Commercial Property Update May 2019

The Commercial Property Department at Fiona Bruce Solicitors continues to expand and 2019 has been a very busy year so far. Despite the deadlock regarding the Brexit negotiations, commercial property remains largely unaffected and we continue to receive a large number of instructions from all those involved in the sector. To boost our commercial property offering, Chris Porter joined the Firm in September 2018. Chris was a Partner at Myersons Solicitors in Altrincham having trained with the Magic Circle Firm Eversheds in the City of London. Chris brings over 16 years’ worth of commercial property experience to the Firm and as part of his role here will be providing a monthly summary of matters of interest in the commercial property world.

If you have any particular questions or queries please do not hesitate to contact Chris Porter at cporter@fionabruce.co.uk or by telephone on 01925 263 273.

• Case Law Update

Co-operative Group Limited v A&A Shar Properties Limited.

An interesting High Court case relating to the liability of a tenant’s guarantor under an Authorised Guarantee Agreement.

The case required the High Court to determine whether the drafting of a Licence to Assign extended the obligations of the outgoing tenant’s guarantor regarding performance of the new tenant (which would be unlawful) or whether the guarantor was instead being asked to guarantee the performance of the Authorised Guarantee Agreement (known as an “AGA”) being provided by the outgoing tenant (which would be lawful).

The case concerned Somerfield Stores Limited (the tenant of a 25 year lease of a supermarket in the Birmingham). The obligations of Somerfield Stores Limited were guaranteed by its parent company, Somerfield Limited. In December 2011 Somerfield assigned its lease to “99p Stores Limited”. Later, both Somerfield Stores Limited and 99p Stores Limited entered Administration. The landlord then sought payment of rent from the parent company (as original guarantor).

It was accepted by Counsel for both parties that if the original guarantor was being asked to guarantee the obligations of 99p Stores Limited, then any such obligation would be void (as an original guarantor cannot be forced to guarantee the performance of an incoming assignee) however, if the guarantor was instead being asked to guarantee the obligations of the outgoing tenant under its AGA (a so called “GAGA”) it was valid and enforceable and the guarantor would be liable for the rent.

Despite the clumsy wording in the Licence to Assign, the High Court held that the guarantor was being asked to guarantee the outgoing tenant’s obligations under its AGA and not the performance of the obligations of the incoming assignee and the guarantee was therefore valid and lawful. Somerfield Limited were therefore still “on the hook”.

Implications:

It has become accepted that, whilst a direct guarantee of an assignee’s obligations is unlawful (following the Court of Appeal case of K/S Victoria Street v House of Fraser (Stores Management) Limited), an indirect guarantee of the assignee (through the medium of a “GAGA” is lawful. The K/S Victoria Street case confirmed that such an indirect guarantee (under which the outgoing tenant’s guarantor guarantees the tenant’s liabilities under the AGA) is lawful under Section 25 of the Landlord and Tenant Covenants Act 1995.

The moral of the story is that when preparing any Licence to Assign whether it is a requirement for an Authorised Guarantee Agreement and where there is an existing guarantor a very careful approach needs to be taken to ensure that clear wording to the extent of any ongoing liability on the part of the original guarantor. If the original guarantor is being asked to guarantee the performance of the incoming assignee, this will almost certainly be void and will release the guarantor from liability. It is therefore vital that careful wording be used to ensure that it is clear that the obligations of the guarantor extend merely to guarantee of the performance by the outgoing tenant of its obligations under its AGA.

• Contract for Sale

The case of Kuznetsov v Camden LBC provides a useful reminder of the application of Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 and the circumstances in which a binding contract for sale can be implied by written correspondence between two parties.

In this case, the Court accepted the Claimant’s appeal on the grounds that a binding contract for sale had come into existence when he had countersigned a letter offering to purchase his land drafted by Camden LBC.

• Background

Camden LBC had been negotiating to acquire a number of interests in land to facilitate a mix use scheme of redevelopment. The Council felt that negotiations had stalled and had made a Compulsory Purchase Order (confirmed by the Secretary of State) resulting in a General Vesting Declaration extinguishing the Claimant’s title. The Claimant wished to set this aside and alleged that an agreement between him and Camden had come into play. The evidence he produced was a letter from a Senior Development Manager at the Council stating: “on receipt of the “Red Book” valuation, the Council will be willing to purchase your property at that value and pay compensation and all reasonable expenses”. The Claimant alleged that he had countersigned this letter by writing at the bottom of it “thank you! I accept your offer and will instruct a valuer as requested”. The Claimant then alleged that he had returned the countersigned letter to the Council.

The Claimant’s case was that the countersigned letter was a contract for sale of land (pursuant to Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (‘the 1989 Act’).

The Judge considering the case decided to uphold the Claimant’s appeal. He noted that Case Law supported the proposition that a hardcopy letter, signed by the sender, which is then countersigned by the addressee, in the context of an exchange of correspondence could give rise to a contract in accordance with Section 2 of the 1989 Act.

• Comment

Under Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, a contract for the sale of land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged in each. The Council (correctly) claimed that a contract could not come about through an exchange of correspondence only and, the Court accepted this. However, in this situation, the contract did not come about through the offer and acceptance in correspondence. It came about through both parties signing the same document. The case was not about whether “contracts are exchanged” but whether one signed document had evidence in agreement between the parties.

• Code for Leasing Business Premises

The Royal Institute of Chartered Surveyors (RICS) continues to consult on a new Code for Leasing Business Premises. It hopes to replicate the recently published RICS Service Charge Code (First Edition).

It is intended that the new Code and its accompanying template Heads of Terms will be used as a checklist for future negotiations before the grant of a new lease and at the time of any lease renewals. It is also intended that the new Code will replace the existing Code for Leasing Business Premises which has been in use since 1995. The current Code has been criticised for its lack of detail and the misalignment of some recommendations with the likely requirements of institutional landlords. More detail and more commercial realism are hoped for in the new Code.

The new draft code will contain 13 recommendations covering a broad range of areas from heads of terms, definition of premises, renewal and break rights, rent and rent review, service charges, insurance costs and other outgoings, alienation and sharing occupation and possession, repairs, alterations and fit out.

Further information can be found here.