This post was also written by Jon Pike and Richard Perkins.
Last spring we posted on the difficulties facing landlords and tenants as a result of the High Court decision in Good Harvest. Yesterday we had some good news as the Court of Appeal has reconsidered the point and introduced some commercial common sense into the law.
The case in question is K/S Victoria Street v House of Fraser and the contract provisions that were being examined in detail were unusual. We are not commenting on those. It is the Court’s remarks about guarantees that are of interest rather than their decision on the very specific facts of the case. We now know that with the right wording a tenant’s guarantor can guarantee the tenant’s obligations given in an authorised guarantee agreement (AGA) when a lease is being assigned.
The practical implications for investors are –
On the grant of a new lease best practice for landlords will be –
- to require the valuable company to be the tenant company and not just a guarantor
- to prohibit assignments intra-group so as to retain control
- to impose a pre-condition to any assignment that any guarantor of the outgoing tenant guarantees their obligations in the AGA
When a tenant wants to assign a lease
- landlords can require that the original guarantor guarantees the outgoing tenant’s obligations being given in the authorised guarantee agreement
- no direct guarantee of the assignee’s liabilities will be enforceable even if given voluntarily by the original guarantor
When an investment acquisition is taking place check early if there are any guarantees with significant covenant strength where the relevant lease has been assigned. Assume any direct guarantee of an assignee will be unenforceable and factor that into any valuation.
