Court of Appeal publishes landmark ruling on lease guarantee

For anyone who has been following the 'AGA saga' concerning the position of guarantors under commercial leases following assignment of the lease, the Court of Appeal has published its eagerly awaited judgment in K/S Victoria Street v House of Fraser.

Many landlords and tenants have been awaiting the decision of the case before completing tenancy assignment deals. The Court of Appeal decision enforces a court ruling which could see landlords unable to enforce guarantees when tenants assign their space to another company.

Bill Chandler, legal director at Hill Dickinson in Liverpool, said: "Whilst we may not all agree with all aspects of the decision, thankfully we at least have a thorough and well-reasoned judgment by Lord Neuberger MR which considers the wider issues with lease guarantees raised by the Good Harvest and House of Fraser cases.

Chandler's summary and implications of the decision is as follows:

– the outgoing tenant's guarantor can never act as guarantor for the assignee; this will cause problems with intra-group assignments;

– but the same guarantor can guarantee alternate tenants; being released on every other assignment and free to assume the liability again on the next assignment;

– the 'sub-guarantee' route works; the guarantee given by the guarantor can extend to include the tenant's liabilities under its AGA – hurray!!;

– the tenant's ability to assign the lease intra-group 'without consent' did not override the financial standing test in the alienation clause; the landlord could therefore prevent the tenant's proposed assignment to a worthless covenant within the group.

The court decision upheld a separate High Court decision in November 2010 into the same case, between K/S Victoria Street v House of Fraser, relating to a dispute over the terms of a sale and leaseback.

A subsidiary of House of Fraser group sold the freehold of Beatties department store in Wolverhampton to K/S Victoria Street. Under the terms of the agreement the lease would be assigned to a company within the House of Fraser Group with greater covenant strength, the House of Fraser parent company was the guarantor. However, the lease was not assigned and the landlord issued proceedings to enforce the terms of the agreement. House of Fraser argued that the term requiring the assignment was void because the part that stated that the parent company would be a guarantor of the assignee was unenforceable under the Landlord & Tenant (Covenants) Act 1995, and a previous case, Good Harvest v Centaur (March 2010).

K/S Victoria Street argued that the facts in the House of Fraser case were materially distinguishable from those of Good Harvest. The judge on Wednesday upheld the decision and agreed with House of Fraser.