K/S Victoria Street v House of Fraser (Stores Management) Ltd & Ors

This hearing is the determination of certain preliminary issues ordered by Mr John Randall QC sitting as a deputy judge of this division on 1^st November 2010. Those issues concern the true construction of the restrictions on alienation contained in a lease dated 26^th January 2006 between the claimant as landlord, the first defendant (“Stores Management”) as tenant, and the third defendant (“PLC”) as surety. At the time the third defendant was known as House of Fraser PLC. Since that date it has changed ownership and changed its name to House of Fraser Limited. For consistency I shall continue to refer to it as PLC. The second defendant (“Stores”) is another company in the House of Fraser Group and a company to which the claimant is apparently, under the terms of a sale agreement of the same date as the lease, entitled to have the lease assigned. This case is all about enforcement of the obligation to assign.

In 2005, before the current global financial crisis struck, the House of Fraser group bought a company known as James Beattie Limited, another company operating various shops, for a substantial sum. That company owned a store known as Beatties Department Store in Victoria Street, Wolverhampton. For various commercial reasons, House of Fraser preferred to rent rather than to own the store and wished to enter into an external sale and leaseback transaction. That could not be arranged immediately, so the store was acquired by Stores Management. This was a previously dormant company owned by PLC. In due course a sale and leaseback arrangement was reached with the claimant – Stores Management sold the property to the claimant (a Danish limited partnership) and agreed to take, and did take, a leaseback.

At the time this was happening Stores was the operating company within the group (or at least the relevant operating company) and was in good financial shape. PLC was the holding company, and had a similarly healthy balance sheet. Those are facts which it was common ground I should be entitled to take into account in dealing with the constructions points which arise on the trial of these preliminary issues. As will appear, that position has changed.

On 26^th January 2006 all the parties to this action entered into an agreement for the sale and lease of the department store. Stores Management was the seller and was to be the tenant; the claimant was to be the purchaser; PLC was the “Surety”. Stores was also a party, probably because of the provisions of clause 3.5.

The agreement provided that Stores Management would sell the property to the claimant for £46 million. On the completion date the claimant was to let the property back to Stores Management under the terms of an agreed lease at a rent of £2.25 million per annum, subject to five-yearly reviews. PLC agreed to act as surety to the lease and promised to execute it on or before the completion date.

Although the lease was to be granted to Stores Management, it was apparently the intention of the parties that it should be conveyed to another company in the group on or before 26^th April 2006. I was told by Mr Taggart (Counsel for the defendants) without objection from Mr Speaight QC (who appeared for the claimant) that the reason that the property was originally let to an otherwise dormant and asset-less company was some fiscal purpose. I know no more than that. An obligation to convey it away from there (which presumably was intended to be for the benefit of the claimant, so that the worth of the covenant could be improved) was contained in clause 3.5 of the sale agreement:

Completion took place on the same day as the sale agreement and accordingly the leaseback was between the claimant as landlord, Stores Management as tenant and PLC as Surety. In the definition section “Landlord” and “Tenant” were each defined so as to include successors in title. The expression “Surety” was defined to mean only PLC, that is to say it was not defined so as to mean any person who in the future might act as guarantor to a future tenant.

Restrictions governing alienation are contained in clause 3.15 of the lease. It runs from subclauses (A) to (N), but I need only set out those running up to and including subclause (F):

From now on in this judgment if I wish to refer to various subclauses in that provision I shall do so simply by referring to them by their letter, without preceding the letter with the words “subclause” or any further amplification.

The House of Fraser Group did not arrange for the assignment of the lease to any other company by 26^th April 2006. There was then a change of ownership of the House of Fraser group when it was bought by Icelandic purchasers, followed by the global financial crisis. The group removed the PLC status of PLC and changed some of the internal group arrangements. The result of that and the economic crisis has been to bring about a situation in which Stores is still a valuable company with a good balance sheet, but PLC is not – it has a negative balance sheet. Consequently, Stores’ covenant is worth having, but PLC’s apparently is not. Stores Management’s never was.

In due course the claimant demanded that House of Fraser bring about the assignment required by clause 3.5 of the sale agreement, but the group failed to do that. Eventually that led to the current proceedings which, in form, is a claim for specific performance of clause 3.5. A number of defences have been raised to that claim, including one which is described as “futility”. It was said that there was no point in ordering specific performance because, under the provisions of clause 3.15 (namely F) Stores would be entitled to assign it straight back again. The defendants went further than that – they actually threatened to effect the assignment and reassignment. They are currently prevented from doing that by interim injunctive relief. The assignment back to Stores Management is objected to.

On 1^st November 2010 Mr John Randall QC determined certain of the issues which had been raised by the parties as to the uncertainty or otherwise of various provisions, points arising under the Law of Property (Miscellaneous Provisions) Act 1989 and certain points arising under the Landlord and Tenant (Covenants) Act 1995. Having done that, he then went on to order the trial of the issues which arrived before me. His order was as follows:

The issues appearing in those paragraphs and the Amended Particulars of Claim are as follows:

The claimants say that the second of the two intended transfers is unlawful on two bases. The first is that it would be contrary to the provisions of clause 3.15, and the second is that it would be breach of clause 3.5 of the sale agreement.

The claimants say that a transfer back from Stores to Stores Management would contravene the assignment restrictions in clause 3.15 of the lease. The argument is that while consent under D is not necessary because of the provisions of clause F, nonetheless the transfer would still have to comply with the other provisions if it were to be lawful. It would be unlawful because it would not be to a company with the profits required by C, and would not be an assignment to a company of equal financial standing, even when coupled with the guarantee, within E. Therefore it would be contrary to clause 3.15.

The defendants dispute that. They say, simply, that the transfer from Stores to Stores Management would be an assignment from one House of Fraser group company to another, supported by the guarantee of PLC, and therefore within F. That is the only provision in that clause which has to be fulfilled in order to make the assignment lawful. If it fulfils the requirements of F then that is enough; there are no additional requirements under the clause.

When put into the words of the clause, the dispute comes down to this. The claimant says that F means what it says. A transfer within that clause is exempted from the need to get consent, but that is all that it is exempted from. In order to be lawful it still has to comply with C and E, and possibly D(ii). The provisions of the clause are essentially cumulative. The defendants say that F is a standalone provision which provides a discrete regime for House of Fraser group companies, and that regime is unaffected by the other provisions of the clause. The reference to consent not being required is to be taken as providing an emphasis - what the sub-clause actually provides is that the preceding sub-clauses do not have to be complied with, not merely the consent provision in D.

The defendants are saying that the reference to consent should not be given its natural meaning. It is therefore useful to start by considering that submission in more detail. Mr Taggart advances a number of reasons why that should be the case.

He starts with the opening words of F. They are “Notwithstanding the provisions”, and he emphasises the plural of the noun. If the claimant were right, he says, it ought to be in the singular because it would only be D (or D(i)) that would apparently need to be covered by the “Notwithstanding”. The opening words therefore suggest a departure from all the preceding parts (provisions) of the clause. I do not regard this is a strong point. To use that plural form would be a natural way in which the draftsman would indicate some form of departure, and I do not believe there is any particular significance in the plural. In any event, on the defendant’s case there is still probably more than one “provision” in the clause from which there has to be an exemption, namely A and D. I think that a draftsman contemplating exempting from the consent requirement alone would quite naturally think he was exempting from more than one, whatever intellectual arguments can be advanced for saying that strictly there might only be one.

Next he relies on the structure of the overall clause. It starts with a blanket prohibition which nonetheless contemplates exceptions. B is a further prohibition which prevents any tenant coming within it from benefiting from any of the other exemptions. C then operates to open a window for tenants with certain financial qualifications and who provide the guarantee referred to. D operates cumulatively with C to give the landlord an extra degree of control, and to permit him to extract another guarantee. E then provides a separate, self-contained exception to the general prohibition, permitting an intra-group assignment to a company of equal strength. Consent is not required for such an assignment (provided the conditions are met). Its commercial purpose is to allow free movement around a group as long as the overall strength of the covenants is not diminished (Footnote: ¹). F provides another self-contained provision which operates solely for the benefit of the House of Fraser group and it allows an intra-group assignment without reference to the financial strength of the assignee provided that the parent guarantees the rent. The reference to consent is a reference to the absence of any right to exercise control over the assignment. Thus Mr Taggart seeks to make the provision overall work logically and commercially.

He then goes on to criticise the case against him, on the basis that if F merely excused the obtaining of consent, then it would make C inoperable. Under the provisions of the Landlord and Tenants (Covenants) Act 1995 one can only have an authorised guarantee agreement (“AGA”) if there is a provision in the lease requiring consent to assign. If one takes out that requirement of consent, which the claimant’s construction of the provision does, then there cannot be an AGA and C(ii) cannot apply or be made sense of. This means that C as a whole cannot be made to apply. This is said to demonstrate that merely excluding the consent provision does not work. Mr Taggart’s construction is said not to produce this drafting absurdity. C never comes into the picture because the only provision that is looked to is F, in the case of a House of Fraser intra-group assignment.

He also criticises the commerciality of the case against him. He says that if the clause works as the landlord says it works then it would be harder for a company to assign intra-group than to assign outside the group, because the requirements are cumulative and all have to be complied with. It is impossible to see the commercial justification for that, and that is especially true of a House of Fraser group company where the original transaction was a sale and leaseback and the landlord has thereby indicated an acceptance of a House of Fraser company as a tenant.

The landlord disputes that analysis. Mr Speaight says that the words of F mean what they say. They were drafted and agreed by solicitors of high repute (Slaughter & May for the tenant and Field Fisher Waterhouse for the landlord) and they can be taken to have known what they were doing. The clause deliberately creates a series of hurdles, some financial (C and E) and some consent-related (D). Any assignment has to jump the relevant hurdles. What F does is to remove the consent hurdle for a House of Fraser group company provided the parent company guarantee is forthcoming. The other hurdles remain. The defendants’ case involves re-writing F to an unjustifiable extent, and it is not necessary to do so. The cumulative nature of the provisions does not produce an uncommercial result, especially bearing in mind the sale agreement which provides that the lease is to end up in another financially sound group company, and it would be circumvented if F had the effect contended for by the defendants.

The case of the defendants on this point turns on the workability of F on its strict terms. It is said that it produces an uncommercial result if the claimant is right, and it produces the internal inconsistency with C(ii). It is therefore appropriate to analyse the clause and compare how the two cases would line up. Since a House of Fraser intra-group transfer is a subset of the general group position set out in E, it will be necessary to consider that more general group company case too.

Before doing so there are some general points to make about the clause. A is a general prohibition with a qualification which refers to the remainder of the clause. That is straightforward enough. B is a clear prohibition which is capable of trumping any other route to a permitted assignment. C starts with the same words “Not to assign …” but then provides a form of permissive qualification. By itself it seems to permit an assignment if one of the two qualifications is complied with. D starts with the same words but adds 2 qualifications, which are capable of operating cumulatively as between themselves.

Pausing there, the question arises as to whether C and D are self-contained regimes, giving the tenant the opportunity to bring himself within one or the other if he wishes to assign, or whether they are cumulative, that is to say they both have to be complied with. I think it is clear that the second of those alternatives is correct. Both sides in this litigation agree as much and I think they are right about that. That is consistent with both the wording and the commercialities. The tenant is not to assign unless C is fulfilled, and then is not to assign unless D is fulfilled. That, as a matter of wording, makes them cumulative. It is also highly unlikely that the parties can have intended the consent in D to be an alternative route to the financial requirements in C. The landlord is likely to be concerned about more things than merely whether the assignee’s profits are at the right level or whether the outgoing tenant will provide a guarantee. Those other things can be taken into account under the consent provision (including the extraction of an additional surety if appropriate).

It is also the case that an AGA (as provided for in C(ii)) can only be an AGA if there is a provision requiring the landlord’s consent to an assignment. The main purpose of the 1995 Act is to provide for the release of liabilities under privity of contract, and the whole scheme of the Act does not arise for consideration here. Section 25 is an anti-avoidance provision, but subs (3) provides:

Section 16 is complimentary in that it provides that an authorised AGA does not fall within section 25. In order to be an AGA a provision has to fulfil certain criteria including the fact that it is to be given by the outgoing tenant and, in subs (3)(a):

Thus there cannot be an AGA if there is no consent provision. The parties to the lease clearly contemplated an AGA, and there is a consent provision (in D(i). That clearly suggests a link between the two, notwithstanding the fact that the consent provision is not explicitly linked to the giving of an AGA. Mr Taggart did not take the point that there is no explicit link, and accepted, as did Mr Speaight, that the consent in D(i) meant that an AGA could be extracted on an assignment. That forges the link, and means that C and D have to read together and no assignment will be allowed unless all the conditions are fulfilled.

That is then the background to E. E starts with the same words again. In terms of consistency, therefore, the words are capable adding another condition, which is to be added to the previous ones before the tenant is to be entitled to assign. On that analysis E is an additional hurdle to be overcome before a tenant can assign - or, strictly speaking, before the landlord is obliged to consider giving his consent to an assignment. I think that if the intention was to provide for a different set of factors to operate in the case of an intra-group transfer, the opening words used, in their context, are odd. One would have expected words with a more overtly permissive thrust, such as “The tenant may assign to another Group Company …”. I acknowledge that in many construction cases one party or the other (or even both) can say that if the draftsman had intended X he could have expressed himself differently and more clearly, and that that is an uncertain guide because it usually does little more than identify (or reinforce) the problem rather than provide a solution, but in this case I think the point has a little more force.

Be that as it may, Mr Taggart says that this sub-clause is different. He says it is a self-contained provision applying to intra-group assignments, so that a tenant can assign within a group merely on fulfilling the requirements of the subclause - by making sure the covenants are as good after the package as they were before.

That is not self-evident from the wording, and in support of his submissions Mr Taggart relies on a comparison of the commercial effects of the two rival contentions. He says it would serve no purpose for the tenant to have what is described, that is to say an unqualified right to assign to another group company (provided the strength of the covenants matched) and then to impose the additional requirements for AGAs and sureties. Therefore the purpose of the clause is to provide a self-contained regime for groups.

Mr Taggart’s logic is not entirely satisfactory. It assumes that which it sets out to prove when it says that there is apparently to be an unqualified right to assign to another group company. That is the very question which arises in relation to E (because it is part of the background to how F works). The real question is whether one interpretation or the other fails to make commercial sense, or what the comparative commercial effects are. I accept that a commercial lease, like any other commercial contract, must be assumed to be intended to make good commercial sense, and that a result which is clearly non-commercial is less likely to have been intended than one with an identifiably sensible commercial effect, though with the caveat expressed by Neuberger LJ in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd[2006] EWCA Civ 1732:

With those principles in mind I approach the two competing constructions of E.

Mr Taggart’s construction imposes a regime which differs significantly from the case of a non-intra group transfer. The landlord does not have the right to have either the specified financial strength of C(i), or the guarantee alternative of C(ii); and he does not have the right to consider other matters which D(i) would give him, or the right to require additional sureties which D(ii) would give him. Mr Taggart says that is understandable and commercially justifiable. The lease is already within the group, and the purpose of the clause is to give the tenant the right to assign within the group. That is in the interest of the tenant. What the landlord gets out of it is a situation in which it is no worse off, in terms of the aggregate strengths of covenant, than he was before the assignment. So it makes sense not to impose the other requirements. By the same token, it makes little sense to say (as Mr Speaight says) that E is there to impose additional requirements.

Mr Speaight’s construction imposes an additional requirement on an intra-group transfer, and he says it is not uncommercial to do so, though he does not go so far as to say that there are no oddities about the way the clause works in this sort of context. The group companies are in practice unlikely to be in a worse position as a result of E than they would be if they were non-group companies. One useful function E performs is that it provides a very useful benchmark or standard for judging the reasonableness of a refusal to consent on financial grounds.

I do not think that either case produces a result that is clearly more commercially sensible, or commercially rational, than the other. On Mr Taggart’s case, the landlord is assumed to have no interest in an intra-group transfer other than a financial one. If he is no worse off (in terms of the covenant) after the assignment than before, then he cannot object and the tenant may assign to an equivalent covenant no matter how bad the covenants have become. He therefore loses the chance to consider the adverse effects of, for example, ending up with a foreign transferee or a foreign surety, or both; or the adverse effects of a transfer to a dormant company with a consequential total reliance on a the proffered surety; or of a transfer to another company which has functions which are inconsistent with the user clause (he may well be entitled to refuse consent to a transfer to an outsider with that quality). He gives all that up once a group structure and an intra-group transfer is involved, whether or not there was a group structure when the lease arrived with the assignor or not. He also loses the chance to better his position if the group is failing and the current covenants are such as to be worth little. The tenant can assign to another company in the group with an equally valueless covenant. While that might, in some ways, be a rational state of affairs, in the sense that is not plainly totally uncommercial, it is at least commercially odd. I do not think that it enables Mr Taggart to set up an obvious commercial case in favour of his construction.

Neither is Mr Speaight’s construction one which makes plain and obvious commercial sense throughout. One wonders why the additional requirements of E would really be imposed when much the same thing would probably be arrived at by the operation of C and D in any event. If the group cannot comply with C(i), it has the option of the guarantee in C(ii), and if that will not produce a good covenant then the landlord will insist on something better under D. It might be thought to be logically and even commercially unnecessary to add a further requirement under E.

Despite the shortcomings in the logic of Mr Speaight’s construction, it is my view that his case on the construction and effect of E is correct. I start with the words used, in their context. Their context is the preceding sub-clauses in which two clauses are used cumulatively to achieve an understandable and plainly commercial result. I do not think that the words used in E are themselves clearly sufficient to set the parties off in a different direction in the case of intra-group transfers. They are more consistent with a scheme of cumulative provisions. It may well be that the parties thought that they were doing something useful in setting out a bare minimum in the case of an intra-group transfer without considering whether that would be achieved by the other provisions anyway, but whether or not that is right I think that the words they have used, in their context, are clear enough, and Mr Taggart’s contrary case based on commercial considerations is not sufficient to displace their effect.

That analysis sets the scene for considering the effect of F. The transaction referred to there is an intra-group transfer which would fall within E. The preceding provisions are part of an interlocking and cumulative set of requirements. Mr Taggart’s submission amounts to this - that notwithstanding the cumulative set of requirements that have been set out hitherto, in the case of a House of Fraser intra-group transfer, the group can do what it wants provided that PLC provides a guarantee. That is a striking result. It has no obvious commercial rationale other than making the lease much more freely transferable within the House of Fraser group than in any other group, which is a commercial rationale, but not one which a judge can be satisfied was sufficiently obviously shared by both parties. Mr Taggart’s construction requires one to depart from the plain meaning of “consent”, and such a commercial rationale is not, in my view, sufficient.

However, it would be wrong to stop there without considering how the clause would work in practice, because it is in theory possible that that would throw up such a nonsensical state of affairs as would require one to reconsider whether “consent” means “consent”.

It has to be accepted that the claimants’ construction leaves the clause somewhat limping. It means that D(i) does not apply, so that a valuable level of commercial control is missing. That is inevitable. In my view it means that D(ii) does not apply either. That sub-clause seems to me to fall within the concept of consent for these purposes. It is an aspect of consent, and is juxtaposed with the express consent provision in terms of drafting. It also means that there cannot be an AGA within C(ii) for the reasons given above - if you remove a consent requirement then you remove the possibility of an AGA. That would leave C(i) without an alternative, unless one posits that an equivalent of an AGA would be sufficient even if not technically an AGA - in other words, the assigning tenant can offer itself as a surety if it wishes and that will be sufficient. Apart from that, the landlord has the benefit of the “before and after” covenant comparison in E, which still, on this footing, applies. All that is not readily commercially justifiable either.

What one is left with, in my view, is an unsatisfactorily drafted clause, but in relation to which there is no sufficient reason to depart from the proper meaning of the words used in F. That points towards the result that “consent” means “consent” and the consent expression does not mean “the foregoing restrictions on assignment shall not apply”.

So far as there is doubt about that, however, then another aspect of the commercial side of this transaction comes into play and makes it much clearer, in my view, that the provision cannot have the effect contended for by Mr Taggart. That factor is clause 3.5 of the sale agreement. That clause embodies something which is apparently central to the sale and leaseback. Its ostensible purpose is to make sure that the lease ends up in the hands of, and guaranteed by, a tenant which is financially sound - it is common ground that James Beattie Ltd was a financially sound company. If House of Fraser does not come up with such a company by the given date, then that company is to be Stores, and again it is common ground that the company was, and is, a good covenant for these purposes. PLC was to guarantee that company, whichever company it might be, but the identity of the tenant company was still important. If it had been the intention of the parties that the lease could, essentially at the whim of the House of Fraser group, end up back with Stores Management, as long as House of Fraser guaranteed it, that would be quite contrary to apparent purpose of that clause. Yet that would be the very effect which House of Fraser seeks to give to F. It effectively neuters clause 3.5 of the sale agreement. Mr Taggart’s approach to clause 3.15 is to seek to force on to the words (“consent” etc) a meaning which they do not naturally bear. While that might be possible if the competing commercial merits of the two constructions pointed sufficiently strongly in that direction, clause 3.5 of the sale agreement demonstrates clearly that they do not, and indeed at this stage of the argument the commercial merits point strongly against Mr Taggart’s construction.

What I think the draftsman intended is as follows. F refers to consent. That should be taken to be a reference to D. The main point in F is the adequacy of PLC as a surety. D(ii) refers to a surety, and I think the draftsman was looking at that. He intended to provide that there should be no argument about the adequacy of a proferred surety if that surety was PLC, on the assumption (which has turned out to be misplaced) that PLC would always be a good surety. The surety requirement has been equated with the overall consent requirement, and therefore F is expressed in terms of avoiding the need for consent. In doing that the draftsman has overlooked the need to have a consent provision in order to create an AGA, and has therefore created a problem with C. The effect of this is either to undermine C completely, so that C(i) does not apply either, or to require an equivalent to an AGA. I do not need to decide which is which, because E still applies and is a barrier to an assignment away from Stores to a lesser company on the current facts. The effect on C is an unforeseen consequence of the drafting. I think that this is more likely to have been unforeseen than the effect on clause 3.5 of the sale agreement if the defendants’ argument is correct.

That enables the claimant to succeed. It is entitled to restrain an assignment which is in breach of clause 3.15, and what the defendants propose to do is such an assignment. Before it is entitled to assign, Stores is obliged to fulfil at least the provisions of E, if not of C(i). It does not matter for these purposes whether it is both or just the former, because Mr Taggart accepts that if “consent” means “consent”, then he loses for the purposes of the preliminary issues.

I record that Mr Speaight placed a lot of emphasis on the contra proferentem principle of construction, and relied on evidence which demonstrated that F was introduced at the express request of House of Fraser’s solicitors, making House of Fraser the proferens. In my view he wins without needing to invoke that principle, and I say no more about it.

Had he lost on the above point, Mr Speaight had two alternative bases on which he said he was entitled to seek to restrain the defendants from acting as they propose flowing from the defined issues. Since he wins on the main basis it is not necessary for me to deal with them, but since I heard argument on them I will deal with them shortly.

Mr Speaight’s first argument flowed from clause 3.5 of the sale agreement. He relied on Ramsay v IRC [1982] AC 300:

In my view this doctrine has nothing to do with what House of Fraser have indicated they are minded to do, or at least nothing which assists the claimant. It is not suggested that, in the situation in which there to be an assignment to Stores and then a re-assignment to Stores Management, there is an element of sham. Each limb of the transaction is a genuine transaction. So if one asks the question whether there was an assignment within clause 3.5 the answer is Yes. The obligation has been complied with, notwithstanding the fact that there is an immediate re-assignment. There are two transactions. If the second one is to be challenged it must be via some other route. Mr Speaight said that the parties would not have achieved that which the claimant was entitled to. However, that depends on defining properly what that entitlement is. The entitlement is to have the lease assigned to an appropriate company. That will have been achieved. What the claimant really needs is an entitlement to have it transferred to that company and left there. That cannot be spelled out of clause 3.5.

Next Mr Speaight relied on the operation of the Land Registration Act. He relied on the fact that registration would be necessary to complete the assignment to Stores, and if there were an assignment and an immediate reassignment there would never have been a time when Stores was registered as proprietor, so clause 3.5 would not have been complied with.

So far as this is a good point, it is only a question of timing and would not ultimately assist the claimant to achieve the full force of what it wants. However, if it matters, I consider that that clause 3.5 would have been complied with by a complete assignment to the relevant assignee by 26th April, whether registered or not, though there would probably be an obligation to go on to complete registration. But in the circumstances I do not need to go into this point further.

In the circumstances I determine the preliminary issues in the sense that the threatened assignment would be a breach of the provisions of clause 3.15 of the lease. The precise form of declaration or determination can be the subject of debate (if necessary) on or after the occasion of the handing down of this judgment.