K/S Victoria v House of Fraser: Where are we now?

K/S Victoria v House of Fraser: Where are we now? John Randall QC

The question of whether the liability of a tenant s guarantor can survive an assignment has been debated since 1996 Sandi Murdoch, Estates Gazette, 17 Sept 2011

Would an original guarantor s sub-guarantee of an original tenant s AGA (a.k.a. GAGAs) fall foul of the 1995 Covenants Act? The opposing written opinions on this point by two eminent QCs (both of whom are now on the bench) compounded the lack of clarity Dellah Gilbert, Property Law Journal, 12 Sept 2011

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) Gladman Homes [under-lessor] Chiron [under-lessee, 10 years from 2001] Centaur [guarantor of Chiron in under-lease] THED [assignee from Chiron, 2004]

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) Clause 5.9.6 stated that the landlord was entitled to impose any or all of certain conditions on giving any licence for an assignment of the whole premises.

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) 5.9.6.1 upon or before any assignment the Tenant making the application for licence to assign and its guarantor (if any but not someone who has already given an authorised guarantee agreement) shall enter into an authorised guarantee agreement in a form permitted by law and agreed between the parties.

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) By February 2005: Good Harvest [freeholder] THED [under-lessor by assignment, then head-lessor] Chiron [co-guarantor of THED until next assignment] Centaur [co-guarantor of THED until next assignment]

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) Good Harvest sues Centaur for THED s unpaid rent Centaur: our co-guarantor s covenant is void and unenforceable under s.25, 1995 Covenants Act insofar as it purports to impose liability on us

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) Section 24 of the Act was meant to ensure that any obligations undertaken by a person as guarantor for a tenant should come to an end on an assignment A requirement to enter into a further guarantee when the lease is assigned can, as a matter of language, fairly be said to frustrate the operation of any provision of [the] Act (quoting from section 25(1)(a))

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) Had Parliament intended a tenant's guarantor to be able to guarantee obligations of an assignee, it could have been expected to say so explicitly (there are express references to guarantors elsewhere in the Act) S.16 addresses the circumstances in which a tenant can give a guarantee for an assignee (AGAs), but (a) there is no other equivalent provision dealing with guarantors, and (b) there is no indication in s.16 itself (which makes no reference to guarantors) that an AGA can include a guarantee from anyone other than the tenant

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) Were it the case that a tenant's guarantor could be required to give a guarantee for an assignee of the tenant, there would be nothing to limit the guarantor's exposure to the period before the next assignment I do not think it is by any means clear that the Covenants Act permits a guarantor to sub-guarantee a tenant's obligations under an AGA

Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426 (Newey J) Reserved judgment Feb 2010: Claim against Centaur on its co-guarantee of Chiron s assignee (THED) dismissed Permission to appeal to the CA, but a few days before listed in June 2010, parties settled

K/S Victoria v House of Fraser [2010] EWHC 3006 (Ch) Sale by Stores Mgmnt (HoF subsidiary) and lease-back by KSV of Beatties department store, Wolverhampton Stores Mgmnt the subsidiary selected for tax reasons, but not in a strong financial position New lease 35 yrs, rent 2.25M pa, 5 yearly u/o reviews, HoF guarantor for its subsidiary Stores Mgmnt Assignment to new, financially healthy subsid w/i 3 ms; in default assignee to be Stores (healthy balance sheet) Whichever subsidiary the assignee, HoF to guarantee

K/S Victoria v House of Fraser [2010] EWHC 3006 (Ch) Stores Mgmnt and HoF said unenforceable, and declined to perform KSV s response included direct attack on Good Harvest decision Deputy Judge considered that a fresh guarantee would end on a subsequent assignment (s.24(2)(b) + defn. of covenant in s.28(1)) Good Harvest not clearly wrong, so under doctrine of precedent followed but permission to appeal to the CA

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) Clause 3.5: (i) [Stores Mgmnt] agrees to assign the Lease to an assignee (being a Group Company of [HoF] being of equal or greater covenant strength to [Beatties], and (ii) if a company is not chosen by 20 April 2006 then the assignee shall be Stores, and Stores agrees to take that assignment by no later than 26 April 2006, and (iii) [HoF] agrees to enter into a deed of guarantee of that assignee's liabilities as surety in the form set out in schedule 3 to the Lease.

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) CA s conclusions (at [53]): (i) an existing or contracting guarantor of a tenant cannot validly be required to commit himself in advance to guarantee the liability of a future assignee, (ii) subject to (iii) and (iv), a guarantor of an assignor cannot validly guarantee the liability of the assignor's assignee, (iii) such a guarantor can validly do so by being party to an AGA which otherwise complies with section 16, and (iv) such a guarantor can in any event validly guarantee the liability of an assignee on a further assignment.

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) (at [43]): we have considered whether section 25(1) should be given a rather narrower effect, so that its ambit is limited to agreements which precede the subsequent guarantee, but it could not invalidate any subsequent guarantee itself. It seems to us that, while it has its attractions, this interpretation cannot be justified

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) (at [46]): By s.24(2), on any assignment, a guarantor of the assignor is only required to be released to the same extent as the tenant. Accordingly, if, where s.16(2) applies, the landlord is entitled to require the assignor to re-assume liability under an AGA, it does not appear to us to be inconsistent with s.24(2), and hence it would not be void under s.25(1), for the landlord in such a case to require the guarantor to guarantee the liability of the tenant under the AGA (at [49]): while the guarantor of an assignor cannot normally validly guarantee the liability of the assignee, it can validly do so by being party to a valid AGA

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) (at [51, 53(iv)]): a guarantor can in any event validly guarantee the liability of an assignee on a further assignment SO: OK to guarantee T1, T3, T5 etc OK to give GAGA re immediate assignee (T1, T2, T4, T5, T7, T8 etc) In my view not OK to have no gap (T1, T2, T3, T4 etc)

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) CA did not decide (1): (at [47]): Whether the guarantor could simply act as a coguarantor under the AGA with the assignor rather than being a guarantor of the assignor's liability, under the AGA that issue is one which we should not determine although there seems to us to be much force in the deputy judge's point that, if the assignor's guarantor can guarantee the assignor's liability under an AGA, it is hard to see why [it] should not be able to do something to the same substantial effect, different only in form

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) CA did not decide (2): (at [50]): We do not agree that a provision which entitles the landlord to require the tenant and its guarantor to enter into an AGA on any assignment [is] invalid Section 16(3) may or may not preclude a landlord relying on a provision in an alienation covenant which purports to entitle it to insist on an AGA as a matter of right on any assignment - we do not need to decide the point and should not do so. However

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) if s.16(3) does preclude the landlord having such an absolute right, so that it is ineffective, that would not prevent the landlord insisting on an AGA, if the alienation covenant also contained a provision that consent to an assignment could not be unreasonably withheld (as in Good Harvest), and it was reasonable to require an AGA

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) Landlord & Tenant Act 1927, section 19: (1) In all leases containing a covenant condition or agreement against assigning [etc] [the] demised premises without licence or consent, such covenant condition or agreement shall, notwithstanding any express provision to the contrary, be deemed to be subject (a) to a proviso to the effect that such licence or consent is not to be unreasonably withheld

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) Landlord & Tenant Act 1927, section 19: (1A) Where the landlord and the tenant under a qualifying lease have entered into an agreement specifying for the purposes of this subsection (b) any conditions subject to which any such licence or consent may be granted, then the landlord (ii) if he gives any such licence or consent subject to any such conditions, shall not be regarded as giving it subject to unreasonable conditions

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) Landlord & Tenant Act 1927, section 19: (1C) ss.(1a) shall not, however, apply to any such agreement to the extent that any conditions specified in it are framed by reference to any matter falling to be determined by the landlord unless under the terms of the agreement (a) [the] power to determine that matter is required to be exercised reasonably

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) Landlord & Tenant Act 1927, section 19: (1E) qualifying lease means any lease which is a new tenancy for the purposes of Section 1 of the Landlord and Tenant (Covenants) Act 1995 other than a residential lease, namely a lease by which a building or part of a building is let wholly or mainly as a single private residence

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) So where does the actual decision in Good Harvest now stand? There the agreement Good Harvest sought to enforce was (or described itself as) an AGA so now wrongly decided?

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) (1) Not if the agreement in Good Harvest was for some reason not compliant with section 16 but neither Newey J nor CA so suggested

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) (2) Not if fact that Centaur had undertaken a direct contractual commitment in advance to both (sub-)lessor and tenant to join in the AGA makes a difference Newey J may have thought so [22] Seems inconsistent with CA [43, 46, 50]

K/S Victoria v House of Fraser [2011] 2 P&CR 15 (CA) (3) Not if fact that Centaur was a co-guarantor with Chiron under the AGA (and not a sub-guarantor of Chiron) makes a difference Newey J may have thought so [22] Seems inconsistent with CA [47]

So, was Good Harvest correctly decided on its facts?

Questions?