Has the UK court created a lease guarantee nightmare?
| DOI | https://doi.org/10.1108/14635781211194827 |
| Published date | 03 February 2012 |
| Date | 03 February 2012 |
| Pages | 83-87 |
| Author | Malcolm Dowden |
| Subject Matter | Property management & built environment |
LAW BRIEFING
Has the UK court created a lease
guarantee nightmare?
Malcolm Dowden
LexisPSL, London, UK
Abstract
Purpose – The purpose of this paper is to highlight the practical difficulties resulting from the
UK Court of Appeal’s recent guidance on the effect of anti-avoidance provisions in the Landlord and
Tenant (Covenants) Act 1995.
Design/methodology/approach – The paper analyses the Court’s guidance, focusing on the
inability of a guarantor to take a valid assignment of a lease from the outgoing tenant.
Findings – The paper identifies significant implications for due diligence, valuation and pricing of
property investments, arguing that the result could be to deprive landlords of access to covenant
strength that is crucial to its valuation or to any sale price.
Originality/value – The paper reflects practitioner discussions since the Court of Appeal gave its
ruling in K/S Victoria Street v. House of Fraser. It highlights significant new issues that must be
factored into property due diligence.
Keywords United Kingdom,Leasing, Legislation, Higher courts,Landlord, Tenant, Guarantee,
Assignment,Liabilities, Release
Paper type General review
Has the UK court created a lease guarantee nightmare?
In an extraordinary move, the Court of Appeal in K/S Victoria Street v. House of Fraser
(Stores Management) [2011] EWCA Civ 904 elected to go beyond the issues required to
reach judgment. The court decided to provide guidance on the effect of Landlord and
Tenant (Covenants) Act 1995 on the liability of former tenants and guarantors.
That guidance certainly provided clarity, but may have created signific ant difficulties
and adverse valuation effects for commercial landlords.
The Court of Appeal ruled that where a lease granted on or after 1 January 1996
created a “new” tenancy for the purposes of the 1995 Act, the tenant is entitled to a release
from liability when it assigns the lease and that its guarantor is entitled to a
consequential release from its liability. To ensure that the act is not excluded or
frustrated, the court ruled that a guarantor cannot be required to provide a guarantee in
respect of the assignee. There was absolutely no surprise in that conclusion.
The Court of Appeal provided useful confirmation that the guarantor of an outgoing
tenant is able to give a “sub-guarantee” (AGA), standing behind the new obligations
taken on by the outgoing tenant in an “authorised guarantee agreement”. That provides
landlords with the means to retain the covenant strength of the guarantor in
circumstances where the outgoing tenant is an insubstantial covenant – a common
situation in retail leases.
The real sting in the guidance was the Court of Appeal’s view that a guarantor cannot
itself take a valid assignment of the lease. That conclusion potentially affects a large
number of transactions effected since the 1995 Act came into force, in some
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
A lease
guarantee
nightmare?
83
Journal of Property Investment
& Finance
Vol. 30 No. 1, 2012
pp. 83-87
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211194827
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