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Further Evolution in Leases – First AGAs and now GAGAs

Colin Winyard

The widely reported Court of Appeal case  K/S Victoria Street –v- House of Fraser (Stores Management) Limited and Others [2011] has extended the liability of guarantors in leases.

The Landlord and Tenant (Covenant) Act 1995 (“1995 Act”) ended Privity of Contract in leases. This resulted in the tenant and its guarantor being released from a lease when the lease was transferred.

Landlords, since the 1995 Act, as a precondition to a transfer have been able to require the old tenant to enter into an Authorised Guarantee Agreement (an “AGA”) to guarantee the new tenant’s performance of the lease.

The 1995 Act was not clear on whether an old guarantor could be required to guarantee the new tenant. This has been a cause of frustration for both landlords and tenants because the guarantor is often the party of substance in a transaction.

The Court of Appeal judgment in the Victoria Street case clarified the following:

  • An old guarantor may not guarantee a new tenant of a lease following the transfer of the lease to the new tenant. A guarantor of Tenant A cannot be guarantor of Tenant B following the transfer by Tenant A. The guarantor would be able to guarantee subsequent tenants (Tenant C for instance).
  • An old guarantor may not be guarantor of a new tenant in an AGA. Only Tenant A may guarantee Tenant B in an AGA following the transfer of a lease from Tenant A to Tenant B.
  • An old guarantor may now guarantee the old tenant in the AGA. This would be a sub-guarantee with the guarantor promising that the old tenant will comply with the terms of the guarantee in the AGA. The sub-guarantee by the guarantor has been given the acronym “GAGA”.

By way of example, in the transfer of a lease by Tenant A to Tenant B, Tenant A may guarantee the performance of Tenant B in an AGA.  The guarantor of Tenant A may then guarantee the performance of Tenant A in a GAGA. This will allow the landlord to pursue both Tenant A in the AGA and the guarantor of Tenant A under the terms of the GAGA.

Please take account of the following in negotiations involving the grant or assignment of a lease:

  • Landlords should in new leases consider including a GAGA clause in the lease guarantee provisions.
  • There is doubt whether a guarantor in a GAGA can be required to take a new lease following default by the tenant.
  • Guarantors must try, if possible, to avoid giving a GAGA because the guarantor will indirectly be guaranteeing the performance of the new tenant whose business may not be connected with the guarantor.
  • Now that a landlord may “roll over” the lease guarantee into the GAGA there is an equivalent argument that the rent deposit given by a tenant should also be “rolled over” to cover the period of the AGA. The rent deposit would then secure the performance by the tenant in the lease and the AGA.

Please contact Colin Winyard if you wish to discuss this change further and its impact on your lease negotiations.

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