K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2011] EWCA Civ 904
Facts
K/S Victoria Street ("the Landlord") entered into an agreement for lease with House of Fraser (Stores Management) Limited ("the Tenant").
The Tenant was not a strong covenant and so the parent company agreed to stand as guarantor. The Tenant was also required to transfer the lease to another company of stronger covenant within the House of Fraser Group ("the Assignee") within 3 months of completion. The parent company agreed to stand as guarantor for the Assignee.
The Landlord issued proceedings for specific performance of the obligation on the Tenant to transfer the Lease to the Assignee, with the benefit of the guarantee from the parent company. The defendants contested the claim on various grounds, including that the obligation on the parent company to guarantee the Assignee was in breach of Section 25 of the Landlord and Tenant (Covenants) Act 1995 ("the Act"), as interpreted in the Good Harvest case. (The Good Harvest case held that an AGA entered into by a guarantor was void in so far as it required the guarantor to guarantee an assignee's liability. Please click here to read the case summary).
At first instance in the House of Fraser case, the judge reluctantly followed the decision in Good Harvest and held that the clause in the agreement which required the guarantor's liability to continue after assignment was unenforceable. The Landlord appealed.
Decision
The Court of Appeal rejected the Landlord's appeal and upheld the first instance decision. In reaching its decision, the Court of Appeal analysed the relevant provisions of the Act. In particular, it noted:
- the Act effectively provides that persons bound by a covenant should be released upon assignment;
- Section 25 provides that an agreement relating to a tenancy is void if it would frustrate the operation of any provision of the Act; and
- Section 25 must be interpreted generously to ensure that the operation of the Act is not directly or indirectly frustrated.
The Court went beyond the facts of the case and provided some general guidance on the liability of guarantors following assignment. The Court stated that:
- a guarantor can be required to guarantee a tenant's Authorised Guarantee Agreement ("AGA") given in respect of the immediate assignee (often referred to as "sub-guarantee").
- any other contractual arrangement which imposes an obligation on a guarantor to guarantee the liabilities of an immediate assignee will be void;
- even where the guarantor agrees to guarantee an assignee's liabilities voluntarily (rather than at the insistence of the landlord) the agreement would still be void;
- a tenant's guarantor can give a fresh guarantee for a subsequent assignee, provided that subsequent assignee is not the immediate assignee of the tenant.
Comment
Landlords will be pleased that this decision confirms that there is a way of keeping guarantors to new tenancies on the hook after assignment: by requiring the guarantor to guarantee the tenant's AGA. The doubt cast on this by the Good Harvest case has now been removed. (The liability of former guarantors to "old tenancies", which are generally tenancies granted before 1 January 1996, remains unaffected.)
The Court's finding that a guarantor cannot voluntarily guarantee an immediate assignee's liabilities may cause difficulties in certain circumstances, particularly where this would be in the commercial interests of all parties (e.g. if the tenant and assignee have the same parent company which wants to continue to continue to act as guarantor after assignment). Leases often contain less stringent requirements for intra-group company assignments. However, landlords whose existing leases allow intra-group assignments without the requirement of landlord's consent, on the proviso that the guarantor of the original tenant continues to stand as guarantor, may now be in difficulties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
