Lease guarantees left worthless by K/S Victoria Street case ruling
Commercial property landlords have been left high and dry after a significant Court of Appeal judgment on lease guarantees.
In K/S Victoria Street v House of Fraser [2011] EWCA Civ 904, the court held that many guarantees are worthless, falling foul of the Landlord and Tenant (Covenants) Act 1995, s 25.
LexisPSL property solicitor Malcolm Dowden said: “There will be a lot of firms redrafting their precedent leases, and a lot of landlords looking with concern at guarantees that are now confirmed to be void. Lawyers who have given a clean bill of financial health to an investment purchase assuming the validity of guarantees may now have to reconsider that advice.”
According to Dowden, the ruling means that “even if freely given and fully intended to be legally binding, a guarantee given by the outgoing tenant’s guarantor in respect of the immediate assignee is void”.
He explained that the 1995 Act was “a hasty response to the perceived injustice of tenants remaining liable for premises long after they had parted with them. Parliament’s answer was to provide an automatic release from liability when the tenant of a lease granted on or after
1 January 1996 assigns it to a new tenant”.
Landlords argued that investment values would be slashed as a result, and their lobbying led to the creation of “authorised guarantee agreements” (AGAs). As a condition of giving its consent to an assignment, a landlord may require the outgoing tenant to guarantee performance by its assignee.
Dowden says: “Since 1996 landlords’ solicitors have tried a range of drafting approaches to work around the limitations of the 1995 Act.
“Only one of those approaches—requiring the guarantor to join in or to stand behind the tenant’s obligations in the AGA—survives the Court of Appeal ruling. Other perfectly rational approaches have been struck down—including the approach initially devised by Clifford Chance under which the outgoing tenant was required to assign first to its guarantor. The guarantor would become ‘tenant’ for a moment before passing the lease on to the actual assignee. Having been tenant for a moment, the guarantor could give an AGA.”
He said landlords may now be deterred from consenting to lease assignments where the covenant strength of the assignee is unproven, “increasing the risk of high street shop units and other commercial properties remaining empty and unused”.
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