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Good Harvest remains good law
Landlords may continue to lose out where they thought there was security
16 November 2010
This month has seen the first reported case to consider the
controversial decision in Good
Harvest Partnership LLP v Centaur Services Ltd in which
the Court held that a guarantor of an original tenant was prevented
from guaranteeing the obligations of a new assignee tenant.
The decision in Good Harvest caused quite a stir in the
industry as many landlords had relied on the alleged security
provided by an original guarantor. Many practitioners had hoped,
following the landlord’s decision to appeal, that the Court of
Appeal would give affirmative guidance to both landlords and
guarantors; however, a settlement was reached prior to the appeal
hearing, so no further authority was given.
The facts
Mr John Randall QC this month considered the case of K/S
Victoria Street v House of Fraser (Stores Management) Ltd and
others.
In January 2006, K/S Victoria Street agreed a sale and leaseback
with the House of Fraser group of its Wolverhampton store, in which
House of Fraser (Stores Management) Ltd took a lease of the
property, with House of Fraser plc guaranteeing the tenant’s
covenants. The agreement also required the lease to be assigned, by
April 2006, to another group company with House of Fraser plc to
again act as guarantor.
No assignment was made within this timeframe and K/S Victoria
Street therefore applied to Court to compel House of Fraser to make
the assignment. House of Fraser raised a number of arguments
against the assignment but the only one the Court accepted was
based on the same legislation which had been interpreted in
Good Harvest. House of Fraser argued that the requirement
for House of Fraser plc to guarantee the incoming tenant’s
obligations after assignment was contrary to legislation and that
the agreement was void in accordance with Good
Harvest.
The Court largely agreed with House of Fraser’s argument and
said the clauses which required House of Fraser plc to guarantee
the new tenant’s obligations on assignment were void in line with
Good Harvest. The Court went on to say that the offending
parts of the clauses could be severed from the remainder – allowing
the assignment clauses to largely still have effect.
What does this mean for guarantors of
leases?
Following the decision in Good Harvest, there was
speculation that the reasoning in that decision would not be
followed by the higher courts. There has, until K/S Victoria
Street, been no reported decision on Good Harvest and
whilst the judge in K/S Victoria Street expressed caution
at some of the reasoning in Good Harvest, it was held that
Good Harvest should be applied.
Accordingly, a landlord is still only entitled to look towards
its original tenant (not the original tenant’s guarantor) to enter
into an Authorised Guarantee Agreement (AGA) to guarantee the
performance of an incoming assignee.
Landlord’s can, however, take some comfort in the Court’s
willingness to sever offending parts of assignment clauses and
leave other conditions to assignment in place.
If you require advice on your obligations as a guarantor, your
ability to enforce guarantees as a landlord or on the drafting on
AGAs then please do contact us.
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