UK: HOF Good Harvest - Good Harvest Is Good Law, But Sub-Guarantors Will Be Allowed

Summary

Last year the High Court in the Good Harvest case1, and subsequently in the House of Fraser case2, held that the Landlord & Tenant (Covenants) Act 1995 (the Act) prevented a guarantor of a tenant's obligations from being required to give a further direct guarantee in respect of an assignee of the lease.

On Wednesday 27 July, the Court of Appeal3 in the House of Fraser appeal confirmed that decision and provided further important, and at times surprising, clarification.

The Court confirmed that an existing guarantor of a tenant cannot guarantee the liability of the tenant's assignee, nor commit itself in advance to guarantee the liability of a future assignee. However, an existing guarantor can later validly guarantee the liability of a future assignee on a further assignment.

An existing guarantor can guarantee the obligations of the Tenant where that Tenant enters into an AGA (a sub-guarantee) at the time of the assignment by that Tenant to an assignee.

An existing guarantor cannot take an assignment of a lease from an existing tenant.

What should landlords do now?

  • Re-consider the valuations of their properties where they have weak tenant covenants backed by guarantors who were repeat guarantors, or where they have leases permitting intra group assignments without consent on the basis that the existing guarantor guarantees the assignee. These guarantees will be void.
  • Ensure that their standard leases contain provisions requiring tenant's guarantors to give a sub-guarantee of the tenant's AGA4 on assignment.
  • Be aware that they cannot rely on any guarantees in existing leases given by repeat guarantors.
  • Not take into account any offer from a tenant's existing guarantor on an application to assign save where the offer is a sub-guarantee of an AGA offered by the existing Tenant.

What should tenants do now?

  • Be aware that they may be required to provide alternative/different security on making an application for consent to assign to their landlord as well-informed landlords are unlikely to accept the offer of a guarantee from the existing guarantor.
  • Be aware that well advised landlords are unlikely to allow intra group assignments without consent (previously this was often done on the basis that the existing guarantor guaranteed the obligations of the assignee).
  • Be aware that a provision in an existing lease requiring their existing guarantor to give a guarantee on assignment will be void.

Requirement for existing guarantor to guarantee an assignee's liabilities void

Last year, the Court held in Good Harvest and House of Fraser that clauses in leases which required an existing guarantor to stand as guarantor to an assignee of the lease were void. This is because such "repeat guarantees" fall foul of the wide anti-avoidance provisions in the Act.

The two decisions caused considerable controversy.

Good Harvest is good law

The Court of Appeal has confirmed that an existing guarantor cannot stand as a guarantor to an assignee of the existing tenant, whether by virtue of a requirement in the lease or by subsequent agreement of the parties. This was on the ground that it is the effect and intention of the Act that, once a tenant assigns its lease, a guarantor should be released from its liabilities under the lease in the same way as the tenant. The Court of Appeal held that any other interpretation "would enable a well advised landlord to ensure that any guarantor was in precisely the position in which it would have been before the [Act] came into force". In addition, if such a liability could lawfully be imposed on and enforced against the guarantor of the original tenant, it would be difficult to see why it could not be imposed on the original tenant itself.

The Court recognised this was not a commercial decision but that this was alleviated to a degree, by the fact sub-guarantees would be allowed (see below).

The Court also decided that an existing guarantor could later give a guarantee to a subsequent assignee (not being the assignee of the lease currently guaranteed). So, provided the guarantor has been released from its liabilities under the lease on the first assignment, there is no reason why the same party could not stand as guarantor to a subsequent tenant on a subsequent assignment. However, we suggest that it is very likely any attempts to make such a subsequent guarantee mandatory in the lease would be void, for the same reasons as a mandatory repeat guarantee.

The Court has also made it clear that its reasoning also applies to any contractual arrangement contained in a later document i.e. a licence to assign or a Deed of Variation. Accordingly, the imposition of a renewal obligation on a guarantor of an assignee would also be void.

Sub guarantees valid

The Court of Appeal also clarified the doubts that had been cast on the effectiveness of sub guarantees by the judgment in Good Harvest. The Court of Appeal is clear that an existing guarantor may guarantee the tenant's obligations in an AGA, the reasoning being that the guarantor must be released to the same extent as the tenant. If the tenant can continue to be on the hook by virtue of an AGA, there seems no reason why the guarantor cannot similarly remain on the book.

Issues closed?

We consider that the Court has now definitively addressed the issues raised by Good Harvest. However, many of the issues, including the use of sub-guarantors did not directly fall to be decided by the Court of Appeal and its comments are not, technically speaking, binding. However, it would take a brave party or barrister who argued against the guidance given by the Master of the Rolls who gave the judgment in this case!

The following has also not been decided by The Court of Appeal:

  • Whether a guarantor can enter into an AGA jointly with the tenant, rather than just guaranteeing the tenant's liabilities under the AGA. This is a technical point which we suspect is unlikely to be a practical significance.
  • Whether a mandatory provision in the lease requiring the tenant to give an AGA on an assignment under any circumstances (as opposed to to just when it is reasonable) is valid. The Court did not have to decide this point, and suggested Section 16(3) of the Act might prohibit this. We suggest that such clauses should be valid and enforceable by virtue of Section 19(1)A of the Landlord and Tenant Act 1927.

Relevant Provisions of the Act:

Section 24(2) Where

  1. by virtue of this Act a tenant is released from a tenant covenant of a tenancy, and
  2. immediately before the release another person is bound by a covenant of the tenancy imposing any liability or penalty in the event of a failure to comply with that tenant covenant,

then, as from the release of the tenant, that other person is released from the covenant mentioned in paragraph (b) to the same extent as the tenant is released from that tenant covenant.

Section 25 (1) Any agreement relating to a tenancy is void to the extent that

  1. it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act.

Footnotes

1 Good Harvest Partnership LLP v. Centaur Services Limited [2010 EW HC 330 (CH)]

2 K/S Victoria Street –v- House of Fraser (Shares Management) Limited and others [2010] EWHC 3006 (Ch) and [2010] EWHC 3344 (Ch)

3 K/S Victoria Street –v- House of Fraser (Shares Management) Limited and others [2011] EWCA Civ 904

4 Authorised Guarantee Agreement

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.

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Authors
Armel Elaudais
 
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