Today, the Court of Appeal has handed down the much-anticipated judgment in the case of K/S Victoria Street v House of Fraser (Stores Management) Limited and others [2011] EWCA Civ 904.

The Landlord and Tenant (Covenants) Act 1995 ("1995 Act") changed the landscape for leasehold covenants. For leases granted on or after 1st January 1996, with some limited exceptions, the tenant and its guarantor will automatically be released from all tenant covenants under the lease on an assignment. The 1995 Act provides that the only circumstances in which the tenant may guarantee the performance by the assignee of the tenant covenants is by giving an "authorised guarantee agreement" (an "AGA"), which will only survive until the next assignment.

The 1995 Act is completely silent as to whether the tenant's guarantor could guarantee performance by the tenant of its obligations under the AGA (by giving what is known as a "GAGA"), but it expressly states that, to the extent that any agreement attempts to exclude, modify or frustrate the operation of the 1995 Act, the agreement will be void. These provisions came under scrutiny in the case of Good Harvest LLP v Centaur Services Limited [2010] EWHC 330, where Newey J held that the guarantor of a tenant's obligations under a lease could not validly guarantee the obligations of the assignee of that tenant (a "repeat guarantee") (see our e-bulletin of 26 February 2010).

Following the settlement of the Good Harvest case just before its Court of Appeal hearing date (see our e-bulletin of 29 June 2010), the K/S Victoria Street case has given the Court of Appeal the first opportunity to comment on whether Good Harvest was correctly decided. The question that has, however, made this such a sought-after judgment was whether the Court of Appeal would provide commentary, and perhaps a little more clarity, on the doubts raised by Newey J in Good Harvest as to the enforceability of GAGAs.

Repeat guarantees

Many had hoped that the Court of Appeal would find a way to allow repeat guarantees to be enforceable, despite the Good Harvest decision. However, given the wording of the statutory provisions, that always appeared unlikely. It is, therefore, unsurprising that Newey J's judgment in Good Harvest has been held, in K/S Victoria Street, to be correctly decided – it remains the case that an existing guarantor of a tenant cannot validly guarantee the obligations of an assignee. This applies whether or not this is a requirement of the lease and even where the giving of the second guarantee suits all of the parties (for example, on an intra-group assignment).

GAGAs

In today's judgment, the Court of Appeal has gone further than could have been hoped and has given strong and reasoned support for GAGAs. The comments of the Court of Appeal on GAGAs are not binding on future courts as this issue was not directly applicable to the facts of the case. Nevertheless, the strong constitution of the Court of Appeal, and the fact that the judgement was given by the Master of the Rolls, will give these comments considerable weight in any future case on the point, so they are likely to be persuasive. This is welcome news for the industry, clarifying a point that has given rise to some doubt since the 1995 Act came into force.

Conclusions

This case should draw a line under the guarantee/ GAGA debate. We understand that there is no intention for the parties to appeal the decision to the Supreme Court and, therefore, the case is likely to remain good law.

Practically, the main situations where landlords need to keep these cases in mind are where an intra-group assignment takes place and where the assigning tenant is insolvent. In the first of those cases, if the parent company has guaranteed the tenant's obligations, a further guarantee from the same company cannot be given for the assignee. A GAGA can be given but that will only assist on the first assignment. If, on a second assignment, the lease is assigned out of the group, the GAGA from the parent company will be released. If, on the second assignment, the lease is assigned to another group company, a further parent company guarantee will be permitted.

Where a tenant, which is in administration or liquidation (but has a solvent guarantor), seeks to assign the lease, the administrator or liquidator is unlikely to be willing to give an AGA. As such the solvent guarantor cannot give a traditional GAGA. Equally, the solvent guarantor cannot give a new direct guarantee of the assignee.