The "Aga Saga" Continued

August 17, 2011

In an earlier edition of our Real Estate Bulletin we reported on the decision in the case which has become known simply as "Good Harvest" in which the Court ruled that a guarantee given to a landlord by a tenant's guarantor for the liabilities of the tenant’s assignee would be void as would be any agreement to do so.  

That decision has been reviewed and confirmed in the recent case of K/S Victoria Street -v- House of Fraser (Stores Management) Ltd and Others (HOF). In this case an agreement required HOF, to guarantee the obligations of an assignee on an assignment of the lease by the tenant (for which it had already given a guarantee. It has been held by the Court of Appeal that the requirement was void and unenforceable because it frustrated the intention of S24(2) of the Landlord & Tenant (Covenants) Act 1995 that a guarantor will cease to have any liability under a lease when the tenant ceases to be liable.

The Good Harvest decision had left undecided and in doubt whether a guarantee provided voluntarily by a tenants guarantor for an assignee, (rather than at the insistence of a landlord or pursuant to a contractual obligation) would be similarly void and unenforceable. The Court of Appeal in this latest case confirms that it is.

The Court also acknowledged that the practice of the assignment of a lease from a tenant to the guarantor (G) followed by assignment to the intended assignee (A) accompanied by an authorised guarantee given by the G for the liability of A, was similarly void.

Acknowledging the potentially significant consequences of the ruling for landlords the Court made concessions and confirmed that i) the use of sub guarantees, often known as SAGA's, is permissible ie the tenant's guarantor can guarantee the tenant’s liability to the landlord under the AGA itself and ii) a tenant’s guarantor may guarantee the liability of an assignee that is not the direct assignee of the tenant (ie a momentary intervening assignment would validate an otherwise offending guarantee).

Landlords would be wise to review the status of guarantees given in relation to their investment portfolios they may not be as sound as they were once considered to be. Contrastingly, guarantors may find that the guarantees are unenforceable and need no longer be provided for as a contingency in their accounts.

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