Earlier this year, the judgment given in Good Harvest Partnership LLP -v- Centaur Services Limited dealt a blow to landlords and tenants alike when a guarantee was found to fall foul of the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995. The guarantee was unenforceable because the guarantor had guaranteed the obligations of the tenant's immediate predecessor under the same lease. Although an appeal was expected, the case was settled and so the decision remains good law.
Yesterday, the case of K/S Victoria Street -v- House of Fraser (Stores Management) Limited became the first reported case to consider the ruling in Good Harvest.
The facts of the House of Fraser case were unusual. K/S Victoria Street agreed to grant a lease to House of Fraser after which House of Fraser was to assign the lease to another House of Fraser Company. The obligations of both tenant and assignee under the lease would be guaranteed by the same House of Fraser parent company. The lease was granted but House of Fraser refused to complete the assignment and the landlord brought court proceedings requiring them to do so.
House of Fraser raised a number of arguments as to why it was not required to complete the assignment. One argument was that the obligation on the parent company to guarantee the assignee company was unenforceable under Good Harvest as the parent company had also guaranteed the current tenant's obligations. House of Fraser argued that this rendered the entire obligation to assign unenforceable.
The Judge followed Good Harvest and held that the requirement for the parent company to guarantee the assignee's obligations under the lease was unenforceable.
The decision does however contain some rich pickings:
The Judge accepted that there were flaws in the reasoning of the Good Harvest decision. However, he felt he was bound to follow it unless he felt that the decision was wrong. Although the Judge was not prepared to say that Good Harvest was wrong, his comments suggest judicial unease at the decision.
More importantly, although the Judge found that the guarantee provision was unenforceable, he did not agree with House of Fraser's argument that this rendered the whole assignment provision unenforceable. He accepted that the requirement of an unenforceable parent company guarantee could be severed from the remainder of the assignment provisions.
This is good news for landlords as it confirms that where assignment provisions in leases and licences to assign contain guarantee provisions which may be unenforceable following Good Harvest, this is unlikely to impact upon the enforceability of the remainder of the clause, provided that it remains workable without the guarantee provision.
For the time being at least Good Harvest continues to be good law. Does this new decision begin to sow some seeds of doubt? Maybe not, but it does at least confirm that the court is prepared to sort the wheat from the chaff!