Lawbite: Do you know your AGAs from your GAGAs?

• United Kingdom

• Real estate litigation

04-06-2019

Co-operative Group Food Ltd v A & A Shah Properties Ltd [2019] EWHC 941 (Ch)

A recent case saw the court wrestle with the difficulties sometimes encountered with guarantee provisions and the way in which they are drafted.

The landlord A & A Shah Properties Limited (“Shah”) granted a lease to Somerfield Stores Limited (“Somerfield”) under which Somerfield Limited stood as guarantor. Cooperative Group Food Limited (“Co-Op”) assumed liability under the guarantee pursuant to a transfer of engagements.

When Somerfield later assigned the lease to 99p Stores a Licence to Assign and Authorised Guarantee Agreement (“AGA”) was entered into. Under the Licence Co-Op entered into guarantee obligations in relation to the future performance of the lease obligations.

Following Somerfield and 99p Stores entering into administration, Shah looked to take action against Co-Op as guarantor.

Guarantee provisions have been the subject of recent reported decisions including the well-known Good Harvest case and the K/S Victoria Street case. Such cases have concluded (amongst other things) that:

0. guarantees whereby a former tenant guarantees the obligations of an assignee (i.e. an AGA), and the guarantor (Co-Op in this case) guarantees the obligations of that former tenant under the AGA (sometimes referred to as a “GAGA”), are valid.
0. guarantees whereby an original guarantor directly guarantees the obligations of an assignee (sometimes referred to as a “repeat guarantee”), are invalid.

In this case there was a dispute as to whether Co-Op’s guarantees were GAGAs or repeat guarantees.  Having construed the wording of the Licence the Court decided, on appeal, that there were valid guarantee obligations under which Co-Op was liable.

Key points

• Whilst some provisions in the Licence were found to be valid guarantees, a provision which saw Co-op covenant to observe and perform obligations set out in the AGA immediately after completion of the assignment was found to be void.  It is important therefore not to assume that all guarantee provisions are valid and enforceable.
• Guarantees need to be carefully drafted to ensure that they do not fall foul of the Landlord and Tenant (Covenants) Act 1995 and the case law which has developed over the last 5-10 years.
• Of course, landlords should always consider if the tenant/assignee has the means to meet the rent and other covenants and if there is doubt, consider taking a guarantee or other security.