Aggravation over AGAs

The first substantive judicial consideration of the operation and effect of the provisions of the Landlord and Tenant (Covenants) Act 1995 did not come until 2010 with the case of Good Harvest v Partnership LLP v Centaur Services Ltd [2010] Ch426.

In that case, on an assignment, the guarantor was required to give a further guarantee as part of an authorised guarantee agreement (AGA) under section 16 of the Act. The landlord’s attempt to enforce the guarantee failed. Justice Newey concluded the agreement was void in its entirety under the anti-avoidance provisions in section 25(1)(a).

The all-encompassing effect
of the Act was of obvious
concern to landlords. Any landlord would want certainty that any assignment would leave it with effective enforceable guarantee covenants, particularly where there is concern about the commercial and financial status of an assignee.

Concerns about impact of the reasoning in the Good Harvest case were not eased by the outcome of K/S Victoria Street v House Of Fraser [2011]. This dispute around leaseback arrangements involved an assignment followed by intra-company assignments between associated companies, backed by a further guarantee given by the parent company.

Reassignment

The landlord sought an order requiring the reassignment to be carried out. The court accepted the defendant’s contentions that the guarantee arrangements were void because the imposition by a landlord of
a renewal obligation on a tenant’s guarantor to guarantee the obligations of an assignee
(and enforcement of such an obligation) would ‘frustrate’ section 24(2) and was contrary
to section 25.

The Good Harvest approach was confirmed, but with a qualification as to the effect
of section 16 of the Act, which permitted a guarantor to guarantee an assignor’s obligations (a GAGA) in an AGA.

In House of Fraser it was recognised that section 25
was not to be tested subjectively
but called for an objective assessment of its effects on
an agreement.

In Tindall Cobham v Adda Hotels [2014] EWCA Civ 1215, the requirement for an objective analysis of the agreement was developed. The case also concerned intra-company assignments, but here the landlord’s consent had not been sought. All parties accepted the assignments were invalid by reason of section 11 of the Act.

Neither the lessees nor the parent company guarantor were released from their obligations.

When considering an application that the lessees were obliged to find a suitable guarantor, and for orders directing reassignment to the original lessees, Lord Justice Patten concluded: “…that a condition which requires the tenant to procure a continuing guarantee from an existing guarantor does have the effect identified in section 25(1). “

The ‘potential’ for the landlord to bring about one of the consequences precluded by section 25 is sufficient to engage it. The task of the court was therefore to preserve the agreement structure by determining what ‘consequences’ that would or could arise in such circumstances and to adopt a ‘balanced approach to invalidation’.
This would neutralise the offending parts without leaving it ‘emasculated and unworkable’.

When considering the operation of section 25(1), the common law principles of severance were inapplicable and did not assist in framing the extent to which offending parts of the agreement could or should be excised. The only relevant provisions were those in section 25(1)(a), which permitted excision to the extent necessary to preserve the agreement.

The issue of severance arose at first instance in the unusual case of Pavilion Properties Trustees Ltd v Permira Advisers LLP [2014] EW HC (CH) (decided before Tindall). This also involved an alienation clause in an underlease (the reversion to which had become vested in the claimant). The guarantee, described as poorly drafted, was replete with inaccurate references to the ‘assignee’ and ‘next assignee’.
It extended the liability of
the guarantor beyond a first assignment.

An application by consent
to ‘sever the good from the
bad’ was refused but the court concluded that severance was permissible either under the principle ‘validate if possible’
or pursuant to section 25 – either way the overall agreement could be preserved. Application of the common law principles now looks out of step with Tindall.

The lack of reported cases
on the Act suggests it is unlikely there will be further elucidation any time soon.

Landlords, particularly
those engaged in complex restructuring arrangements of the sort considered here, will be encouraged by the emerging measured tempered approach to the effect of section 25. It signals a retreat from the all-or-nothing invalidation consequences in Good Harvest. Questions arise, for example, as to what might constitute a triggering ‘potentiality’ and the bases on which the ‘structure’ of an agreement is capable of being preserved. Those involved in commercial leasing transactions need to be take rigorous care in structuring and drafting any agreement involving an AGA, with or without a GAGA. SJ

Karl King is a barrister practising from Hardwicke