All we hear is: this is a GAGA

The recent decision in Co-operative Group Food Limited v A & A Shah Properties Limited, Frank Forney and Partners LLP [2019] is a rare case about GAGAs (being Guarantees of Authorised Guarantee Agreements).

The Background

To briefly recap the story so far:

The Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) automatically relieved tenants of liability on assignment, save where they entered into a guarantee of an immediate assignee’s performance (an Authorised Guarantee Agreement). Guarantors were to be released to the same extent as tenants (s24). The 1995 Act included anti-avoidance provisions which rendered void any agreement which restricted the operation of the 1995 Act.

Regrettably, the precise effect of the provision that guarantors were to be released to the same extent as tenants was unclear and has since been the subject of more than two decades of debate and litigation. Lord Neuberger’s obiter opinion in K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2011] is generally considered to be definitive and states that:

• A tenant’s guarantor may guarantee that tenant’s obligations, as assignor, under an AGA (a GAGA); but
• A tenant’s guarantor cannot validly agree to directly guarantee the tenant’s assignee’s performance of the tenant covenants (known as a repeat or direct guarantee).

The Facts

The Co-op case turned on whether an obligation was a GAGA (and thus valid) or a direct guarantee (which would be void).

The facts were that the tenant, Summerfield Stores, wished to assign its lease to 99p Stores Limited. Co-op was the tenant’s guarantor. A licence to assign and AGA were entered into and the assignment followed. In due course, both Summerfield and 99p Stores entered into administration and the Landlord (A&A Shah) sought the continuing rent from the guarantor, Co-op.

The provisions in contention were contained in the licence to assign:

• The licence annexed the form of AGA in a schedule
• Recital 1.7 provided that the schedule formed part of the licence and that any reference to the licence included the schedule
• Clause 2.3 required the tenant, but not the guarantor, to enter into the AGA
• Clause 4.1 provided that “The Tenant and the Tenant’s Guarantor covenant to observe and perform the obligations set out in the [AGA] immediately after completion of the assignment”
• Clause 4.2 provided that the guarantor’s guarantee would extend and apply to the obligations on the part of the tenant under the licence.

At first instance, the master found that both clause 4.1 and clause 4.2 contained GAGAs which were valid and enforceable. Co-op appealed.

The decision

On appeal, the Court decided that:

• Clause 4.1 was a direct guarantee and was therefore void. Essentially, the clause required the guarantor to give a direct guarantee of the assignee’s obligations under the AGA.
• Clause 4.2, however, was a GAGA and was therefore valid and enforceable. By virtue of recital 1.7, any reference to the licence included the schedule and the terms of the schedule would therefore be capable of having direct contractual effect. Thus the tenant’s obligations in the licence (which included the terms of the AGA) were guaranteed by way of a GAGA, which would not be invalidated by the 1995 Act. It was also possible to reach this conclusion by construing clause 4.2 as a guarantee of the tenant’s obligation in 4.1 (to observe the obligations in the AGA) notwithstanding that 4.1 was void as against the guarantor (but not the tenant) as a direct guarantee.

Summary

This case involved detailed questions of interpretation. The Court displayed a degree of pragmatism, being influenced by the fact that the parties intended meaningful obligations to be assumed by the guarantor notwithstanding the 1995 Act. The Landlord was, up to a point, saved by a recital which only serves to emphasise the importance of careful drafting and cross-checking of provisions.

Interestingly, the second defendants in the case are the firm of solicitors who acted for the guarantor and against whom a negligence claim is being pursued. That claim was stayed pending the outcome of this case. The fact that Co-op is taking action against its solicitors would seem to cast doubt on the court’s finding that “the parties intended meaningful obligations to assumed by the guarantor”. Perhaps the guarantor did not understand that to be the case, not least because it was not a party to the AGA which was actually entered into? The case reminds us that this is an area fraught with uncertainty and difficulty and that contractual provisions need to be drafted clearly and carefully.