PP 2010/171

The litigation in K/S Victoria Street v House of Fraser (Stores Management) Ltd has attracted much attention. The issue was whether a landlord can compel its tenant to comply with an obligation imposed in an agreement for sale and leaseback that required the tenant to assign its lease to another company in the same group. The initial proceedings between the parties (see [2010] EWHC 3006 (Ch); [2010] 44 EG 125 (CS)) focused on whether the landlord could enforce: (i) the tenant’s obligation to assign its lease; and (ii) the outgoing guarantor’s obligation to execute an authorised guarantee agreement (AGA) in respect of the assignee’s obligations under the lease. The judge applied the decision in Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] 1 EGLR 29; [2010] 14 EG 114 and ruled that the landlord was not entitled to require the outgoing guarantor to enter into the AGA. However, this did not invalidate the tenant’s obligation to effect an intra-group assignment to a company with a better covenant. The parties have returned to court for guidance on how to interpret the restrictions on alienation in their lease: see [2010] EWHC 3344 (Ch); [2010] PLSCS 320. The retailer tried to sidestep its obligation to assign the premises to another company by relying on alienation provisions in the lease that, it claimed, entitled the assignee to transfer the premises back to the retailer. The judge began by analysing the alienation provisions in the lease. The clause prohibited assignments unless the assignee had net profits of more than three times the annual rent or the tenant provided an AGA. The clause also prohibited assignments without the landlord’s consent (in which case, the landlord was entitled to require guarantees where it was reasonable to do so). An additional provision prohibited intra-group assignments unless the assignee and any guarantors were of equivalent or greater covenant strength than the current tenant and its guarantor. However, the provision that appeared immediately after this stated that the landlord’s consent need not be obtained where the lease was assigned to another company within the retailer’s group, if the parent company (which now had a negative balance sheet, with the result that the covenant strength of the assignee had become vital) acted as a guarantor for the assignee. How did the judge resolve such apparently contradictory terms, especially since the retailer had agreed in the agreement for lease to ensure that the lease was assigned to a financially sound company? The judge decided that the conditions were cumulative and that “consent” meant consent. Therefore, although the retailer did not require the landlord’s consent for an intra-group assignment with a parent company guarantee, the lease did not state that the other restrictions on alienation did not apply. The retailer had managed to disapply some, but not all of the restrictions and the assignee would not be entitled to effect an intra-group assignment to lesser covenants. The litigation illustrates the attention to detail that is required when drafting legal documents and the importance of specifying precisely how interlocking provisions, which have the potential to conflict, are intended to interact with each other. Allyson Colby is a property law consultant