Full house

Last month the Court of Appeal published its eagerly awaited judgment in K/S Victoria Street v House Of Fraser, a decision which Bill Chandler warns has significant implications for local authority landlords and anyone else involved with commercial leases.

The liability of guarantors following the assignment of a commercial lease was thrown into doubt by two High Court cases in the past year, the Good Harvest case (see ‘No guarantees’, 3 November 2010) and the House of Fraser case (see ‘Without consent’, 9 June 2011). These decisions on the release of guarantors under the Landlord and Tenant (Covenants) Act 1995 have caused significant difficulties in practice, both on the negotiation of new leases and on the proposed assignment of existing leases.

The 1995 Act releases the outgoing tenant from its liabilities under the lease as from the date of assignment, save that where landlord’s consent to assign is required the outgoing tenant is allowed to guarantee its immediate assignee by an Authorised Guarantee Agreement (AGA). The Act also releases the outgoing tenant’s guarantor, but without allowing the guarantor to provide an AGA. Any arrangement which is not expressly permitted by the Act falls foul of extensive anti-avoidance provisions. It was the application of these statutory rules in Good Harvest and House of Fraser which has caused controversy and uncertainty.

We now have the thorough and well-reasoned Court of Appeal judgment by renowned property law expert Lord Neuberger MR, which thankfully considers the wider issues with lease guarantees raised by the High Court decisions in Good Harvest and House of Fraser. Whilst we may not all agree with all aspects of the decision, we at least have greater certainty as to the position of lease guarantors following assignment:

• the outgoing tenant's guarantor can never act as guarantor for the assignee, since repeat guarantees could be used to frustrate the guarantor’s release under the Act. This aspect of the decision will inevitably cause problems for all parties on intra-group assignments, since the parent company who is already guaranteeing the outgoing tenant cannot guarantee the assignee and the tenant may not have another equivalent guarantor to offer;
• landlords need to be especially careful when faced with applications for consent to assign to another group company, since any repeat guarantee given by the parent company will be void. Landlords may also wish to examine how many of their current tenants are guaranteed by the same guarantor as the previous tenant, since those repeat guarantees will now be void, leaving the landlord potentially exposed;
• when negotiating leases, landlords should no longer be tempted to agree provisos which allow the tenant to assign the lease to another group company without consent provided the parent company provides a repeat guarantee. Any parent company guarantee given under such a provision would be void, whilst the absence of any requirement for consent would invalidate any AGA given by the outgoing tenant, letting the outgoing tenant and the parent company off the hook completely and leaving the landlord with just the covenant of the assignee, which may not be adequate;
• the same guarantor can guarantee subsequent tenants, so long as it doesn’t guarantee the immediate assignee. So the guarantor, once released on the assignment of the lease by the tenant it has guaranteed, is free to assume the liability again on the next assignment and could therefore potentially guarantee alternate tenants. However, structuring lease assignments as a double assignment to secure the guarantee may well be considered a sham and therefore void under the 1995 Act;
• the 'sub-guarantee' route works. Good Harvest had left open the question of whether the guarantee given by the guarantor could extend to include a guarantee of the tenant's liabilities under its AGA following assignment of the lease, but this so-called ‘sub-guarantee’ has been upheld. This is good news for landlords, who otherwise would have been limited following assignment to an unguaranteed AGA from the outgoing tenant, which might not be worth much.

The Court of Appeal also considered that the tenant's ability contained within the lease to assign the lease intra-group 'without consent' did not override the financial standing test contained elsewhere in the alienation clause. The landlord could therefore prevent the tenant's proposed assignment to a worthless covenant within the group. Whilst based on the precise wording of the relevant lease and the commercial context of the sale and leaseback transaction between House of Fraser and K/S Victoria Street, this aspect of the decision highlights the need to be crystal clear when negotiating provisos allowing a particular tenant to take action without consent: is it only the consent aspect which is dispensed with or can all pre-conditions be ignored?This issue can arise not only in the context of assignment, but also subletting, alterations, change of use and elsewhere.

As will be appreciated from the above, the Court of Appeal judgment provides welcome certainty, but still leaves some practical difficulties and potential traps for both landlords and tenants.

Bill Chandler is a Legal Director at leading national law firm Hill Dickinson LLP. He can be contacted on 0151 600 8725 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..