The court upholds a GAGA

The Landlord and Tenant (Covenants) Act 1995 was enacted to ensure that tenants and their guarantors were released from liability to their landlords on the lawful assignment of a lease granted on or after 1 January 1996. But section 16 included provisions to mollify landlords, enabling outgoing tenants to enter into authorised guarantee agreements (AGAs) with their landlords guaranteeing the incoming tenant’s obligations under the lease. The 1995 Act makes no mention of outgoing guarantors in relation to AGAs. Even so, the Court of Appeal has suggested, without actually deciding the point, that an outgoing tenant’s guarantor can guarantee the outgoing tenant’s liabilities under an AGA (an arrangement that has been christened a “guarantee of an AGA”, or GAGA): K/S Victoria Street v House of Fraser (Stores Management) Ltd [2012] Ch 497; [2011] 2 EGLR 11. EMI Group Ltd v The Prudential Assurance Company Ltd [2020] EWHC 2061 (Ch) concerned a lease that was granted to HMV, supported by a guarantee given by EMI. The guarantee operated at two levels: first, while “the Principal” was the tenant and, secondly, while “the Principal” was liable under any AGA – ie it operated as both a guarantee and a GAGA. The lease was subsequently assigned to a third party and HMV guaranteed the liabilities of the incoming tenant, which subsequently went into administration. But, when the landlord called on EMI to honour its GAGA, EMI claimed that the wording in the lease was so wide that it fell foul of section 25 of the 1995 Act – an anti-avoidance provision (which is interpreted generously by the courts) that renders agreements void to the extent that they frustrate the operation of the legislation. EMI’s argument turned, chiefly, on the meaning of the term “the Principal”, which was defined to mean “the person who is or is to become the Tenant”. It reminded the court that an AGA cannot impose liability for anyone other than an immediate assignee, or in relation to any period of time after the assignee is itself released from liability to the landlord by the operation of the legislation: section 16(4). And it claimed that the words underlined in the phrase “the person who is or is to become the Tenant” created an impermissible repeat guarantee. The judge disagreed. She ruled that the definition referred to one person, and one person only, and that the words “or is to become” catered for the possibility of an AGA being given in a licence to assign, before the lease was assigned to the incoming tenant. Furthermore, if these words had meant that EMI was guaranteeing the obligations of HMV and any future tenant, the judge would have had no difficulty in striking them out. Section 25 invalidates provisions only “to the extent that” they offend the 1995 Act – and the parties had specifically provided that any offending terms should be severed from their agreement. EMI advanced an alternative argument, which did not depend on the terms of the 1995 Act. It was bound “while the Principal is bound” – and HMV had since been dissolved. Consequently – so EMI’s argument went – HMV and EMI had both ceased to be bound to the landlord. But the parties had specifically agreed that the liability of the guarantor should not be affected by “the Principal” being dissolved or otherwise ceasing to exist. Consequently, the judge upheld the landlord’s claim that EMI was liable under its guarantee for unpaid rent and service charges due under the lease.   Allyson Colby, property law consultant