In 2000, famous music and film retailer, HMV, was granted a lease of premises on Europe’s busiest shopping street, Oxford Street. Music industry group, EMI, agreed to be their guarantor.
After 11 years, HMV decided to assign its lease in this prime London location to female fashion retailer, Forever 21, and agreed to guarantee the new tenant’s performance of the tenant covenants under an Authorised Guarantee Agreement (“AGA”). HMV’s guarantor, EMI, then agreed to be a guarantor of this agreement under a “GAGA”.
When Forever 21 failed to pay the rent and service charges due as a result of falling into administration, the landlord, Prudential, was unable to go after HMV under the AGA because HMV had also collapsed into administration and been dissolved. Prudential therefore turned to EMI for the unpaid sums as they were the last company standing and HMV’s guarantor under the GAGA.
EMI asserted that the GAGA was not enforceable due to the way the lease and subsequent licence to assign were drafted. They argued that as section 25 of the Landlord and Tenant (Covenants) Act 1995 (“the Act”) states that an outgoing tenant and its guarantor are released from their obligations under a lease when it has been assigned and any agreement to the contrary is void, the GAGA was not valid. They also argued that because the lease stated that their liability only continued as long as HMV was bound, they were effectively released from any liability under the GAGA when HMV was dissolved.
However, as section 16 of the Act expressly provides an exception to section 25 in the form of an AGA and the lease itself contained a specific clause which stated that EMI’s liability would continue even if HMV ceased to exist, the Court found the GAGA to be lawful and EMI therefore liable for £5 million worth of unpaid rent and service charges.
Although EMI are reportedly considering an appeal, this case shows that the Court will uphold GAGAs, provided the underlying lease and AGA comply with the Act. The case also shows that the drafting of these documents is critical, as the outcome may have been different if the lease did not expressly state that EMI’s liability should continue despite HMV’s insolvency.
If you have any queries regarding the enforceability of or liability under a GAGA, please feel free to contact Sophia Papworth on 01223 532701 or by email
or another member of our Commercial Property team