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Reminder: no court has yet decided that a guarantee of an AGA is valid 8 September 2014

This is an article about the case of Tindall Cobham 1 Ltd v Adda Hotels (an unlimited company) [2014] EWCA 1215, decided on Friday last week.  Except that it isn’t about the decision in that case, but more about one statement made by Patten LJ in the case.  (Patten LJ gave the only judgment, with which Longmore and Ryder LJJ agreed.)

The case itself is interesting, but I will not discuss it in massive detail because there will be plenty of other commentaries.  There is a good summary on Lawtel today, for example (subscription needed) and I am sure that Practical Law (subscription also needed) will have a legal update on the case very shortly (now available here). 

In summary, the Court of Appeal had to decide how to interpret a provision in a lease that stated that the tenant could assign to an associated company with the landlord’s consent, but so long as the existing guarantor (the parent company) and any other guarantor provided a new guarantee of the assignee’s liabilities, and the assignee gave notice of the assignment within ten days, “the landlords consent shall be given”.  (There is no apostrophe in “landlords” in the version of the clause set out in the Court of Appeal’s judgment, but perhaps there was an apostrophe in the lease itself.  There were in fact ten leases, one for each of ten hotels let to the Hilton Group.)

The issue, of course, is that the repeat guarantee from the parent company would be invalid, as a result of the operation of section 25 Landlord and Tenant (Covenants) Act 1995.  We know that from K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904.  The lease in this case was granted in 2002, after the 1995 Act came into force but before the world realised that repeat guarantees could be caught by section 25.

So the tenant argued that the landlord could not prevent the assignment of the lease to an associated company even without the parent company guarantee – meaning that the lease could be assigned to a £1 company and the landlord would be powerless to prevent it.

Fortunately (for the landlord, and for landlords everywhere), on the drafting of this particular lease, the Court of Appeal was able to sever the offending provision so as to leave a conventional alienation provision.  The tenant could assign to an associated company with the landlord’s consent.  This did not matter for the past, as the assignment had already taken place (and was held at first instance to be an “excluded assignment”, as landlord’s consent had not been obtained).  But it mattered a lot for the future.  If the tenant’s argument had succeeded, it could have assigned the lease once again to a company with no assets.

Obiter or what?

I see that by accident I have in fact provided a commentary on the case.  It’s a sound decision and it is difficult to see the Supreme Court agreeing to hear an appeal even were the tenant to ask for leave.

The point that struck me when reading the transcript on Friday was this paragraph:

“16.   The only exception to the operation of ss. 5 and 24(2) [ie the automatic release following an assignment of the tenant and any guarantor respectively] is an authorised guarantee agreement (“AGA”) under s.16 (referred to in s.25(3)) under which the existing tenant whose covenants would be released under s.5 agrees to guarantee the performance of those covenants by the assignee only until any subsequent assignment of the lease: see s.16(4). In K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2012] Ch 497 this Court decided that in a case where the existing tenant entered into an AGA in respect of the covenant liabilities of the assignee, it was permissible under s.25 for the tenant’s liabilities under the AGA to continue to be guaranteed by the existing guarantor.  This was consistent with rather than a frustration of the provisions of s.24(2) which, as mentioned earlier, release the guarantor only where the tenant is himself released from his own covenants under the tenancy agreement.  Beyond this limited exception, however, the provisions of s.25 are absolute in their effect and require an objective determination of what provisions of the relevant agreement fall within the scope of s.25(1)(a).”

My concern is that the wording that I have highlighted by italics is in fact wrong.  The Court of Appeal did not decide in the House of Fraser case that a guarantee of an AGA (GAGA, or repeat guarantee, some call it) is valid.

Lord Neuberger did discuss the point, and concluded that a guarantee of an AGA does not infringe the anti-avoidance provision in section 25.  However, this was not part of his decision.  It was an obiter dictum (which is a Latin phrase meaning “a comment made in passing”).  That means that it is strictly speaking not binding on courts in the future.

Sometimes it is difficult to tell in a judgment which sections form part of the decision (ratio decidendi or “reason for the decision”) and which parts are obiter.  Lord Neuberger made it easy for us in the House of Fraser case, as this extract from [30] illustrates:

“The foregoing discussion is enough to dispose of Victoria’s appeal against the decision of Mr Randall.”

In spite of that, Lord Neuberger went on to consider Newey J’s first-instance decision in a completely different case, Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch), for a further 24 paragraphs.  (This was the case in which the appeal was settled on the steps of the court, to the dismay of landlord and tenant lawyers.  Could these 24 paragraphs possibly be extracts from the decision that Lord Neuberger would have made, had he been given the opportunity actually to hear the appeal?)   He concluded that he agreed with Newey J’s analysis of the 1995 Act, except that he concluded that a guarantee of an AGA is not invalidated by section 25.

Rejoicing all around.  Lord N says that a guarantee of an AGA is valid !!!

But remember that this was obiter, and so a court in the future – even at first instance – is not bound by it.  Agreed, it would take a confident judge to disagree with Lord N, one of the leading landlord and tenant lawyers of our generation.  But there are one or two confident judges out there, one of whom might feel it was worth a go.  And I have seen at least one commentary on the House of Fraser case (I cannot remember by whom, unfortunately) that suggests that Lord N’s argument is not 100% watertight.

Look at it this way.  Let’s assume that you are advising a company that has given a guarantee of an AGA in relation to a lease that is a new tenancy.  Outstanding rent of £10m is due, and the landlord is now pursuing you for the rent under the guarantee of the AGA.  Would you advise your client to pay up, or to challenge the validity of the guarantee of the AGA under section 25?  It’s a pretty easy decision, isn’t it.

Similarly, would you advise your investor client to buy a building let to a single tenant, where the only covenant of value comprises a guarantee of an AGA – the corollary of the above situation?  Another easy decision.

And once you reach that conclusion, the issue becomes much the same however much or little rent is owing.  Despite Lord Neuberger’s best intentions (and he made it clear that he was trying to assist the legal profession), he did not have the opportunity to “decide” in House of Fraser that a guarantee of an AGA is valid, simply because the question was not relevant to the issue before him.  This remains the case regardless of what Patten LJ may have said about it in Tindall Cobham

Just don’t forget: we still don’t actually know that a guarantee of an AGA will survive the anti-avoidance provisions in section 25.  In that respect we are as ignorant today as we were when the 1995 Act came into force almost twenty years ago.


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