When is the guarantee of an AGA enforceable?

20th September 2019

In Co-operative Group Food v A&A Shah Properties, the High Court has provided guidance on the tricky issue of how a guarantor can validly guarantee an outgoing tenant’s obligations in an authorised guarantee agreement, without breaching the Landlord and Tenant (Covenants) Act 1995. Specialist Real Estate Litigator Martin McKeague explains and offers practical advice.

Why is this case of interest?

On the assignment of a lease to which the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) applies, whether (and how) a guarantor can guarantee an outgoing tenant’s obligations under an authorised guarantee agreement (AGA) is a tricky legal issue which can cause practical problems. The issue often arises in the context of intra-group assignments.

The recent case of Co-operative Group Food v A&A Shah Properties [1] is of interest because it provides clarity and guidance as to when such a guarantee will be lawful and enforceable, and when it will be rendered invalid under the 1995 Act.

What does the law say?

The 1995 Act provides that, on an assignment, the outgoing tenant is released from the tenant covenants, and any guarantor of the outgoing tenant is simultaneously released from the guarantee. The 1995 Act contains ‘anti-avoidance’ provisions, which specifically prevent parties from contracting out of this position.

The 1995 Act does, however, allow the outgoing tenant to enter into an AGA to guarantee the assignee’s performance of the tenant covenants; and case law [2] confirms that the outgoing tenant’s guarantor can also guarantee the outgoing tenant’s performance of its obligations under the AGA. The latter is effectively a ‘sub-guarantee’.

Where, however, a guarantor attempts to guarantee performance of the covenants by the assignee, this would be a ‘direct guarantee’. Such a direct guarantee would fall foul of the anti-avoidance provisions in the 1995 Act and be rendered invalid and unenforceable.

These subtle and complex legal provisions can present significant traps – in particular for unwary landlords, and for anyone instructed to draft the various assignment and guarantee documents.

What happened in this case?

Facts and AGA/guarantee provisions

A supermarket and car park were let by the landlord (A&A Shah Properties) to the original tenant (Somerfield Stores Ltd) pursuant to a lease dated 22 June 2006 for a term expiring in 2031 (the Lease). The tenant’s obligations under the Lease were guaranteed by Somerfield Ltd. In 2011, the Lease was assigned to 99p Stores Ltd, and Co-operative Group Food Ltd assumed liability under the guarantee.

The form of AGA required on assignment was contained within a licence to assign and included the provision: “The Tenant and the Tenant’s Guarantor covenant to observe and perform the obligations set out in the Authorised Guarantee Agreement immediately after completion of the assignment”.

A second provision provided “…the Tenant’s Guarantor agrees that its guarantee and other obligations under the Lease shall remain fully effective and…shall extend and apply to the covenants given by and the obligations on the part of the Tenant under this Licence”.

When the original tenant and assignee entered administration, the landlord sought to recover rent from Co-operative Group under the above guarantee provisions. It fell to the court to determine whether the provisions amounted to a valid sub-guarantee of an AGA and were therefore enforceable; or whether they amounted to direct guarantees which were invalid and unenforceable under the 1995 Act.

High Court decision

In relation to the first provision, the High Court found that the original tenant and the guarantor (now Co-operative Group) had both covenanted to observe the obligations under the AGA. The obligations were therefore direct guarantees of the assignee’s obligations and were void and unenforceable against the guarantor.

In relation to the second provision, the High Court held that this was a valid sub-guarantee. The judge explained that, because the outgoing tenant had covenanted (effectively guaranteed), in the licence to assign, to observe and perform the provisions of the AGA, this second provision was a sub-guarantee to that effective guarantee.

What practical advice arises?

This case is a cautionary reminder for landlords that, on any assignment of a lease to which the 1995 Act applies, it is not enough that the assignment documentation seems to offer, on its face, sufficient guarantees to safeguard the landlord’s positions if/when original or outgoing tenants fail to comply with their rental or other obligations. Instead, the operation of the 1995 Act – in particular its anti-avoidance provisions – mean that it is essential for landlords to ensure that any AGA-guarantee arrangements are properly structured to be a sub-guarantee (and not a direct guarantee) if they are to be relied upon and enforced against guarantors.

The temptation in many assignment scenarios is simply to get the deal done, and that can especially be the case where the assignment is ‘merely’ intra-group. However, the risk of inadvertently letting a guarantor ‘off the hook’ by failing to structure and word the documentation correctly is significant, such that specialist advice and drafting assistance should be sought in every case.

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[1] [2019] EWHC 941 (Ch)
[2] K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2011] EWCA Civ 904 and Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch) – see our earlier briefing for further information