In our Law-Now of 26 February 2010 (AGAs - Landlords must look forward and not back) and our follow up Law-Now of 1 July 2010 (AGAs - The Good Harvest case - An Update), we outlined to you the problems created by the decision in the case of Good Harvest Partnership LLP -v- Centaur Services Limited [2010] EWHC 330.

In short, the case confirmed that any agreement which attempts to extend the liability of a tenant’s guarantor beyond the assignment of the lease by the tenant will frustrate the operation of the Landlord and Tenant (Covenants) Act 1995, and will fall foul of the anti-avoidance provisions under Section 25 of the Act. Therefore, a guarantor of the assignor cannot guarantee the assignee’s obligations and a guarantor will be released on assignment regardless of any agreement to the contrary.

A particularly unsatisfactory consequence of the Good Harvest case was that it failed to address whether a tenant’s guarantor could voluntarily give a guarantee for the assignee and it also failed to expand on whether a sub-guarantee, a guarantee of the out-going tenant’s obligations under an AGA by a guarantor, was permitted.

This case and the uncertainty that it has created has had a significant impact on the way landlords, tenants and guarantors have had to think about the structure of assignments of leases.  This applies particularly in relation to intra-group transfers. A judgment handed down today by the Court of Appeal in the case of K/S Victoria Street -v- House of Fraser (Stores Management) Limited [2011] EWCA Civ 904 has brought some much needed clarity to this important area.

This case concerns the lease of a department store where a parent company acted as guarantor.  The agreement for lease required that on assignment the parent company would also guarantee the obligations of the assignee. Last year, the High Court followed the authority in Good Harvest and ruled that the relevant provision in the agreement for lease was void and that the parent company could not guarantee the obligations of the assignee.

The Court of Appeal has today upheld that decision and the principle in Good Harvest that a guarantor cannot be required to guarantee the assignee’s obligations. However, the judgment also provides clarity on the issues that were not dealt with by the Court in Good Harvest. The emerging principles are as follows:

  1. A guarantor of the assignor cannot provide a guarantee of the assignee’s obligations even if it is offered freely by the guarantor and is not doing so in pursuance of an obligation placed on it by the landlord.
  2. A guarantor of the assignor is not precluded by Section 25 of the Act from guaranteeing the obligations of the assignor under the AGA (provision of a sub-guarantee).
  3. Section 25 of the Act does not preclude forever an outgoing guarantor from giving a further guarantee of the obligations in the lease. Therefore, on a subsequent assignment, the original guarantor could guarantee the obligations of the subsequent assignee.

This decision will be welcomed by landlords and tenants alike as although it has not changed the law as decided in Good Harvest, it has at least given much-needed guidance and certainty on an area of law which is fundamental to property transactions.