Guarantees supporting tenant covenants under leases are commonplace in the property market, but they are never more important than in a time of economic uncertainty. Unfortunately for landlords, the law heavily restricts the extent to which such guarantees are permitted following an assignment of the lease.

Uncertainties over the interpretation of the relevant provisions of the Landlord and Tenant (Covenants) Act 1995 led to the cases of Good Harvest Partnership LLP v Centaur Services Ltd and K/S Victoria Street v House of Fraser (Stores Management) Ltd. An appeal in the latter case has just been dismissed by the Court of Appeal. However, the court's judgment gives the clearest indication yet of what is and is not permitted by way of guarantees on assignment.

Suppose a lease is vested in a tenant (T), guaranteed by T's parent company (G). The lease is subsequently assigned by T to an assignee (A). The lease requires the consent of the landlord (L) to assignment and makes provision for an authorised guarantee agreement (AGA) to be given by an outgoing tenant on assignment. AGAs, which are permitted by the 1995 Act, allow T to guarantee the performance of the tenant covenants in the lease by A, but only for so long as A is itself the tenant under the lease.

What works?

  • G can guarantee T's covenants in the AGA, and the lease can contain a provision requiring him to do so. The court stated that it may even be possible for G to provide a direct guarantee of A in the AGA, as opposed to a guarantee of T (known as a "sub-guarantee"). This will generate a spark of hope for landlords who have the benefit of such agreements and who thought, following Good Harvest, that they were void. However, it will be safer to draft guarantees in new AGAs as sub-guarantees.
  • If the lease is subsequently re-assigned by A back to T, G can stand as guarantor for T again. Similarly, if the lease is assigned by A to another company (B), G can stand as guarantor for B, notwithstanding the fact that it has already been guarantor for T. This is illustrated by the diagrams below.

Click here for diagrams

However, while this will apply where G has not given any form of guarantee for A, it is not clear that this would be the case if G has also guaranteed an AGA given by T to cover A's obligations (see "Do any uncertainties remain?" below). In other words, this tactic and the one referred to in the first bullet point above may not be capable of being used together on successive assignments, and may well be alternatives.

What doesn't work?

  • G cannot give a stand alone guarantee for A when the lease is assigned. It makes no difference whether the guarantee is required by L or "freely offered" by G. A clause in a lease, agreement for lease, licence to assign or other document which requires such a guarantee is therefore void. The impact of this rule is, however, mitigated by the fact that G is permitted to guarantee an AGA given by T on the assignment to A (see above).
  • Alarmingly, the court also suggests that an assignment by T to G would be void. This was not previously thought to be the case and could cause difficulties.

Do any uncertainties remain?

Although the court's judgment is far-ranging, there are a number of structures which the court did not expressly consider. The validity of such structures is not yet, therefore, the subject of a binding determination by the court. They include:

  • G gives a guarantee for T. T assigns the lease to A. T and G give an AGA covering A's obligations under the lease. A then assigns the lease to B. Can G stand as guarantor for B?
  • G gives a guarantee for T. The lease permits intra-group assignments but only if there is a "double assignment" of the lease – first to another company in T's group (without any form of guarantee or AGA) and secondly to the intended assignee, guaranteed by G. Is the second guarantee by G valid?

Conclusion

While the court's decision brings welcome clarity to a number of issues in this difficult area of law, a few thorny questions remain. The AGA saga may not have run its course yet. Watch this space...