03 February 2012 #Commercial Real Estate
The vexed question as to the extent of a guarantor’s continued liability for a tenant proposing to assign its lease finally came before the Court of Appeal in K/S Victoria Street v House of Fraser (Stores Management) Ltd & others.
The case provides (for the moment) the definitive guidance on the extent to which a tenant’s guarantor can be required to guarantee the tenant’s proposed assignee’s liability under the lease, having regard to the principles of the Landlord and Tenant (Covenants) Act 1995 (“the Act”).
Since the Act came into being there has been much debate on this, and 2 methods of trying to ensure that the guarantor remained liable have been routinely used:
The Victoria Street case has concluded the following:
Whilst it seems perfectly reasonable that a guarantor cannot be compelled to give a direct guarantee of an assignee whose financial standing it could not have reviewed at the time it gave its commitment, it is surprising to see that the court rejects also those given voluntarily. The rejection of a voluntary direct guarantee by a tenant’s guarantor may have unforeseen effects. For example, where an inter group assignment is required, and the real wealth remains fixed in the same parent company or indeed the same individual director. That parent co/ individual cannot now validly give a guarantee for the second company as assignee, if it guaranteed the first company tenant. It can remain bound indirectly, if the first company gives an AGA, but what if the purpose of transfer is to wind up the first company? In such circumstances it may be more prudent to contemplate surrender and a new lease, rather than an assignment.
On sub guarantees, as a practical point, it also seems somewhat contorted to say that a guarantor cannot be liable directly, but can be liable indirectly through the AGA as the effect for the guarantor is much the same unless the intervening tenant is of good standing. It does however ease the position for landlords and indeed for tenants wishing to assign, who can point to the strength of their guarantor still in terms of the assessment of overall covenant strength.
For Landlords, the effect must be to always call for the tenant to give an AGA if you are entitled to one. Any provision requiring the existing guarantor to directly guarantee an assignee will be void but in those circumstances requesting an indirect guarantee of the outgoing tenant’s AGA should be a reasonable condition of consent. We may as a result of this case also see a rise in the number of rent deposits requested; or perhaps a further shortening in the length of term granted so that assignment issues do not arise. For tenants, beware that landlords will now be looking very carefully at what security is available in the context of any proposed assignee.