Going GAGA? A useful reminder when dealing with guarantors on lease assignments

Its been almost 15 years since the Good Harvest and K/S Victoria Street cases (both in 2010) but its useful to be reminded of the issues surrounding the position of giving guarantees on a lease assignment.

Consider a scenario where there is a lease between Landlord (LL) and Tenant (T) backed up by a guarantee from a third party guarantor (G). T applies to LL for consent to assign the lease to the assignee (A). LL wants to retain the same party G, as guarantor of A’s liabilities. This is often the case if the lease is being assigned to a group company – often G will be a director of T and may well be a director (perhaps even the sole director) of A. So it makes sense that LL would want G to cover both T and A.

In summary if you try to follow this route and get a new guarantee from G of A’s liabilities then the guarantee is in fact void. The only thing G can do is to give a GAGA (guarantee of the outgoing tenant’s AGA). If a guarantee is required of A’s liabilities then a new guarantor must be provided (G2).

Summary of case law

Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch)

The court held that an AGA entered into by G (to guarantee the obligations of A), as a pre-condition to a consent to assign, was void under section 25 of the Landlord and Tenant (Covenants) Act 1995. Such a condition would have imposed additional obligations on G which s24 of the LCTA does not permit. To hold G liable as guarantor of A would frustrate the aims of the LTCA 1995.

K/S Victoria Street v House of Fraser (Stores Management) Ltd [2010] EWHC 3006 (Ch)

This case confirmed Good Harvest to the extent that any agreement that requires G to guarantee the obligations of A, will be void, section 25 of the LTCA 1995.

In EMI Group Ltd v O & H Q1 Ltd [2016] EWHC 529 (Ch) the High Court considered the validity of an actual assignment of a new lease by T to G. The High Court held that under the LTCA 1995 a tenant may not assign its lease to its guarantor. The assignment is void by virtue of section 25(1) of the LTCA 1995 as it frustrates the purpose of the LTCA 1995. The assignment does not take effect to vest the lease in the assignee. The lease remains vested in the tenant and the guarantor remains bound by its guarantee.

In summary:

It is ineffective to require G to agree, in advance, to guarantee the liability of A.
G cannot validly agree to guarantee the liability of A regardless of whether G does so voluntarily or is obliged to do so.
G may validly guarantee the performance, by T, of T’s obligations under an AGA (in other words, G may provide a sub-guarantee or GAGA).
G may guarantee the performance of a subsequent assignee – so there has to be a gap/second assignment in between G’s first guarantee and their second guarantee.
You will need a new guarantor to guarantee A’s liability on the first assignment.

Please do come and speak to us in relation to any applications to assign a lease.

Kate Palmer (kpalmer@keelys.co.uk | 01543 420021) is a Partner in the Keelys Real Estate Team.