Careful drafting is needed to keep outgoing guarantors on the hook

The Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) provides that on an assignment of a lease created after 1 January 1996, tenants and their guarantors are released from liability under their leases. The 1995 Act also contains a comprehensive anti-avoidance provision, which renders agreements that frustrate the operation of these provisions void. However, tenants are allowed to enter into authorised guarantee agreements (AGAs) with their landlords when they assign their leases, guaranteeing that the assignee will pay the rent and comply with the obligations in the lease that is being assigned. But the 1995 Act does not say whether a departing tenant’s guarantor can provide a similar guarantee, even though most landlords expect the guarantors of departing tenants to do so. Heated debate followed, until the Court of Appeal decision in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] PLSCS 198. In that case, the court indicated that the guarantors of departing tenants can enter into sub-guarantees, guaranteeing a departing tenant’s liabilities under an AGA, even though they cannot enter into direct guarantees, guaranteeing the liabilities of an incoming assignee. The question that arose in Co-operative Group Food Ltd v A&A Shah Properties Ltd [2019] EWHC 941 (Ch); [2019] PLSCS 72 was whether the guarantee provisions in a licence to assign were enforceable. The premises in respect of which the guarantee was given were situated in Birmingham and were let as a supermarket. The lease was assigned to 99p Stores Ltd in 2011 and when it became insolvent, the landlord turned to the previous tenant and its guarantor for rental payments. Although the previous tenant was in administration, its guarantor, Cooperative Group Food Ltd (CGFL), was not. So the court had to decide whether CGFL’s obligations to the landlord, which were set out in the licence to assign to 99p Stores Ltd, constituted a sub-guarantee of the departing tenant’s liabilities, which was enforceable, or an unenforceable direct guarantee of 99p Stores Ltd’s liabilities under the lease. The licence to assign required the departing tenant and CGFL to observe and perform the obligations set out in a separate AGA provided by the departing tenant. And because CGFL was not itself a party to the AGA, the judge at first instance decided that CGFL had entered into a sub-guarantee. But the High Court disagreed because the AGA related to the obligations assumed by 99p Stores Ltd – and could not be read as obliging CGFL to ensure that the departing tenant performed its own obligations under the AGA. However, that was not the end of the story, because the licence to assign went further. CGFL also agreed that its guarantee and other obligations would remain fully effective and “extend and apply to the covenants given by and the obligations on the part of the Tenant under this Licence”. And, since the departing tenant’s obligations under the licence incorporated its obligations under the AGA, the judge at first instance and the High Court both agreed that CGFL had entered into a guarantee of a guarantee – or, to put it another way, a valid sub-guarantee of the departing tenant’s obligations to the landlord.   Allyson Colby, property law consultant