Real Estate Review

    View Authors August 2011
    The Court of Appeal has handed down a landmark ruling which has important commercial implications for landlords who are relying on guarantees provided for tenants and companies who have given those guarantees.

    In the case of K/S Victoria Street v House of Fraser (Stores Management) Limited & others, the Court has confirmed that, on an assignment of a lease, the guarantor of the outgoing tenant cannot act as the guarantor for the incoming tenant, even where it volunteers to do so. The judgement also outlaws any obligation placed on a guarantor to guarantee any future assignee.

    Implications for landlords

    Landlords have traditionally relied on guarantees to support weak tenant covenants. This decision means that some guarantees which landlords have taken in the past, in accordance with the law as it was understood at the time, are now effectively worthless. In particular, where a corporate tenant has assigned a lease around its group and the parent company has acted as guarantor on each assignment, the landlord may not be able to rely on the guarantee provided by the parent. Where guarantees are void, landlords will need to re-assess the prospects of the lease covenants being performed and the outcome may have an affect on valuation.

    Landlords must review their portfolios to identify void guarantees. We can assist in this process and also provide guidance as to how leases must be structured in future to take full advantage of the opportunities offered by the ruling.

    Implications for guarantors

    For corporate tenants, particularly those accustomed to moving property around their group, there may be real opportunities for guarantor companies to lose liabilities which they have assumed under guarantees now deemed to be void. We can help to identify these opportunities and advise as to how companies can retain maximum flexibility when negotiating provisions which allow inter-company transactions within lease alienation clauses. As a result of the case, these clauses are likely to be drafted very differently in future.

    More information

    In some quarters, the judgement is being heralded as good news for landlords and guarantors. Whilst this is undoubtedly true in certain respects, the ruling that some existing guarantees must now be regarded as unenforceable (but others may continue to be valid) cannot be ignored.