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Court confirms validity of guarantees when leases are transferred


Landlords can enforce guarantees of an outgoing tenant's ongoing liabilities when their tenants assign their leases, the Court of Appeal has confirmed.

Property owners can require outgoing tenants to guarantee an incoming tenant's liabilities, for example to pay rent to the landlord, under what is known as an authorised guarantee agreement (AGA).

AGAs are an exception to the general rule that previous tenants are automatically released from any liability to a landlord when a lease is lawfully assigned to another tenant.

The Court decided that an outgoing tenant’s guarantor can guarantee an outgoing tenant's liabilities under an AGA.

In this way, guarantors can indirectly guarantee the new tenant's liabilities. However, an outgoing tenant's guarantor cannot directly guarantee the liabilities of the incoming tenant.

There have been heated debates about the validity of guarantees of leasehold liabilities since a "controversial" High Court decision last year that a guarantee of a new tenant given by the previous tenant's guarantor was void, the court said in its ruling.

That decision led "to some uncertainty in the field of landlord and tenant" until clarified by the Court of Appeal.

The case concerned the assignment of a property in Wolverhampton between two companies in the House of Fraser retail group, guaranteed in both cases by the group's holding company.

The landlord, Danish partnership K/S Victoria Street, had agreed to the sale and leaseback of its property to a House of Fraser company on the assumption that the lease would be assigned to another group company while retaining a parent company guarantee. When the assignment did not take place is asked the court to step in.

The court said that the guarantee to be given by House of Fraser's parent company in respect of the new tenant's liabilities under the lease was invalid, as the parent company was also the outgoing guarantor.

However, the Court went on to say that there was nothing to stop the guarantor of an outgoing tenant entering into a guarantee of that outgoing tenant's liabilities under an AGA.  This is sometimes referred to as a sub-guarantee.

Alicia Foo, a property litigation expert with Pinsent Masons, the law firm behind Out-Law.com, said that the property industry would "breathe a collective sigh of relief" at the news that the appeal court had come to a "commercial decision" and clarified its position on the ongoing liabilities of guarantors under leases. However, she warned that some intra-group assignments, such as that between the House of Fraser companies, could still pose problems.

"Nonetheless, the decision that sub-guarantees are valid is good news for the property industry and will put paid to some of the controversy arising out of the 'AGA saga'," she said.

The Court of Appeal did not say whether it would be possible for landlords to contract with the same guarantor through a string of intra-group assignments, using a series of guarantees and sub-guarantees. It also suggested that tenants may be unable to assign leases directly to their guarantors.

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