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This article was included in the spring 2011 issue of Informer - the real estate newsletter.
Landlords whose tenants have guarantors need to take care in the light of a recent court decision.
Last year, the High Court ruled in Good Harvest Partnership LLP v Centaur Services Limited that an authorised guarantee agreement ("AGA") provided by a tenant's guarantor as a precondition to the landlord granting consent to assign the lease was void. However, the case settled before it got to the Court of Appeal, leaving the property industry unsure as to the implications of the decision and the validity of existing guarantees.
The decision was subsequently challenged in the case of K/S Victoria Street v House of Fraser (Stores Management) Ltd. The K/S case dealt with the question of whether a parent company that has guaranteed a lease to a subsidiary was able to stand as guarantor on an intra-group assignment. Although the court cast doubt upon part of the reasoning in Good Harvest, it ultimately upheld that decision. The K/S case is now due to be heard before the Court of Appeal in May. Therefore, until the Court of Appeal gives a ruling on these issues, the decision in Good Harvest remains good law. Pending this decision, landlords and their agents should remain alert to the following issues when being asked for consent to assign:
- A landlord cannot rely on an AGA given by a former guarantor as a pre-condition to assignment, nor (probably) on guarantees given voluntarily by a former guarantor;
- It remains undecided whether a guarantor can validly "sub-guarantee" a tenant's obligations under an AGA. Although it would be premature to stop inserting these provisions into leases/guarantees, the K/S case would appear to suggest that there is no substantive distinction between a direct guarantee and a sub-guarantee;
- Given these uncertainties, increased focus should be directed to assessing the covenant strength of a potential assignee. Where the assignee is of weak covenant strength, then a landlord should consider seeking increased security in the form of a bank guarantee or rent deposit.
For further information please contact Hannah Watson.