The Court of Appeal today issued its judgment in K/S Victoria Street v House of Fraser (Stores Management) Ltd & Ors  EWCA Civ 904 (27 July 2011). Some might call this case “son of Good Harvest” and it was the Court of Appeal’s first chance to consider the decision made by Mr J Newey in Good Harvest Partnership LLP v Centaur Services Ltd. Those of you who have been reading my blog for a while may remember that I got excited about the first instance decision in House of Fraser as Mr Randall QC opted to follow Good Harvest even though he felt that the reasoning in it was flawed!
I will not bother to go into the detail of Good Harvest and what it means to both landlords and tenants as to do so would simply trod over such well-trodden ground that it is a bit of a quagmire. I have read the decision of the Court of Appeal and, unsurprisingly bearing in mind the Court in this case was headed by the Master of the Rolls, LJ Neuberger, an exceptionally well respected judge with particular expertise in Real estate, it is a well reasoned decision. In some ways what is most fulfilling about this judgment is that it has expressly been given to address the uncertainties created by the Newey J decision in Good Harvest. In fact in one part of the judgment it reads:
“We would hope that those responsible for drafting leases are aware of these conclusions, and that, as a result, the 1995 Act should not lead to many practical difficulties of the sort discussed above.”
The Court is speaking to me and my peers and telling us clearly, “we have told you what the law means now you have no excuses for further screw-ups”!
The decision of the Court of Appeal provides much needed clarity and confirms the following:
- Any agreement which seeks to require a guarantor of a tenant under a lease to guarantee the obligations of an assignee of the tenant will be void.
- Even where a landlord merely require a guarantor of a proposed assignee and it is the assignee/assignor who suggests the current guarantor (i.e. the landlord did not require it) as a guarantor of the assignee, that will be void.
- Any guarantee entered into as a result of an agreement along the lines suggested in points 1 or 2 will not be enforceable.
- A guarantor can, where reasonable so to do, be required to guarantee the obligations of a tenant as assignor of a lease in an authorised guarantee agreement (the GAGA survives).
Of biggest comfort to landlords (and commercially minded tenants) will be point 4. It had been suggested in Good Harvest that a guarantor could not be required to enter into an AGA. If this view had been repeated then it would have resulted in landlords always insisting on the assignee being the most financially sound entity in any group.
The judgment did raise some issues which need to be considered practically so that practitioners seek to ensure that they do not run unnecessary risks with their drafting. I would highlight the following:
- Provisions in leases which effectively allow intra-group assignments where the TopCo remains on the hook cannot be made to work. It seems to me that they simply become unenforceable since the tenant cannot comply with the obligation to provide the guarantee and without it one would revert to the usual consent provisions in the lease. So tread carefully here.
- The Court has blessed the concept of the current guarantor guaranteeing the outgoing tenant’s covenants in the AGA. However, it did not bless a guarantor guaranteeing the assignee’s obligations directly but less this open.
- A provision in the original guarantee which seeks to extend the guarantee to a guarantee of any covenants by the tenant in an AGA on an assignment may be vulnerable to challenge.
- The court cast doubt as to whether a landlord can automatically require on any assignment the outgoing tenant to enter into an authorised guarantee agreement. This is potentially interesting in the insolvency scenario where landlords often seek to rely on such provisions to refuse consent on the basis that an administrator will not enter into an AGA.
So, Good Harvest has been suitably tithed by the Court of Appeal. The law has been clarified for the better and the investment community can sleep a little more soundly tonight. However, a word of warning, there are many existing leases out there which will fall foul of the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995 even after this decision. The clarity afforded by this decision means a discount in value must be applied to those leases that do.