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This article was included in the Winter 2011 issue of Informer - the real estate newsletter
In our spring edition of Informer, we included an update on the latest position in the “AGA saga”, which originated in the Good Harvest case and then continued in the later case of K/S Victoria Street v House of Fraser (Stores Management) Ltd.
As mentioned in that update, the case was being taken to the Court of Appeal and the judgment was recently given. In short, the Court upheld the decisions of the previous cases on the principal point, but also included some opinions about the wider position.
In summary:
- The Court confirmed that it is unlawful for the guarantor of an original tenant to be required to directly guarantee an incoming tenant/assignee of the lease. Therefore any such obligation within a contract will be rendered void by the release provisions within section 24 and 25 of the Landlord and Tenant Covenants Act 1995. It is also irrelevant if the guarantor is happy to enter into a new guarantee.
- However, the Court also expressed an opinion that it is possible for the original tenant's guarantor to guarantee an authorised guarantee agreement (an "AGA") - i.e. as an indirect or sub-guarantee. By way of reminder, outgoing tenants can (in some cases) be required to enter into a AGA under which the outgoing tenant guarantees the obligations of the incoming tenant. Whilst it is important to note that this part of the judgment is not legally binding, it is highly likely to be followed in practice as the opinion was given by leading judge Lord Neuberger within the Court of Appeal.
The decision is helpful in that it gives practitioners some certainty about what is and what is not valid, even though not all uncertainty has been removed. The majority view also believes that commercially the decision is the right result. The case will have (and already has had) wide spread ramifications on the investment market and the valuation of properties which are already covered by the type of arrangements which have been struck down by the Court. Going forward, it will also force landlords to re-think about how to seek to enhance their security and to protect their investments.
Article by Chris Hill, Associate in the Property Litigation Practice at Fieldfisher.