Summary and implications

A tenant’s guarantor cannot give a valid guarantee when the tenant assigns its lease. The Court of Appeal has confirmed that such a guarantee will be invalid.1 Landlords and tenants can now be confident that:

  • A repeat guarantee by an existing guarantor to an assignee is void except if there has been an intervening assignment (see below);
  • A guarantee of a tenant’s liability under an AGA given on an assignment is valid (this is known as a sub-guarantee).

This decision will have far-reaching implications for landlords and tenants.

  • Landlords may be able to withhold consent if the assignee is a weak covenant and cannot offer a fresh guarantor.
  • Landlords may not be able to recover unpaid sums from an existing repeat guarantor. This may affect investment values.
  • It may be difficult for tenants to carry out intra-group transfers if the only guarantor available is the parent company, which has already guaranteed the existing tenant.

The House of Fraser case confirmed what had been said in Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch)

Click here for our briefing on the Good Harvest decision.

Repeat guarantees are void, subject to the intervening assignment exception

Click here to see diagram

The basic principle is that, if a tenant’s obligations in a lease are guaranteed by a guarantor and the tenant assigns the lease, the guarantor cannot guarantee the assignee’s obligations. This is because the repeat guarantee frustrates the Landlord and Tenant (Covenants) Act 1995.2

This applies to a repeat guarantee by the guarantor of an original tenant and/or the guarantor of an assignee.

A repeat guarantee will be invalid even if it is freely offered by the guarantor

The repeat guarantee will be invalid regardless of whether the landlord requires the guarantees or the guarantor freely offers it.

The intervening assignment exception

Click here to view diagram

The Court of Appeal confirmed that, where there has been an intervening assignment, the guarantor can subsequently return as guarantor to a subsequent assignee. In other words, there must be a period during which the guarantor is released from its obligations to guarantee the tenant’s covenants.

However, tenants should be careful in agreeing arrangements using the intervening assignment exception in order to circumvent the repeat guarantee principle. There is a risk that the overall effect of the arrangement would still constitute a “frustration” of section 24(2)(b).

A sub-guarantee (guarantee of an AGA) is valid

Click here to view diagram

The Court of Appeal has confirmed that a guarantor can guarantee the tenant’s obligations in an AGA given on assignment.

This means that a weak outgoing tenant giving an AGA can now secure his obligations under the AGA by making his guarantor party to the AGA.