Not Another Covenants Act Case...

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In Co-Operative Group Food Ltd. v. A&A Shah Properties Ltd. [2019] EWHC 941 (Ch); [2019] PLSCS 72, Mann J had the opportunity to delve into some of the murk left in the waters of Landlord and Tenant (Covenants) Act 1995 after the landmark decision in K/S Victoria Street v. House of Fraser (Stores Management) Ltd. [2012] Ch 497 (CA). Following a transfer of engagements under the Industrial and Provident Societies Act 1965, the Co-Op found itself as the guarantor of a lease which had been granted to Somerfield Stores Ltd. by A&A Shah Properties Ltd.  On an assignment of the lease from Somerfield to  99p Stores Ltd,. Somerfield had given A&A Shah an Authorised Guarantee Agreement, or “AGA”, and the Co-Op had given some covenants in the Licence to Assign. When both Somerfield and 99p went bust, A&A Shah sued Co-Op on the basis that its covenants in the Licence constituted a  “SAGA”: that is a sub-guarantee of Somerfield’s AGA.  Co-Op contended that the covenants were not a SAGA, which it accepted would be lawful, but constituted either a joint guarantee or a repeat guarantee, either of which would be rendered void by section 25(1) of the Act. Thus, one particular issue before Mann J was something that had troubled the first instance judge in K/S Victoria Street,[2010] EWHC 3006 (Ch), Mr. John Randall QC.  In paragraph [41], the Deputy Judge observed that it was odd that the Covenants Act could permit a guarantor to enter into a SAGA, but could not “do something to the same substantial effect, different only in form, namely to grant a guarantee in the form of a direct covenant”.  Lord Neuberger, giving the judgment of the Court of Appeal said, at [47], that the Court thought there was “much force” in that observation. The Co-Op argued before Mann J that both the K/S Victoria judgments departed from the wrong starting point, because the difference between a sub-guarantee and a direct guarantee is a matter of substance, not just form, so there was a discernible policy reason for the draftsman drawing that distinction, which left a SAGA valid, but a joint guarantee void. Mann J kindly complemented Counsel for Co-Op, at [13] on the “learned discourse on how the Act operated”, which analysed the issues with a “considerable level of detail”.  Indeed, Leading Counsel for A&A Shah conceded that the Co-Op’s analysis was correct.  However, Mann J did not find it necessary to resolve the question which had so troubled Mr. Randall QC and Lord Neuberger, as he held that the Licence, on its proper construction, was a SAGA, not a joint guarantee.  Accordingly, the landlord succeeded. The judgment is reported on the EGi website as a Case Summary, as well as a news item. Nic Taggart acted for the Co-Op having achieved slightly better results in K/S Victoria Street.

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