its existence, which determine its validity for the purpose of section 25(1). It would be wrong in practice to adopt the approach inherent in the submission, because it would introduce an element of uncertainty, and the opportunity for disputes of fact, into an area where it is important to have predictability.

Section 25(1): clause 3.15(F) and the decision in Good Harvest [2010] Ch 426

(F) and the decision in Good Harvest [2010] Ch 426

[30]The foregoing discussion is enough to dispose of Victoria’s appeal against the decision of Mr Randall. However, it is appropriate to consider the reasoning and decision of Newey J in Good Harvest [2010] Ch 426, for two reasons. First, the decision seems to have led to some controversy, and, because it is a first instance decision, to some uncertainty, in the field of landlord and tenant. Secondly, it is common ground in this case that the proviso to clause 3.15(F) is valid, and that might appear questionable, especially in the light of the wide way in which Mr Seitler put his primary argument as to the validity of clause 3.5(iii).[31]The effect of the reasoning of Newey J in Good Harvest [2010] Ch 426 appears to be that, on an assignment of a lease from the existing tenant (“the assignor”) to an assignee, section 25(1) invalidates a guarantee of the assignee’s liabilities by the person who was the guarantor of the assignor’s liabilities. This is based on the point that the agreement by the guarantor to guarantee the liabilities of the assignee, with effect from the date on which the assignor assigns the lease, “frustrates” the effect of section 24(2), which requires the guarantor to be released from such liability with effect from the assignment.[32]In Good Harvest [2010] Ch 426, the tenancy was granted to Chiron, whose liability was guaranteed by Centaur, and Chiron wished to assign to Total. The alienation covenant, Clause 5.9, was (as in the present case) a fairly complex provision (see [2010] Ch 426, para 4); by clause 5.9.3 the tenant covenanted not to assign without landlord’s consent (not to be unreasonably withheld), clause 5.9.6.1 contained a requirement that the tenant and its guarantor enter into an AGA on any assignment, and clause 5.9.6.6 included a term that a guarantor would be provided for an assignee to be approved by the landlord (such approval not to be unreasonably withheld).[33]The tenancy was assigned to Total pursuant to an agreement under which both Chiron (the tenant) and Centaur (its guarantor) guaranteed the liability of Total. Total failed to pay the rent, and the landlord sued Centaur under its guarantee in the agreement pursuant to which the assignment was made. In an admirably clear and concisely expressed judgment, Newey J held that Centaur’s covenant in that agreement was rendered void by section 25(1) as it frustrated the effect of section 24(2). He seems to have taken a wide view of section 25(1), holding that “it serves to bar a guarantor [of the assignor] from giving a guarantee for an assignee” – see at [2010] Ch 426, para 22(viii), and also para 22(iv) and (ix).[34]For the reasons already discussed, an agreement which requires a guarantor to provide a further guarantee in the future falls foul of section 25(1), because it involves a guarantor, at a time that he is, or is agreeing to become, the tenant’s guarantor, committing himself to re-assume his liabilities on a future assignment, when the plain purpose of section 24(2) is to ensure that he is released from his liabilities with effect from the assignment. What is less clear, however, is how much further the ambit of section 25(1) goes. In Good Harvest [2010] Ch 426, Newey J appears to have given an interpretation (“interpretation (i)”) to section 25(1) which meant that it invalidated any agreement which involves a guarantor of the assignor guaranteeing that assignor’s assignee. An alternative interpretation (“interpretation (ii)”), which was raised before us, is that section 25(1) only invalidates such an agreement if it was entered into at the insistence of the landlord.[35]We shall begin by considering the issue without regard to sections 16 and 25(3) – i.e. ignoring the provisions relating to AGAs.[36]Where a lease contains a tenant’s covenant against assignment in the normal form, namely that it requires landlord’s consent, which is not to be unreasonably withheld, the landlord may often reasonably refuse consent to a particular assignment unless a suitable guarantor of the assignee is provided. If interpretation (i) is correct, the assignor could not offer his own guarantor, because a guarantor of the present tenant is, in effect, absolutely precluded from providing a subsequent guarantee of that tenant’s assignee. Interpretation (i) would thus appear to give the 1995 Act an unattractively limiting and commercially unrealistic effect.[37]As Newey J accepted, interpretation (i) would mean that, even where it suited the assignor, the assignee and the guarantor that the assignee should have the same guarantor as the assignor (because, for instance, the assignor and the assignee had the same parent company, or shared a common bank, which was the guarantor), they could not offer that guarantor. It would also appear to mean that the lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it. Lord Nicholls said in Avonridge [2005] 1 WLR 3956, para 16, that section 5 was “intended to benefit … tenants … . That is [its] purpose. That is how [it is] meant to operate.” So, too, section 24(2) is meant to benefit guarantors. It can therefore be argued that, where the assignor and the guarantor who want the guarantor to guarantee an assignee, or who want the lease to be assigned to the guarantor, such a renewal, or such an assignment, would not “frustrate the operation of any provision of [the 1995 Act]”.[38]All this provides some support for the contention that a guarantee of the assignee by the assignor’s guarantor may not fall foul of section 25(1) if it is freely offered by the assignor and guarantor. On the other hand, there is much to be said for interpretation (i). It leads to a clear and simple position. It avoids argument, after, possibly long after, the subsequent guarantee has been given, as to whether it really had been insisted on by the landlord or freely offered by the assignor. Such problems could be particularly acute where the landlord’s interest had been assigned after the subsequent guarantee had been obtained, and the current landlord therefore may have no knowledge of the circumstances in which it had been obtained.[39]Interpretation (ii) is, in many ways, more attractive in terms of commercial sense, as it is consistent with the idea that that section 25 is to be treated as an anti-avoidance provision which (in a case involving an assignment of the tenancy rather than the reversion) protects the assignor and its guarantor, but does not work to their disadvantage.[40]Thus, in a case of a covenant against assignment subject to landlord’s consent, interpretation (ii) would prevent the landlord insisting on the assignor’s guarantor guaranteeing an assignee, as that would involve requiring an arrangement in the future whereby the present guarantor was not released. However, it would not prevent the landlord, if it was reasonable to do so, from requiring a guarantor of the assignee, and the assignor then proposing the present guarantor for that role. Such a course would involve the landlord imposing a requirement which did not fall foul of section 25(1), but the reason for the subsequent guarantee from the existing guarantor would be because the assignor offered it freely (i.e. following a reasonable and unobjectionable request from the landlord), which, on interpretation (ii), would result in the subsequent guarantee not being invalidated by section 25(1).[41]However, as already mentioned above, section 25(1) appears to be concerned with “the effect” of a particular agreement, which suggests that what it aims to invalidate is the objective effect of an agreement, rather than its subjective purpose. It does appear that interpretation (ii) runs rather counter to that approach, as it looks to the subjective reason for the guarantor guaranteeing the assignee, rather than its objective effect.[42]Interpretation (ii) also carries with it the problem that, unlike interpretation (i), it would not be enough to look at the documents of title to see whether section 25 applies. The fact that the assignment included a guarantee from the existing guarantor may mean that section 25 is engaged, but it would be necessary to look at the negotiations leading to that guarantee in order to see if it had been insisted on by the landlord, or freely offered by the assignor and/or guarantor. Such an exercise may raise difficult points both of principle and on the facts, as the negotiations may have been conducted orally as well as in writing, and there may have been nuances in the negotiations which render it difficult to decide whether the landlord was insisting on the subsequent guarantee or it was being freely offered.[43]So we have to choose between interpretation (i) and (ii). (It is right to add that, in addition to interpretations (i) and (ii), we have considered whether section 25(1) should be given a rather narrower effect, so that its ambit is limited to agreements which precede the subsequent guarantee, but it could not invalidate any subsequent guarantee itself. It seems to us that, while it has its attractions, this interpretation cannot be justified. First, subsections (1), (2) and (4) of section 25 are concerned with agreements, not conditions or imposed terms; secondly, the exclusion in section 25(3) of an AGA, as opposed to a requirement that an assignor enters into an AGA, seems inconsistent with this interpretation; thirdly, section 16(1) also envisages that an AGA, rather than a requirement for an AGA, would, in the absence of the section, be ruled out by section 25, as would an agreement which, while similar to an AGA, for some reason does not comply with the requirements of section 16.)[44]In our view, interpretation(i) is correct, albeit subject to a very important qualification, which relates to AGAs under section 16. It appears to us that the principled objections to interpretation(ii) are correct. Further, the qualification we have mentioned removes most of the unsatisfactory commercial consequences to which interpretation (i) appears otherwise to give rise.[45]As already mentioned, in almost all cases (save relatively freely assignable long leases at low rents), leases are assignable only with landlord’s consent, not to be unreasonably withheld. Where consent is not required, the lease is normally pretty freely assignable or wholly unassignable, so the 1995 Act is unlikely to present any problem. In the normal case, where landlord’s consent (not to be unreasonably withheld) is required for an assignment, the landlord can, if it is reasonable to do so, require the tenant to enter into an AGA – see section 16(3). That plainly qualifies the extent to which the assignor is released from his liability in accordance with section 5(2), as sections 16(1) and 25(3) recognise, because, instead of being released from liability under the lease, such liability is immediately re-imposed on him.[46]By section 24(2), on any assignment, a guarantor of the assignor is only required to be released “to the same extent as the tenant”. Accordingly, if, where section 16(2) applies, the landlord is entitled to require the assignor to re-assume liability under an AGA, it does not appear to us to be inconsistent with section 24(2), and hence it would not be void under section 25(1), for the landlord in such a case to require the guarantor to guarantee the liability of the tenant under the AGA. Where an assignor is lawfully required to enter into an AGA, then, when he assigns the lease, he is released from his obligations under the lease, save to the extent that he re-assumes those obligations under the AGA. There appears to be nothing inconsistent with section 24(2) if the assignor’s guarantor is required to guarantee the assignor’s liability under the AGA: the guarantor is released to precisely the same extent as the assigning tenant.[47](It may well be that the guarantor could simply act as a co-guarantor under the AGA with the assignor, as might have been the position in Good Harvest [2010] Ch 426 - see at para 5 - rather than being a guarantor of the assignor’s liability, under the AGA. However, that issue is one which we should not determine as it involves going much further than we need on any view, although there seems to us to be much force in Mr Randall’s point that, if the assignor’s guarantor can guarantee the assignor’s liability under an AGA, it is hard to see why that guarantor should not be able “to do something to the same substantial effect, different only in form” – [2010] EWHC 3006 (Ch), para 41.)[48]The conclusion that the assignor’s guarantor can be required to guarantee the liability of the assignor under an AGA appears to comply with commercial sense and to avoid many of the problems which are otherwise thrown up by interpretation (i). It is also consistent with the purpose of an AGA. Take the facts of the present case: Victoria granted the lease to Management, an impecunious subsidiary of a substantial company, HoF, taking HoF as a guarantor. On an assignment to another company outside the HoF group, it would be of very little value to Victoria to have the right to ask for an AGA from Management, unless it could require HoF to guarantee Management’s liability under the AGA. It would therefore be positively surprising if section 16 extended to an assignor but not to the assignor’s guarantor.[49]Newey J appears to have left open the question whether the assignor’s guarantor could validly guarantee the liability of the assignor under an AGA – see [2010] Ch 426, para 22(vii). However, for the reasons we have given, in the light of the terms of sections 5(2), 16(1) (2), 24(2) and 25(1), while the guarantor of an assignor cannot normally validly guarantee the liability of the assignee, it can validly do so by being party to a valid AGA.[50]We would add that, if (which we doubt) the reasoning of Newey J was predicated on the ground that a provision such as clause 5.9.6.1, which entitled the landlord to require the tenant and its guarantor to enter into an AGA on any assignment, was invalid, we do not agree. Section 16(3) may or may not preclude a landlord relying on a provision in an alienation covenant which purports to entitle it to insist on an AGA as a matter of right on any assignment (we do not need to decide the point and should not do so). However, if it does preclude the landlord having such an absolute right, so that it is ineffective, that would not prevent the landlord insisting on an AGA, if the alienation covenant also contained a provision that consent to an assignment could not be unreasonably withheld (like clause 5.9.6.6 in Good Harvest [2010] Ch 426), and it was reasonable to require an AGA.[51]This conclusion does not mean that the proviso to clause 3.15(F) of the Lease in this case is unenforceable in relation to the contemplated assignment by Stores back to Management. It is true that it would involve HoF, the guarantor of the original tenant, Management, who would have been released on the assignment to Stores under clause 3.5(ii) (because clause 3.5(iii) was unenforceable), becoming liable again under the Lease, as guarantor of Stores’ liability. If a tenancy, granted to a tenant whose obligations are guaranteed by a guarantor, is assigned, and thereafter the assignee assigns it back to the tenant, whose obligations are again guaranteed by the guarantor, it seems unlikely that section 25(1) could possibly have been intended to invalidate the guarantor’s renewed guarantee or the tenant’s renewed assumption of liability under the tenancy. In such a case, the original tenant and the original guarantor are released from liability under the tenancy on the first assignment, and the fact that they choose subsequently, namely on a further assignment, to reassume liability under the lease cannot be said to “frustrate” their release on the first assignment.[52]However, it is only right to add that a provision such as the proviso to clause 3.15(F) would, on our analysis, appear to have a rather capricious effect if it was invoked to effect an assignment between companies in the same group. If, on the present facts, and ignoring clause 3.5, Management wished to assign to Stores, it seems to us that Victoria could not require HoF to guarantee Stores’ liability, as that would fall foul of section 25(1) for the reasons discussed. Whether that would undermine Management’s ability to rely on clause 3.15(F) we do not need to decide. However, if it did not, and Management then assigned to Stores, without HoF guaranteeing Stores’ liability, and Stores then wished to assign on to another HoF company (such as Management or Beatties), in reliance on clause 3.15(F), then Victoria could invoke the proviso and insist on HoF guaranteeing the new assignee’s liabilities.[53]Reverting to the general effect of the 1995 Act on existing guarantors, our conclusion, as explained above is that the effect of sections 24 and 25 is that: 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.[54]Accordingly, we largely agree with Newey J’s analysis in Good Harvest [2010] Ch 426, save in relation to AGAs (point (iii) in the previous paragraph), which he appears to have left open. We have been much assisted by his analysis of the effect of the 1995 Act, as well as by Mr Randall’s discussion of that analysis in the judgment under appeal.

The interpretation of clause 3.15(F)

[55]Turning now to the second issue, the HoF defendants’ contention is that clause 3.15(F) is a “stand-alone” provision, which operates independently of the other parts of the clause, so that an assignment is lawful if the requirements of clause 3.15(F) alone are fulfilled. If that is right, then, even if the Lease is assigned to Stores pursuant to clause 3.5(ii), it could freely be re-assigned straight back to Management, and so, argue the HoF defendants, it would therefore be pointless to order specific performance of clause 3.5(ii).[56]Mann J did not accept that clause 3.15(F) was a “stand alone” provision. He concluded that the removal in clause 3.15(F) of the need for consent means that assignments within the HoF Group do not need to comply with paras (D) or (C)(ii) of that clause, but that they did, however, need to comply with para (E) and, arguably, with para (C)(i). He did not have to resolve whether para (C)(i) would apply because, on the facts, the requirements of para (E) could not be satisfied: Stores is a valuable company with a good balance sheet, whereas HoF has a negative balance sheet and Management’s covenant is not and has never been worth having. The Judge concluded, therefore, that the threatened re-assignment would be a breach of the provisions of clause 3.15.[57]Mr Seitler attacked the Judge’s analysis on several grounds. He made a general criticism that the Judge had subjected the wording of clause 3.15 to examination under a forensic microscope (adapting the language of Sir Thomas Bingham MR in Arbuthnott v Fagan [1995] CLC 1396), resulting in a strained and uncommercial result. Mr Seitler’s overriding point was that the Judge had failed to give proper weight to the opening words of paragraph (F) of clause 3.15 - “Notwithstanding the provisions of this clause” - which, he said, showed that the paragraph is intended to operate independently of all the preceding provisions of the clause and is to be “free-standing”. Mr Seitler drew attention to similar wording in clause 3.15(N) (relating to parting with possession and occupation), and said that the literal meaning of the words could not be ignored. He submitted that, consistently with that literal meaning, “consent” in para (F) refers to each of paras (C) to (E) of clause 3.15, all of which relate to what is required to be satisfied when consent is necessary.[58]Ignoring para (B) of clause 3.15, which, as both parties agree, is an absolute prohibition applicable to all assignments, Mr Seitler adopted the Judge’s view that paras (C) and (D) are cumulative and must be read together; the requirements of para (D) are excluded from an assignment within para (F) because para (D) is expressly dealing with consent; and the requirements of paras (C)(ii) are similarly excluded because, as is made clear in section 16(3)(a) of the 1995 Act, an AGA only arises in the context of a covenant not to assign without the landlord’s consent. Mr Seitler submitted that, since para (C)(ii) has no application to an assignment within para (F), then nor can para (C)(i) since they are stated to be alternatives. Furthermore, he contended, the fact that both paras (C) and (F) are dealing with the same subject matter, namely guarantees and - expressly in the case of para (C) and implicitly in the case of para (F) - financial standing, shows that their requirements are not intended to be cumulative but separate.[59]Turning to para (E), Mr Seitler advanced a number of reasons supporting his argument, based on his over-arching point on the opening words of para (F), that it is not cumulative with para (F). He pointed out that, unlike para (F), para (E) does not begin with the words “Notwithstanding the provisions of this clause”, thereby both showing that para (E) is cumulative with para (D), and, at the same time, that para (F) is not cumulative with para (E). He also pointed out that both paras (E) and (F) are dealing with the same subject-matter, namely assignments within a group of companies. He said that para (F) is, therefore, naturally to be read as giving a special concession to the HoF Group, reducing the requirements that would otherwise apply to such assignments. He further submitted that, as in the case of paras (F) and (C), on the one hand, and paras (E) and (C), on the other hand, the fact that para (F) is dealing with the same subject matter as para (E), namely guarantees and (explicitly or implicitly) financial standing, also shows that their requirements were not intended to be cumulative but alternatives.[60]The HoF Defendants also say that, if and so far as necessary, the restrictions in clause 3.15 should be construed in favour of the tenant since they deprive the tenant of what would otherwise be an important incident of the normal right of a tenant to turn the tenancy to account by alienation. They submit that the presumption that it was not intended to deprive the tenant of that right should have been applied by the Judge once he had concluded that the clause was unsatisfactorily drafted and unclear.[61]Mr Seitler submitted that the Judge’s interpretation produces a result which is contrary to commercial common sense. Instead of transfers within the BoF Group being subject to a lower level of restriction on alienation than transfers outside the BoF Group, which was the manifest intention, to read para (F) as cumulative with paras (C) and (E) would make such assignments subject to more onerous requirements and so more difficult.[62]We agree with the Judge and Mr Seitler that para (F) necessarily excludes the requirements of paras (D) and (C)(ii) since those covenants are directly and exclusively concerned with the landlord’s consent to an assignment. The critical issue is whether the requirements of para (F) stand alone or are cumulative with those in paras (C)(i) and (E).[63]Both paras (E) and (F) are dealing with transfers within a group of companies. While it is true that para (E), like para (F), addresses the issue of guarantors in different terms, there is nothing inherently impossible about reading its requirements as cumulative with those in para (F). Furthermore, to do so would still leave para (F) conferring an advantage on the HoF Group when compared with assignments within other groups of companies. As Mr Speaight pointed out in his admirably succinct oral submissions, the effect of para (F) is to preclude the landlord objecting to an assignment within the HoF Group on matters not addressed in para (C) or para (E), such as the fact that the assignee is a foreign subsidiary or there are outstanding breaches of covenant, such as disrepair.[64]So far as the language of clause 3.15(F) is concerned, two points are worth making. First, we do not accept that the opening words of clause 3.15(F) naturally mean that all the preceding paragraphs of the clause must be disregarded. While they could have that meaning, what they more naturally imply is that, in so far as any express provision of para (F) is inconsistent with what is in a previous paragraph, the terms of para (F) prevail. Further, if the opening words of para (F) had the meaning contended for by Mr Seitler, it is hard to see why the paragraph goes on to refer to the absence of any need for consent. Secondly, while the concept of “consent” mentioned in the paragraph could refer, as Mr Seitler contends, to everything in the preceding paragraphs, it seems to us that the word is at least as apt to be naturally read as referring to the consents mentioned to in paras (D)(i) and (C)(i).[65]Critically, we agree with the Judge that the commercial context in which the Lease was granted eliminates any doubt on the point. The Agreement and the Lease are composite parts of a single commercial transaction, namely the sale and leaseback of the Premises. The annual rent of £2.25 million (subject to 5 yearly rent reviews) was a critical commercial aspect of the transaction under which Victoria paid the purchase price of £46 million. The financial ability of the tenant to pay that rent would obviously be a matter of the central concern to Victoria, as would the financial standing of the tenant’s guarantor. That concern is reflected in clause 3.5. Management was known to be a company with a worthless covenant at that time, whereas Stores and HoF Ltd were financially strong. HoF wanted Management to be the first tenant in order to assist HoF’s tax position. Victoria agreed, but only on the basis that clause 3.5 was included in the Agreement. It would make commercial nonsense of that vital part of the deal if, following the assignment from Management to Stores, the purpose of clause 3.5 could be rendered futile by an immediate re-assignment of the Lease back to Management without Victoria’s consent. The commercial objective underlying clause 3.5 would be achieved if paras (E) and (F) were read cumulatively; but it would be frustrated if they were not.[66]Mr Seitler submitted that there is a conflict between clause 3.5 and clause 3.15(F), and that conflict must be resolved in favour of para (F) since, once the sale was completed and the Lease was granted, the Agreement was spent. We cannot accept that contention. In the first place, the argument assumes a conflict, and the anterior question is whether there is a conflict. In any event, clause 3.5 was intended to operate precisely because and while the Lease is on foot. Accordingly, the provisions of both the Lease and clause 3.5 are to be interpreted in a way that gives effect to the commercial intention of the parties underlying both of them, if it is possible to do so consistently with their language.[67]Mr Speaight submitted that, in addition to para (E), both limbs of para (C) are to be read cumulatively with para (F). As we have said, the Judge did not consider he had to resolve that issue, and nor do we. It is sufficient if, as we find, (E) is to be read cumulatively with (F). However, it is right to say that, as at present advised, we see considerable force in the argument that para (C)(i) is difficult to reconcile with para (F), and that, if para (C)(i) is not applicable to an assignment falling within para (F), then para (C)(ii) should not be applicable either.[68]There is a respondent’s notice on behalf of Victoria seeking to uphold the Judge’s decision on the further ground that the contra proferentem rule should apply, so that any uncertainly concerning the interpretation of para (F) should be resolved in favour of Victoria, since the paragraph was introduced at the request of the HoF Defendants and it favours them. Like the Judge, we consider that there is no need to resort to the rule in order to resolve the issue of interpretation in favour of Victoria: such rules are rarely if ever of any assistance when it comes to construing commercial contracts. Quite apart from raising abstruse issues as to who is the proferens (and, in particular, whether the issue turns on the precise facts of the case or hypothetical analysis), “rules” of interpretation such as contra proferentem are rarely decisive as to the meaning of any provisions of a commercial contract. The words used, commercial sense, and the documentary and factual context, are, and should be, normally enough to determine the meaning of a contractual provision.[69]Accordingly, for substantially the same reasons as Mann J in his careful judgment, we consider that clause 3.15(E) could be relied on by Victoria if, after taking an assignment of the Lease, Stores sought to invoke clause 3.15(F) and assign the Lease back to Management.

Conclusions

[70]For these reasons, we would dismiss the appeal from(a) the decision of Mr Randall QC that clause 3.5(iii) of the Agreement is void, and(b) the decision of Mann J that, where 3.15(F) of the Lease applies, the application of clause 3.15(E) is not excluded.

Cited in 18 later judgments

and 9 more of the most senior