Last year, the case of Good Harvest Partnership LLP v Centaur Services Limited spread consternation throughout the property industry when it was decided by the English Courts that an existing guarantor could not guarantee an incoming tenant by way of an authorised guarantee agreement (AGA).  

The guarantor's obligations under the AGA were struck out by the Court as unenforceable under the Landlord and Tenant (Covenants) Act 1995.  The Act makes it clear that the liability of tenants and guarantors falls away on the assignment of a lease. The only exception is that the outgoing tenant can guarantee the incoming tenant by way of an AGA.

The landlord's appeal was eagerly awaited but when the parties settled many felt that a bad decision had been allowed to remain good law.  Hopes that the decision would be overturned were dashed when Good Harvest was upheld by the High Court in K/S Victoria Street v House of Fraser (Stores Management) Limited.

Fortunately, the Court of Appeal's judgment in K/S Victoria Street, handed down today by the Master of the Rolls, Lord Neuberger, makes it clear that former guarantors can enter into an AGA.  This should come as some relief to landlords and tenants alike.

House of Fraser had entered into a sale and leaseback arrangement in respect of a department store.  For tax efficiency, the lease was granted to a dormant subsidiary then was to be assigned to an operating company.  So that this arrangement was acceptable to the landlord, House of Fraser agreed to guarantee both the original tenant and the assignee.  However, it subsequently refused to complete the assignment and the landlord brought proceedings at Court.

In the High Court, House of Fraser successfully argued that the requirement to guarantee the assignee frustrated the anti-avoidance provisions of the Act. This spelled disastrous consequences for landlords who had consented to assignments on the strength of a former guarantor's covenant, as well as occupiers seeking to transfer a guaranteed lease within a group company structure.

The Court of Appeal sympathised with the landlord's position.  House of Fraser's agreement to guarantee the assignee was a sensible concession in return for the landlord's agreement to accept the tax efficient deal.  However, the Court felt constrained by the wording of the Act and found that an existing guarantor could not be required to give a new guarantee for the incoming tenant, even if it had contracted to do so.

Fortunately, the Court of Appeal found that a guarantor could validly guarantee the outgoing tenant's obligations in an AGA.  This is sometimes called a "sub-guarantee".  Whilst Good Harvest did not decide that sub-guarantees were invalid, the Court expressed doubts about their validity and following the decision it was unclear whether they would fall foul of the Act.

Perhaps the Court has come up with a complex solution to a simple problem but it seems that it had no choice. The good news is that the Court has taken away the worst effects of Good Harvest and confirmed that former guarantors can remain liable under an AGA.