There have been further developments in the above area following the recent Court of Appeal decision in K/S Victoria Street v House of Fraser (Stores Management) Limited [2011] EWCA Civ 904. This case has confirmed the position in Good Harvest Partnership LLP V Centaur Services Limited [2010] EWHC 330 (Ch) that a landlord cannot require a tenant’s guarantor to guarantee the obligations of that tenant’s assignee on an assignment of a lease, even if the guarantee is being offered by the guarantor voluntarily.

K/S Victoria Street (“the Landlord”) granted a lease to House of Fraser (Store Management) Limited (“the Tenant”) with House of Fraser plc (“the Guarantor”) providing a parent company guarantee under a sale and leaseback agreement. The Landlord not only required the Guarantor to guarantee the Tenant’s obligations it further required the Tenant to assign the lease to House of Fraser (Stores) Limited (“the Assignee”) within three months with the Guarantor also guaranteeing the obligations of the Assignee, as it felt the Tenant offered a weak financial covenant. The assignment had not taken place by the due date and the Landlord took steps to sue the Tenant, the Guarantor and the Assignee for the failure to comply with the obligation to assign. House of Fraser successfully argued that the obligation was void under section 25 of the Landlord and Tenant (Covenants) Act 1995 (“the Act”).

The Act protects tenants and their guarantors by releasing them from liability on an assignment of a lease. The Court of Appeal held that the obligation to assign the lease with the benefit of the guarantee from the Guarantor was void as it did not permit the guarantor to be released and contradicted the provisions under the Act. Any intention to frustrate the operation of this release is invalid under the Act.

However, the Court of Appeal confirmed that it is acceptable for a tenant’s guarantor to guarantee the tenant’s obligations under an authorised guarantee agreement (“AGA”) on an assignment of a lease. This does not invalidate the Act provided that the guarantor is not guaranteeing the obligations of the tenant’s assignee and is only sub-guaranteeing the tenant’s obligations under the AGA to the tenant’s assignee. The Court of Appeal went further and stated that there is nothing to prevent a guarantor guaranteeing the obligations of a tenant on a subsequent assignment and the Act would not invalidate that arrangement, as the guarantor would be providing a fresh guarantee and the link to the initial guarantee would have been broken.

The Court of Appeal decision brings some sense to this area of law. However there are still some difficulties. Tenants have previously been able to assign their lease to a group company without obtaining the landlord’s prior consent, provided that the parent company was guaranteeing its obligations. However, following this case it is clear that this is not possible and will be invalid under the Act. Inter group assignments for tenants are no longer going to be straight forward and will require far more input from landlords.

Landlords will also need to take care that the company with the strong covenant is the tenant and not just the guarantor and to ensure that they are obtaining an AGA on an assignment of a lease from the more valuable company and also, impose a pre-condition in the lease that on assignment of a lease the guarantor guarantees the tenant’s obligations under the AGA.