GAGA held to be valid

On an assignment of a 'new' lease under the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act") the outgoing tenant may guarantee the obligations of the incoming tenant under what is commonly known as an AGA. If the outgoing tenant's obligations were guaranteed by a guarantor, then that guarantor may provide a guarantee of the outgoing tenant's obligations under the AGA. This is commonly known as a GAGA. Almost all commercial leases granted after 1 January 1996 will be 'new' leases.

In the case summarised below, despite various technical arguments, the guarantor was unsuccessful in its attempts to avoid liability under a GAGA.

Background

The case concerned the former Forever21 store on Oxford Street. It had originally been let to HMV UK Limited (HMV) for a 25 year term from 1999. EMI Group Limited (EMI) were HMV's guarantor. When HMV assigned the store to Forever21 (UK) Limited several years later, it entered into an AGA and EMI became liable under a GAGA. HMV was dissolved in 2015. In 2019, both Forever21 (UK) Limited and its guarantor became subject to insolvency proceedings.

The landlord sought to recover unpaid rent and service charge from EMI by way of service of a notice under S17 of the 1995 Act. EMI disputed it was bound by the guarantee.

What happened?

The Court found in favour of the landlord, holding that the GAGA was valid and gave judgment for the sums due which were just under £5m.

The GAGA and the wider guarantee in the lease did not fall foul of the anti-avoidance provision in the 1995 Act.

• Some of EMI's arguments turned on specific drafting in the lease. One such argument was that the guarantee was given in relation to 'the person who is or is to become the Tenant.....'. EMI argued that the drafting in context meant it was required to guarantee both HMV and HMV's assignee and as such it was a repeat guarantee, which was void. The Court dismissed this argument with the meaning of 'or' once again under the spotlight. The Court found that "or" can, but does not always, mean "and", and the most natural reading here is that it really does mean "or" in a disjunctive sense. Overall the Court was satisfied that that the construction of the lease did not offend the provisions of the 1995 Act. It was also prepared to consider the validation principle when interpreting certain provisions in the lease. This proceeds on the basis that the parties would not have intended to enter into an unlawful contract. Therefore if two realistic meanings of a clause are possible and one would result in it being void while the other would result in its being valid, the latter should be preferred.

• EMI also argued that the GAGA was invalid because, whereas the landlord had to be reasonable in requiring the tenant to give an AGA, the guarantor was automatically bound to provide a GAGA under the lease if an AGA was provided. The GAGA was not therefore subject to an independent test of reasonableness. EMI's position was that this fell foul of the 1995 Act as the guarantor was not bound to the same extent as the tenant. The Court rejected this argument too, noting that the key focus under the 1995 Act was that the guarantor was released at the same time as the tenant and not the terms which require the AGA/GAGA to be given.

The Court found that, based on the drafting in the lease, EMI had not been released from its obligations under the guarantee and the GAGA on the dissolution of HMV.

The obiter comments in relation to the anti-avoidance provision in the 1995 Act having its own test to invalidate offending provisions are of note. It was also noted that the parties can make an automatic AGA a pre-condition in the lease.

Comment

Landlords (and their lawyers) will be relieved to see the Court's approach in this case, which favoured giving effect to the original bargain struck between the parties and protecting the beneficiary of the guarantee.

Of particular interest to those involved in this area will be the findings that:

• a GAGA will automatically follow the AGA and, provided the guarantor is to be released at the same time as the tenant, there is no independent reasonableness test for the giving of a GAGA;
• the judgment supports the view that a landlord can require an AGA as a pre-condition in the lease without having to qualify its requirement with reasonableness; and
• the guarantor is not excused just because the tenant is no longer liable as a result of its dissolution.

EMI Group Ltd v The Prudential Assurance Company Ltd [2020] EWHC 2061 (Ch)