The High Court decision in Co-Operative Group Food Ltd v. A&A Shah Properties Ltd [2019] EWHC 941 (Ch) is an interesting decision on the thorny issue of how a guarantor can validly guarantee an outgoing tenant's obligations in an authorised guarantee agreement (AGA) without falling foul of the Landlord and Tenant (Covenants) Act 1995 (the Act).

Background

The Act requires that on an assignment of a new lease the outgoing tenant is released from the tenant covenants and, at the same time, any guarantor of that outgoing tenant is simultaneously released from its guarantee. The one qualification to this is that the outgoing tenant may be required to enter into an AGA to guarantee the performance by the assignee of the tenant covenants in the lease. Case law has established that in turn the outgoing tenant's guarantor (OTG) can guarantee the outgoing tenant's performance of its obligations under the AGA (a sub-guarantee). However, should the OTG guarantee performance of the tenant's covenants by the assignee that would be a direct guarantee and would be rendered invalid by the anti-avoidance provisions of the Act.

The decision

The question that arose in this case was whether two separate provisions in a licence to assign each amounted to a valid sub-guarantee of an AGA or, alternatively, whether they amounted to direct guarantees that fell foul of the Act.

The first provision read:

"The tenant and the [OTG] covenant to observe and perform the obligations set out in the … [AGA] …immediately after completion of the assignment."

Reversing the 2018 summary judgment, the High Court held that, since the obligations under the AGA were guarantees of the obligations of the assignee, this made the OTG's obligations under this clause "a direct guarantee of the assignee and it is accepted (for the purposes of this appeal) that that would be avoided under the Act". This clause was therefore held to be unenforceable against the OTG.

The second provision was less clear-cut. It provided that:

"… the [OTG] agrees that its guarantee and other obligations under the Lease shall remain fully effective and … shall extend and apply to the covenants given by and the obligations on the part of the [outgoing tenant] under this Licence".

The High Court held this amounted to a valid sub-guarantee (in agreement with the 2018 summary judgment). The decision could be justified in one of two ways:

  • since the outgoing tenant had covenanted elsewhere in the licence to observe and perform the provisions of the AGA, this was a clear sub-guarantee of the outgoing tenant's performance of the same; and/or
  • by virtue of another provision in the licence, any references to the licence extended also to the schedule to the licence which contained the AGA. As such, this provision should be read as if the words "and the schedule" had been included at the end.

Comment

Landlords need to be careful that any drafting they use falls on the right side of the distinction between a sub-guarantee and direct guarantee, otherwise they may find that they cannot claim against the guarantee right at the very moment they most need to (in this case, when the assignee and the outgoing tenant had both entered into administration). The key is to ensure that the OTG only ever guarantees performance by the outgoing tenant and not performance by the assignee. While in this case the second provision was held to be an enforceable sub-guarantee, we would caution against using that drafting for two reasons: firstly, because it was not clear enough to avoid a dispute; and secondly for the reason given below.

The second provision refers to the OTG's "guarantee and other obligations under the Lease" remaining "fully effective" and being extended to cover the outgoing tenant's obligations in the AGA. Under the terms of section 24 of the Act an OTG is required to be released from its existing guarantee when the lease is assigned. Any attempt to extend that guarantor's obligations following assignment will be unenforceable. The most extreme example of this was in EMI Group Ltd v. O&H Q1 Ltd [2016] EWHC 529 (Ch) in which an OTG took an assignment of the lease and that assignment was held to have been rendered void by section 24 since the overall effect of the assignment was that the OTG was never effectively released from its covenants. While it appears this point was argued in this case, the High Court ruled that "the natural effect" of the words used in the second provision was "to create a fresh obligation". Given the EMI ruling it would be unsurprising if this point was appealed.

The difficulties revealed by EMI and this decision will no doubt add weight to calls for reform of the Act which is regarded by many as unsatisfactory for the way in which it adds complications to assignments (particularly intra-group). However, for the time being, it looks as though reform is not going to be forthcoming so parties will have to continue to work within its confines and stay alert to (and try to avoid) some of the uncommercial outcomes that it can produce.