A Guarantor or not a Guarantor? That is the question.

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:

1. To have as a condition of consent to an assignment that the tenant’s guarantor enters into a direct guarantee of the incoming assignee’s liabilities under the lease; or
    
2. To specify that the original guarantee of the tenant’s liability covers not only the tenant’s liability under the lease but also the tenant’s liabilities under any Authorised Guarantee Agreement (AGA) given by the tenant for the assignee ( known as a sub guarantee). 

The Victoria Street case has concluded the following:

1. A direct guarantee is not valid-it falls foul of s25 of the Act (the anti avoidance provisions). It would frustrate the Act if a Landlord could, on the grant of a lease,  impose an obligation on a guarantor to guarantee liability of a future assignee. This upholds the decision in Good Harvest Partnership LL P v Centaur Services Limited ; 
2. Further, in no circumstances can an existing tenant’s guarantor directly guarantee the immediate incoming assignee (whether by request from the Landlord or voluntarily) and whenever given before, in or after the lease.
3. A  sub guarantee  is valid. Where the landlord, as a condition of consent, reasonably requires the tenant to give an AGA, then the tenant is said to reassume liability under the lease through the AGA. A sub guarantee therefore complies with the Act’s requirements in s.24 that a guarantor must be released “to the same extent” as the outgoing tenant, as the outgoing tenant retains its liability, with the guarantor standing behind it.

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.