Continuation of Guarantees on Lease Assignment

Originally published 29 July 2011

Keywords: tenant's guarantor, authorised guarantee agreement, AGA

The Court of Appeal has handed down judgment in K/S Victoria Street v. House of Fraser (Stores Management) Ltd1 upholding the decision in Good Harvest Partnership LLP v Centaur Services Limited2 that a tenant's guarantor is released on a lawful assignment of a lease (entered into after 1 January 1996)3 and cannot act as guarantor for the assignee either by way of an authorised guarantee agreement ("AGA") or by entering into a new contractual guarantee even if the guarantor is happy to do so.

There is, however, some good news for landlords. The Court of Appeal expressed the view that guarantors can be required to guarantee an assignor's obligations under an AGA and that they can also validly guarantee the liability of an assignee on a further assignment.

The Facts

K/S Victoria Street (the "Landlord") granted a lease to House of Fraser (Stores Management) Ltd (the "Tenant") on 26 January 2006. The Tenant's parent company, House of Fraser plc ("HOF"), acted as guarantor. The Tenant was a dormant company, but the Landlord agreed to accept it as the initial tenant to assist the House of Fraser group's tax affairs. In return, at HOF's suggestion, the lease terms provided that the Tenant would assign the lease by no later than 26 April 2006 to House of Fraser (Stores) Limited ("T2") with HOF acting as T2's guarantor.

By 2010, the lease had still not been assigned. The Landlord brought an application against the Tenant, T2 and HOF for specific performance.

The Tenant, T2 and HOF argued that the obligation to assign to T2 was unenforceable because it required HOF to be guarantor. They relied upon the Landlord and Tenant (Covenants) Act 1995 ("the Act"), as interpreted by Good Harvest, which stated that guarantor's are released on assignment and any attempt to circumvent the Act was void.

At first instance the High Court held that the requirement that HOF provide a guarantee was void. However, as the guarantee condition was in a separate sub-paragraph to the obligation to assign, the two clauses were held to be independent and the obligation to assign to T2 was, therefore, enforceable. The Landlord appealed the issue of whether HOF could be required to guarantee the assignee's performance.

The Decision

The Court of Appeal agreed with the High Court. It held that the guarantor was released by s5 of the Act and that any provision which required HOF to...