In the recent case of K/S Victoria Street v House of Fraser (Stores Management) Limited and Others, the Court of Appeal in deciding this case upheld the landmark ruling in Good Harvest which looked at the validity of guarantees given on assignment.
K/S Victoria Street, the landlord in this case, challenged the ruling in Good Harvest that an obligation on a guarantor to guarantee an assignee was void under section 25 of the Landlord and Tenant (Covenants) Act 1995.
At first instance, Good Harvest, was followed. On appeal, the landlord's challenge has failed. In their judgment, the Court of Appeal gave some helpful guidance on the circumstances in which anyone in a guarantor's position can accept liabilities in respect of assignees.
The court’s guidance on the continuing liabilities of guarantors under a lease
- where a guarantor is guaranteeing the performance of a tenant (T1) under a lease, any obligation on the guarantor (whether in the lease or another document) to act as guarantor for that tenant’s assignee (T2) will be void;
- in addition, a guarantor of T1 cannot voluntarily offer to guarantee T2, even where it suits the guarantor and T1 and T2. For example, where the guarantor of T1 is the parent company of both T1 and T2, the parent company guarantor cannot guarantee T2;
- on a subsequent assignment, a guarantor can give a direct guarantee for future tenants under the lease (ie the guarantor of T1 can guarantee T3 but not T2; the interposition of T2, who does not have a guarantee from the guarantor, means the anti-avoidance provision in section 25 of the 1995 Act does not bite);
- although they did not have to decide the point, the Court of Appeal did comment that an existingguarantor can guarantee an assignor’s Authorised Guarantee Agreement (AGA) obligations. This type of guarantee, commonly known as a 'GAGA', describes the situation where an existing tenant’s guarantor guarantees the liability of the outgoing tenant under an AGA given on assignment; and
- there is also obiter comment expressing doubt about whether a lease can be assigned from T1 to the guarantor, even where both T1 and the guarantor want this.
What does this mean for landlords in practice?
For existing leases, landlords should check whether or not guarantees of tenants and assignees are valid. If the guarantee is not valid, this will obviously affect value and a discount is likely to be applied.
For new leases, landlords should:
- include, as pre condition to any assignment, a requirement that any guarantor of the outgoing tenant, guarantees that outgoing tenant's obligations in any AGA that it gives;
- not include provisions requiring the original guarantor to provide 'repeat' guarantees on intra-group assignments. These do not work;
- not allow intra-group assignments without landlord's consent. This is because an AGA can only be given where landlord's consent is required.
On an assignment application (in respect of a 'new lease' (broadly one granted after 1 January 1996)):
- the landlord cannot ask for (nor should it accept even if voluntarily offered) a direct guarantee of the assignee’s liabilities given by the assignor's guarantor;
- the landlord should require the original guarantor to guarantee the outgoing tenant's obligations in an AGA; and
- watch out for intra-group assignments where the parent company has guaranteed the assignor, that parent company cannot guarantee the incoming group company. Alternative security will need to be sought where appropriate.
On an investment purchase, check as part of the due diligence if there are guarantees where the relevant lease has been assigned. Ascertain whether any direct guarantee of an assignee is unenforceable as if it is, this will affect value.
Although there may be difficulties with intra-group assignments, both property lawyers and landlords will welcome the clarification provided by the Court of Appeal’s judgment. Landlords will now routinely request that a guarantor guarantees an assignor's obligations under an AGA. It would appear that GAGAs are here to stay.