The Court of Appeal have given their approval to the controversial decision in Good Harvest Partnership LLP v Centaur Services Ltd1 regarding the extent to which a guarantor can be required to guarantee the obligations of an assignee. In KS Victoria Street v House of Fraser (Stores Management) Ltd2 the Court has held that a guarantor who has given a guarantee in respect of the liabilities of a tenant cannot be contractually obliged or required to give a guarantee in respect of that tenant's immediate assignee. The landlord entered into an agreement for the lease of a department store with House of Fraser (Store Management) Limited ('the tenant') with House of Fraser Plc providing a parent company guarantee. The agreement for the lease stipulated that the tenant was required to transfer the lease to a stronger covenant within the House of Fraser Group ('the assignee') and for the House of Fraser Plc to also guarantee the obligations of the assignee. The landlord sought specific performance of the relevant provisions under the lease and the House of Fraser contested the claim on the grounds that the obligation on the parent company to guarantee the assignee was not enforceable. At first instance the judge found in favour of the House of Fraser, following the decision in Good Harvest, and held that the obligation on the parent company to guarantee the assignee was in breach of Section 25 of the Landlord and Tenant (Covenants) Act 1995. The purpose of the Act was to ensure that any persons bound by a covenant should be released upon a legal assignment, and Section 25 provided that any agreement relating to a tenancy is void if it would frustrate the operation of any provision of the Act. The agreement for the lease sought to prevent the termination of the guarantor's liability upon a legal assignment and therefore conflicted with the purpose of the Act. The Court held that the relevant provisions could be severed from the agreement, and the remainder of the agreement remained enforceable. The Court also went beyond the facts of the case to provide some general guidance on the liability of guarantors following assignment, and clear up some issues left outstanding from the Good Harvest judgment. It was confirmed by the Court that not only can a landlord not compel a guarantor of an outgoing tenant to give a direct guarantee for the assignee, but the guarantor cannot volunteer an effective direct guarantee either. Thus even where the guarantor agrees to guarantee an assignee's liabilities voluntarily the agreement would still be void. However, the Court did confirm that there was an exception enabling landlords a way of still keeping guarantors to tenancies liable after assignment, as it was held that the Act does not invalidate an agreement which requires the guarantor to stand as a sub-guarantor to any Authorised Guarantee Agreement which the assignor tenant might give in respect of his immediate assignee. The confirmation that a guarantor for an outgoing tenant cannot guarantee the lease obligations of a successive assignee will come as bad news for landlords who have taken on such guarantees. However, they will be pleased by the fact that the Court has cleared up any doubt left by Good Harvest in endorsing the validity of requiring a guarantor to sub- guarantee the tenant's Authorised Guarantee Agreement. 1  EWHC 330 (Ch) 2  EWCA Civ 904 • For additional information please contact: Edward Worthy of Gepp & Sons. The above is not legal advice; it is intended to provide information of general interest about current legal issues.
Guarantors released from obligations upon assignment.