Is it guaranteed?

This case concerned supermarket premises in Birmingham originally let in 2006 to Somerfield Stores Limited and guaranteed by Somerfield Limited. In January 2011, via a transfer of engagements, Co-operative Group Food Limited (the Co-op) assumed liability under the guarantee.

In 2011 the tenant wished to assign to 99p Stores Limited. In this connection a Licence to Assign and an authorised guarantee agreement (AGA), which was annexed to the Licence, were entered into and the assignment followed. In the Licence the guarantor provided covenants in relation to the future performance of the lease obligations.

In due course the original tenant and the assignee entered into administration and the landlord sought the continuing rent from the Co-op under the guarantee obligations in the Licence.

The Licence contained the following material provisions.

• Recital 1.1 defined the AGA as meaning the agreement set out in the form annexed in the Schedule to the Licence.

• Recital 1.7 provided that the Schedule formed part of the Licence and was to have effect as if set out in full in the body of the Licence and that any reference to the Licence included the Schedule.

• Clause 4.1 contained a covenant by both the tenant and the guarantor to observe and perform the obligations set out in the AGA immediately after completion of the assignment.

• Clause 4.2 contained an acknowledgment that the consent granted by the Licence was granted at the guarantor’s request and that the guarantor consented to the tenant entering into the Licence. Sub-clause 4.2(b) read that “in consideration of the consent granted by the landlord and subject to clause 4.3 the Tenant’s Guarantor agrees that its guarantee and other obligations under the Lease remain fully effective and ……. shall extend and apply to the covenants given by and the obligations on the part of the Tenant under this Licence”.

On the landlord’s summary judgment application for rent, the Co-op sought to argue that the provisions of clause 4 were caught by the wide anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995 (the Act) and hence void. Section 25 of the Act voids any arrangement that frustrates the purpose of the Act, namely the release of a tenant from its obligations upon assignment (section 5) and the release of the tenant’s guarantor from its obligations upon assignment (section 24).

The Master had decided that the obligations undertaken in both clauses 4.1 and 4.2 operated as sub-guarantees (GAGAs) and were valid and enforceable.

On appeal by the Co-op, both parties accepted the following key propositions based on the decisions in the leading authorities, including Good Harvest v Centaur Services Ltd and K/S Victoria Street v House of Fraser.

• If clause 4 of the Licence contained a guarantee of the guarantee obligations of the former tenant under the AGA it was valid, and the guarantor was liable for the rent claimed. In other words, if it contained a sub-guarantee then it was valid.

• If clause 4 contained a direct guarantee by the guarantor of the obligations of the assignee its effect was nullified by the Act and the guarantor was not liable for the rent claimed.

Mr Justice Mann dismissed the appeal.

He found that clause 4.1 was a direct guarantee. He did not consider it possible to interpret the clause as a sub-guarantee in the way proposed by the Master. In clause 4.1 both the tenant and the guarantor covenanted to observe the obligations undertaken under the AGA. The obligations under the AGA were guarantees of the obligations of the assignee, so that would make the guarantor’s obligation in effect a direct guarantee of the assignee and therefore void under the provisions of the Act.

However, in relation to clause 4.2(b) he considered that on the true construction of the Licence the “obligations on the part of the Tenant under this Licence” included the former tenant’s obligations under the AGA. This amounted to a sub-guarantee which survived the avoiding provisions of the Act.

There were two routes to this conclusion.

• Clause 4.1 contained a covenant by the tenant to observe and perform the obligations in the AGA which gave rise to obligations under the Licence. Those obligations were covered by the clear guarantee given by clause 4.2 (b).

• The other route was via clause 1.7, which provided that any reference to the Licence included the Schedule which set out the terms of the AGA. The reference to the Schedule should therefore be interpreted as being a reference to the obligations described in the AGA. The terms of the Schedule were to have effect as if its terms were set out in the Licence and were capable of having direct contractual effect. That effect would then be an obligation of the former tenant in the Licence, which would in turn be an obligation covered by the guarantee in clause 4.2(b).

The decision in this case clearly rests upon the oddity of the provisions in the Licence. The strained construction placed by the judge on clause 4.2(b) of the Licence was clearly designed to give it some useful effect and to be consistent with his conclusions that the parties intended meaningful obligations to be assumed by the guarantor notwithstanding the terms of the Act.

While it is useful to have further judicial consideration of the Act, the judicial time being taken up with cases arising from the operation of the Act emphasises its fundamental flaws and lack of commercial and at times rational application.