Last year the High Court heard the Good Harvest case (Good Harvest Partnership LLP v Centaur Services Ltd [2010 EWHC 330 (Ch)] in which it held that an authorised guarantee agreement (AGA) entered into by a tenant's guarantor as a pre-condition to a consent to assign, was void under section 25 of the Landlord and Tenant (Covenants) Act 1995 (the Act).

When the case settled out of Court before the appeal was heard, landlords, tenants and guarantors were all left wondering as to the implications of the decision and as to the validity of existing guarantees. The case of K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2010] EWHC 3344 (Ch) (“KS”) may now shed some light on whether Good Harvest is “good law”.

Good Harvest involved an assignment of a sublease where both the subtenant and the subtenant’s guarantor entered into an AGA which guaranteed the assignee’s obligations. The High Court held the AGA was avoided by section 25 of the Act insofar as it purported to impose any liability on the guarantor. The Court held (obiter) that even if the subtenant's guarantor had voluntarily offered to guarantee the assignee's obligations, the guarantee would still be void under section 25.

In KS, the High Court held that a clause in the agreement which required a surety to enter into a guarantee on assignment of the lease was void and unenforceable by reason of its contravention of section 25 of the Act.

This decision confirms Good Harvest in that any agreement that requires the tenant's guarantor to guarantee the assignee's obligations under the lease, will be void under section 25 of the Act, as will the guarantee given pursuant to such an agreement.

The Court agreed with the reasoning in Good Harvest that section 16 of the Act provides an exception to a general prohibition preventing tenants from providing guarantees for assignees. Despite the belief that part of the judge's reasoning in Good Harvest was flawed, the case was not wrongly decided and must be followed. As a result, the clauses were void and unenforceable under section 25 of the Act, to the extent that they sought to impose a requirement on the guarantor to guarantee the obligations of an assignee on the assignment of the lease.

The decision of KS has disappointed some who hoped that the questions left unanswered in Good Harvest would be argued before a higher court.

KS does not, however, deal with the questions that remained unanswered in Good Harvest, namely whether a voluntary guarantee given by the tenant's guarantor, guaranteeing the assignee's obligations, or whether a guarantee, given by the tenant's guarantor, guaranteeing the tenant's obligations under an AGA (a sub-guarantee), would also be void under section 25 of the Act.

KS is not due to be heard before the court until late this year. It therefore still appears that until the Court of Appeal gives a ruling, Good Harvest is likely to be followed.

It is recommended that Landlords look more closely at the assignee’s covenant strength, and assume that any guarantors offered would fall away on the next assignment. Landlords may therefore consider requiring additional security by way of a bank guarantee or rent deposit and tenants should not be surprised to be asked for this.  Alternatively landlords may require the guarantor to be a party to the lease, so that it is in the joint names of the tenant and the company/person who would ordinarily have been the guarantor.

Please contact the Solomon Taylor & Shaw property litigation department for more information on this case or any other property litigation issues.