Lease of commercial premises – Assignment – Parent company guaranteeing obligations of tenant – Agreement for lease requiring onward assignment of lease to another group company with further guarantee by parent company – Requirement for further guarantee held to frustrate operation of section 24(2) of Landlord and Tenant (Covenants) Act 1995 so as to be void under section 25(1)(a) – Assignee held not to be entitled to effect immediate reassignment to original tenant – Appeals of both parties dismissed
Pursuant to an agreement dated January 2006, the first defendant sold a department store to the claimant and immediately took a leaseback of the premises for a term of 35 years at an initial rent of £2.25m, with its obligations as tenant guaranteed by the third defendant, its parent company. The third defendant had chosen the first defendant to act as vendor and the initial tenant under the leaseback for tax reasons, but it was not a satisfactory tenant from the claimant’s point of view. In order to provide the claimant with a financially satisfactory tenant, clause 3.5 of the agreement required the first defendant, within three months, to assign the lease to the second defendant or another group company and the third defendant to guarantee the assignee’s liabilities.
The first defendant did not assign the lease and the claimant brought proceedings for specific enforcement of clause 3.5. In those proceedings, it was held that, although the claimant could require an assignment to the second defendant, it could not require the third defendant to act as the assignee’s guarantor, since that would frustrate the operation of section 24(2) of the Landlord and Tenant (Covenants) Act 1995, which was designed to ensure that the liabilities of a tenant’s guarantor terminated when the lease was assigned. In reaching that conclusion, 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 accordingly ruled that the parts of clauses 3.5 requiring the guarantee were void under the anti-avoidance provisions of section 25: see [2010] EWHC 3006 (Ch); [2010] 44 EG 125 (CS).
In a further judgment, it was held that the second defendant was not entitled to effect an immediate reassignment to the first defendant. Although para (F) of clause 3.15 conferred a right to assign to another group company on certain terms “Notwithstanding the provisions of this clause”, that right was held to be subject to the requirements of para (E) regarding the financial standing of the assignee: see [2010] EWHC 3344 (Ch); [2010] PLSCS 320. The claimant appealed from the first judgment and the defendant appealed from the second.
Held: The appeals were dismissed.
(1) The requirement in clause 3.5 for the third defendant to guarantee the assignee’s liabilities was void by reason of section 25(1)(a) of the 1995 Act. The thrust of section 24(2) was that a party should not remain liable under a tenancy after the tenant with whose liability it was associated had been released from that liability. It would frustrate the operation of section 24(2) if a landlord could, when granting a tenancy, impose an obligation on the tenant’s guarantor to guarantee the liability of an assignee in the event of an assignment. Given the purpose of the 1995 Act, and the widely expressed terms of section 25(1)(a) and (4), any contractual arrangement contained in a tenancy or in a prior agreement that obliged an existing or prospective guarantor of the tenant’s liabilities to guarantee the liabilities of a future assignee would be void: London Diocesan Fund v Phithwa [2005] UKHL 70; [2006] 1 EGLR 15; [2006] 01 EG 100 and Good Harvest applied. The same would be true of a contractual arrangement contained in a later document, since section 25 applied to agreements “whether or not” they were made in or prior to a tenancy.
Clause 3.5 was not saved by the fact that it was a sensible quid pro quo from the defendants in return for the claimant’s agreement to accept the first defendant as the initial tenant under the lease for a short period, in order to assist the defendants’ tax affairs. The validity of a provision for the purposes of section 25(1) was determined by the objective effect of a provision, not the subjective reasons for its existence.
(2) Although it was unnecessary to decide for the purpose of the instant appeals, the better view was that section 25(1) invalidated any agreement that involved a guarantor of a tenant guaranteeing that tenant’s assignee, regardless of whether the agreement was entered into at the insistence of the landlord or was freely offered by the assignor and guarantor. On that interpretation, section 25(1) precluded such an arrangement even where it suited all the parties to use the same guarantor on the assignment because, for instance, it was the parent company of both the assignor and the assignee. A guarantor of a present tenant was, in effect, absolutely precluded from providing a subsequent guarantee for that tenant’s assignee. An important qualification to that rule, relating to cases involving an authorised guarantee agreement (AGA) under section 16, removed most of the unsatisfactory commercial consequences to which that interpretation might otherwise give rise. In the normal case where a landlord’s consent was required for an assignment, it could, if it was reasonable to do so, require the tenant to enter into an AGA guaranteeing the performance of the lease covenants by the assignee. Since section 24(2) released the tenant’s guarantor only “to the same extent as the tenant”, where the tenant reassumed liability under an AGA then the guarantor could give a guarantee in respect of that liability. Moreover, if a guarantor of the tenant was released from its guarantee on an assignment of the tenancy, nothing prevent it from becoming a guarantor again on a further assignment.
(3) The second defendant could not, on taking an assignment of the lease, immediately reassign it to the first defendant. The words “Nothwithstanding the provisions of this clause” in clause 3.15(F), properly construed, did not mean that all the preceding paragraphs of clause 3.15 could be disregarded in its application, but only that the terms of para (F) would prevail so far as its express provisions were inconsistent with a preceding paragraph. Paragraphs (E) and (F) were not inconsistent and were to be read cumulatively. That construction accorded with the commercial context of the sale and leaseback and the purpose of clause 3.5.
Anthony Speaight QC (instructed by Stockler Brunton) appeared for the claimant; Jonathan Seitler QC and Nicholas Taggart (instructed by Lawrence Graham LLP) appeared for the defendants.
Sally Dobson, barrister
