Allyson Colby analyses the latest decision on the enduring talking point of GAGAs.
Key points
- A guarantee of an authorised guarantee agreement, or GAGA, has survived a multi-faceted legal challenge
- Properly construed, and applying the principle that the court should validate agreements where possible, the guarantee did not offend the provisions in the Landlord and Tenant (Covenants) Act 1995
- Section 25 of the 1995 Act operates to invalidate provisions only to the extent that is necessary
The Landlord and Tenant (Covenants) Act 1995 releases outgoing tenants and their guarantors from liability to their landlords on the lawful assignment of leases granted on or after 1 January 1996. Section 16 permits the outgoing tenant to enter into an authorised guarantee agreement, or AGA, with its landlord guaranteeing the incoming tenant’s obligations under the lease. But, without the backing of its guarantor, the outgoing tenant’s AGA may be worthless. So landlords have sought ways to keep outgoing guarantors on the hook too.
Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] 1 EGLR 29 confirmed that repeat guarantees (ie guarantees given by outgoing guarantors in respect of an incoming tenant’s liabilities under a lease) are null and void. But, in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] 2 EGLR 11, the Court of Appeal suggested, without actually deciding the point, that outgoing guarantors can guarantee outgoing tenants’ liabilities under AGAs – even though GAGAs (as these arrangements have become known) have the same practical effect as repeat guarantees. The decision calmed nerves. But guarantors have continued to attack GAGAs.
EMI Group Ltd v The Prudential Assurance Company Ltd [2020] EWHC 2061; (Ch) [2020] PLSCS 151 concerned a lease to HMV, supported by a guarantee from EMI. The guarantee, which was set out in the lease, operated at two levels: first, while “the Principal” was the tenant and, secondly, while “the Principal” was liable under any AGA. In other words, the guarantee operated initially as a guarantee, and then as a GAGA.
In due course, HMV assigned its lease to a third party and entered into an AGA, guaranteeing the liabilities of its assignee, before being dissolved in 2015. The assignee became insolvent four years later. And, when the landlord called on EMI to pay arrears of rent and service charge, totalling nearly £5m when the case was heard, EMI challenged the validity of its guarantee, relying on section 25 of the 1995 Act, which renders agreements void to the extent that they frustrate the operation of the legislation.
Repeat guarantee
EMI attacked the definition of “the Principal” in the lease. It reminded the court that an AGA cannot impose liability for anyone other than an immediate assignee: section 16(4)(a). But the lease defined the term “the Principal” to mean “the person who is or is to become the Tenant”. And EMI claimed that the use of the future tense in this phrase fell foul of the prohibition on repeat guarantees.
The judge disagreed. She concluded that the disputed wording was tied up with the alienation provisions in the lease (envisaging the provision of an AGA in a licence to assign, before an assignment to an incoming tenant) and decided that EMI’s guarantee related to HMV’s liabilities under its AGA – and to nothing else.
Had the wording required EMI to guarantee the obligations of HMV and those of the incoming tenant as well, the judge would have struck the offending wording from the lease. She explained that section 25 invalidates provisions only “to the extent that” they offend the 1995 Act and that the parties’ lease specifically provided that any provisions rendered void by the legislation should be severed from their agreement.
Meaning of “while”
EMI claimed that the GAGA went too far. In order to reflect the requirements of section 16(4)(b), it should have been liable only “until” its principal was released by a lawful assignment of the lease, instead of being liable “while” its principal was. The wording selected by the landlord allowed for the possibility that the lease might, one day, be reassigned to the outgoing tenant, reigniting and extending its liability under the GAGA – which was impermissible.
But the judge applied the principle that parties to agreements are presumed to have intended them to be valid and that, where possible, words are to be interpreted so as to preserve them. Consequently, the judge was able to decide that the word “while”, in this context, was intended to mean a single period and did not contemplate a future, and unlikely, assignment back to the outgoing tenant.
Equivalence
The 1995 Act provides for outgoing tenants and guarantors to be released “to the same extent” as each other. And EMI argued that it had been denied equivalence of treatment because its GAGA was automatic, whereas the landlord had to be reasonable when requiring an AGA.
However, the analysis in K/S Victoria suggesting that GAGAs are permissible focused on the fact that outgoing guarantors are released when outgoing tenants are released, and not on the terms requiring the provision of an AGA. Furthermore, the provision of an AGA was a condition of the lease, to which the tenant could not object, thanks to the provisions of section 19(1A) of the Landlord and Tenant Act 1927. So there was no inequality of treatment in this case.
Finally
EMI’s final argument did not depend on the terms of the 1995 Act. It was bound “while the Principal is bound” – and EMI argued that HMV’s dissolution had released both companies from liability to the landlord. But the parties had specifically agreed that the liability of the guarantor should not be affected if “the Principal” were to be dissolved or otherwise cease to exist. Consequently, the judge upheld the landlord’s claim that EMI was liable under its GAGA.
Allyson Colby is a property law consultant
