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good harvest remains good law

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 landlords 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 tenants 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 tenants 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 Frasers argument and said the clauses which required House of Fraser plc to guarantee the new tenants 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 tenants guarantor) to enter into an Authorised Guarantee Agreement (AGA) to guarantee the performance of an incoming assignee.

Landlords can, however, take some comfort in the Courts 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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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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