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

Restrictions on alienation in a commercial lease may operate cumulatively. A provision relieving an intra-group assignment from the need for the landlord’s consent does not, without clearer words, disapply separate financial and guarantee requirements. Commercial common sense may assist contractual construction, but cannot justify departing from natural wording merely because the result is unexpected or commercially imperfect. The surrounding transaction may confirm the natural construction. Accordingly, an assignment within a corporate group remained subject to the applicable financial covenant despite the presence of a parent-company guarantee.

The claimant landlord granted a lease to Stores Management, guaranteed by PLC, as part of a sale and leaseback transaction. The sale agreement required the lease to be assigned to a financially sound group company, ultimately identified as Stores if no other company was selected.

The defendants proposed assigning the lease to Stores and immediately reassigning it to Stores Management. The preliminary issues concerned whether that reassignment would comply with the lease’s alienation provisions, particularly clauses 3.15(C), (E) and (F), and whether the transaction would breach the sale agreement.

1. Construction of clauses 3.15(C) and (D). The financial and consent requirements were cumulative. Clause 3.15(C) imposed conditions on assignment, and clause 3.15(D) imposed further conditions. The consent requirement was not an alternative route around the financial requirements.
2. Clause 3.15(E). The intra-group assignment provision was an additional hurdle. Its wording did not create a self-contained regime which displaced the preceding requirements. An intra-group assignee therefore had to satisfy the relevant financial-strength requirement, in addition to the other applicable conditions.
3. Clause 3.15(F). The reference to consent meant consent in its ordinary sense. It relieved a House of Fraser intra-group assignment from the consent requirement, and from the related surety requirement in clause 3.15(D)(ii), but did not disapply clause 3.15(E). The alternative construction would give the group an effectively unrestricted right to move the lease to a company with an inadequate covenant and would undermine the commercial purpose of clause 3.5 of the sale agreement.
4. In construing a commercial contract, commercial common sense is relevant, as explained in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732, but it is not a licence to rewrite the parties’ words. The natural meaning of clause 3.15(F) was not displaced.
5. The threatened reassignment to Stores Management would therefore breach clause 3.15. The claimant was entitled to restrain it. The alternative argument based on Ramsay v IRC [1982] AC 300 was unnecessary to the result. The court observed that a genuine assignment followed by a genuine immediate reassignment would nevertheless satisfy the obligation in clause 3.5 to assign the lease.