Landlord and tenant - the latest on the enforceability of guarantees on lease assignment

17.11.10

 

Key points

  • The decision in Good Harvest has been upheld
  • A parent company which has guaranteed a lease to a subsidiary will not be able to stand as guarantor on an intra-group assignment

The decision in Good Harvest

In Good Harvest Partnership LLP v Centaur Services Limited, the High Court ruled that a guarantee of an assignee given by the outgoing tenant's guarantor was void. The issue has now come before the High Court again in K/S Victoria Street v House of Fraser (Stores Management) Ltd.

A full transcript of the case has not yet been released, and we understand that leave to appeal has been granted. A summary of the case is below; a further analysis will be issued once more information becomes available.

The latest case: K/S Victoria Street v House of Fraser (Stores Management) Ltd

In January 2006, the parties entered into an agreement for the grant of a lease to House of Fraser (Stores Management) Ltd. The lease was guaranteed by the House of Fraser parent company. The agreement contained a provision which obliged the tenant to assign the lease to another company in the same group by April 2006, with the parent company acting as guarantor for the assignee.

The intra-group assignment did not happen and the landlord sought to enforce the provisions in the agreement for lease. The tenant raised a number of defences, one of which was that the clause was unenforceable because it contravened the anti-avoidance provisions of the Landlord & Tenant (Covenants) Act 1995.

The 1995 Act provides for tenants and guarantors of "new leases" (broadly, leases granted on or after 1 January 1996) to be released from liability on a lawful assignment of the lease by the tenant. The tenant in this case argued that the agreement to assign was unenforceable because it required the parent company to guarantee the assignee, which would frustrate the statutory release of the parent company on assignment.

The High Court identified a flaw in part of the reasoning in Good Harvest. However, despite that, the court was unable to say the decision in Good Harvest was wrong, and accordingly ruled that it should be applied to the present case. The clause in the agreement for lease was therefore void to the extent that it purported to require the parent company to guarantee the assignee.

However, this part of the clause could be "severed", so that the obligation to assign the lease intra-group remained enforceable. The landlord would therefore need to decide whether it wanted to enforce the assignment at the expense of the parent company guarantee.

Things to consider

The decision in Good Harvest was viewed with dismay by landlords. However, this case illustrates that Good Harvest contains pitfalls for tenants too. Landlords will be unwilling to permit intra-group assignments where there is a valuable guarantee, unless the assignee can offer a different guarantor, or some other form of adequate security. Where the original guarantor is the ultimate parent, this may prove impossible.

Update July 2011

See also the decision of the Court of Appeal in this case.

The above analysis was written by Sarah Dawe, associate in Wragge & Co's Real Estate group.

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This analysis may contain information of general interest about current legal issues, but does not give legal advice.