Landlord and tenant - intra-group assignments
In the December 2010 edition of Property update, we reviewed the case of K/S Victoria Street v House of Fraser (Stores Management) Ltd. The case considered whether a parent company guarantor to a lease can stand as guarantor again if the lease is assigned intra-group. Shortly before Christmas the parties returned to court on a different point. This time they sought a declaration as to the meaning of the alienation covenant in the lease.
The parties had entered into an agreement for lease, which was guaranteed by the tenant's parent company. The agreement contained a provision which obliged the tenant to assign the lease to another company in the same group by April 2006, with the parent company acting as guarantor for the assignee. The intra-group assignment did not happen and the landlord sought to enforce the provisions in the agreement for lease. The tenant argued that an order for specific performance of the agreement for lease would be futile, as it could immediately re-assign the lease back to the original tenant pursuant to the provision in the lease which dealt with intra-group assignments.
It was necessary for the court to consider the wording of the alienation clause in some detail. It was divided into a number of lettered parts. Part C provided that the tenant could not assign the lease unless the net profits of the assignee exceeded three times the rent. Part E provided that the tenant could not assign to a group company unless the assignee (together with any guarantor) was of the same or better financial standing as the tenant and any existing guarantor. Part F dealt specifically with assignments within the House of Fraser group. It provided:
"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 landlord argued that, if the tenant wanted to assign intra-group, part F was not the only part of the alienation clause which applied. It contended that part F only dispensed with the need to obtain landlord's consent. The tenant still needed to comply with the other parts of the clause; particularly parts C and E.
On the landlord's case, House of Fraser would not be able to assign the lease back to the original tenant, because:
- The original tenant did not meet the net profits test in part C
- The original tenant was not of the same financial standing as the group company to whom the lease was supposed to be assigned under the agreement for lease (part E)
- The combined value of the original tenant and the guarantor would be less than the combined value of the then tenant and its guarantor (part E). This would be the case even if the guarantee were unenforceable following the first assignment (as discussed in our earlier alert).
In contrast, the tenant contended that part F was the only section of the clause which applied to intra-group assignments within House of Fraser, and that compliance with the provisions of F alone would make the assignment lawful. The tenant pointed to the fact that part F opened with the words "Notwithstanding the provisions of this clause...". It argued that, if F had only meant to dispense with the need to obtain landlord's consent, it would not have needed to refer to "provisions" in plural.
The court did not accept this argument. It pointed out that the requirement for landlord's consent was located in two parts of the alienation clause, which accounted for the plural reference.
The judge considered both parties' arguments. He thought that neither of them stood out as producing a result which was clearly more commercially sensible than the other. Having reviewed the clause in detail, he ruled that the meaning of the word "consent" in part F of the alienation clause could not be extended to other matters as well.
On that basis, the other provisions of the clause continued to apply to an intra-group assignment. Since E was a barrier to the assignment back, the landlord would be entitled to restrain the proposed assignment.
Things to consider
The judge's decision may surprise many, both landlords and tenants alike. It highlights the importance of ensuring that concessions - whether in leases or other agreements - specifically refer to all the provisions they are intended to disapply or suspend. Otherwise, one party may end up with less than it thought it had bargained for.
Update July 2011
The decision of the High Court on this point was upheld by the Court of Appeal. The Court of Appeal was particularly influenced by the commercial context in which the lease was granted. The agreement for lease and the lease itself were composite parts of a single commercial transaction. The clause in the agreement for lease requiring the assignment of the lease intra-group would be frustrated if the lease could be immediately re-assigned without the landlord's consent.
The above analysis was written by Sarah Dawe, associate in Wragge & Co's Real Estate group.
This analysis may contain information of general interest about current legal issues, but does not give legal advice.