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

Under the Landlord and Tenant (Covenants) Act 1995, an existing or prospective guarantor cannot be required in advance to guarantee a future assignee’s liabilities. Nor may an assignor’s guarantor ordinarily guarantee the immediate assignee. Such arrangements frustrate the statutory release of the tenant and guarantor and are void under section 25(1).

A guarantor may, however, guarantee the assignor’s lawful obligations under an authorised guarantee agreement. An original tenant and guarantor may also reassume liability upon a later assignment back to them.

Commercial contracts are construed from their language, commercial purpose and documentary and factual context. Introductory words such as “notwithstanding” displace other provisions only to the extent of inconsistency.

The claimant bought a department store from the first defendant under a sale-and-leaseback transaction. The first defendant became tenant, while the third defendant guaranteed its obligations. The agreement required an early assignment to a financially stronger group company and required the guarantor to guarantee that assignee.

A Deputy High Court Judge held in [2010] EWHC 3006 (Ch) that the renewed guarantee obligation was void under the Landlord and Tenant (Covenants) Act 1995, but severable from the assignment obligations. Mann J subsequently held in [2010] EWHC 3344 (Ch) that the assignee could not immediately reassign the lease to the original tenant without satisfying another alienation restriction.

The claimant appealed the first ruling. The defendants appealed the second. The issues concerned the validity of the renewed guarantee and the proper construction of the lease’s restrictions on intra-group assignments.

1. Both appeals dismissed. Clause 3.5(iii), which required the existing guarantor to guarantee the specified assignee, was void under section 25(1)(a) of the Landlord and Tenant (Covenants) Act 1995. Clause 3.15(E) of the lease continued to restrict a proposed reassignment to the original tenant.

2. Section 24(2) releases a guarantor to the same extent that the assigning tenant is released. A contractual obligation imposed in advance on that guarantor to guarantee a future assignee would frustrate that release. Section 25 is a comprehensive anti-avoidance provision and applies to arrangements in the lease, before it, or in later documents. Validity depends upon the arrangement’s objective effect, not the parties’ motives or whether it formed part of a commercially sensible bargain.

3. The court largely agreed with Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch). An assignor’s guarantor cannot ordinarily guarantee the immediate assignee, even where the guarantee is said to have been freely offered. A distinction based upon whether the landlord demanded the guarantee would undermine certainty and make validity depend upon negotiations outside the title documents.

4. There is an important qualification for authorised guarantee agreements. Where an assignor may lawfully be required to enter an agreement under section 16, its guarantor may guarantee the assignor’s resulting obligations. The guarantor is then released to the same extent as the tenant, as section 24(2) requires. The court left open whether the guarantor could instead act as a co-guarantor with the assignor.

5. The Act does not prevent an original tenant and guarantor, after release upon one assignment, from reassuming liability upon a further assignment back to the tenant. That later voluntary assumption does not frustrate the earlier statutory release.

6. Clause 3.15(F) removed the need for consent to qualifying intra-group assignments, but did not displace clause 3.15(E). “Notwithstanding” made paragraph (F) prevail only where inconsistent with preceding provisions. Reading paragraphs (E) and (F) cumulatively gave effect to the sale-and-leaseback’s commercial purpose and prevented the agreed assignment to a financially strong company from being immediately reversed.

7. The contra proferentem rule was unnecessary. In commercial contracts, the words, commercial sense and documentary and factual context will normally determine meaning.

1. Court of Appeal (Civil Division): Dismissed both appeals in [2011] EWCA Civ 904. It upheld the conclusions that clause 3.5(iii) was void and that clause 3.15(E) continued to apply to an assignment falling within clause 3.15(F).

2. High Court, Chancery Division: Mann J held in [2010] EWHC 3344 (Ch) that the contemplated reassignment to the original tenant would breach clause 3.15.

3. High Court, Chancery Division: Mr John Randall QC, sitting as a Deputy High Court Judge, held in [2010] EWHC 3006 (Ch) that the renewed guarantee obligation was void under the Landlord and Tenant (Covenants) Act 1995, but severable from the remaining assignment obligations.