Lease Disclaimer as a “Failure” Triggering Parent Company Guarantee Indemnity for AGA New-Lease Costs

1. Introduction

This appeal concerned the interpretation of a deed of guarantee and indemnity (a parent company guarantee, “PCG”) given by a parent company in favour of a lease assignor, alongside an authorised guarantee agreement (“AGA”). The assignor (the claimant/appellant) argued that the parent company (the respondent) had to indemnify it for liabilities incurred when the landlord required the assignor to take a new lease after the assignee’s liquidator disclaimed the original lease.

The core issues were (i) whether a lease disclaimer was a “failure” by the assignee to pay rent/perform tenant covenants within the PCG; and (ii) whether the costs of entering the new lease “arose from” that “failure”.

2. Summary of the Judgment

• The appeal was allowed (Phillips LJ; Newey LJ and Cobb LJ concurring).
• The court held that the assignee’s disclaimer of the lease constituted a “failure” within clause 3.2 of the PCG.
• The assignor’s obligations and costs under the new lease did “arise from” that “failure”.
• The case was to proceed to agreement (or further submissions) on the form of order, quantum adjustments, interest, and costs.

3. Factual and Contractual Context

3.1 The transaction structure

The claimant originally held a 10-year commercial lease. It assigned the lease to a subsidiary (the assignee), backed by:

1. PCG (deed) from the parent company to indemnify the assignor against specified costs/liabilities flowing from the assignee’s failures; and
2. AGA under which the assignor guaranteed the assignee’s performance to the landlord, including a “new lease” mechanism if the lease was disclaimed.

3.2 Insolvency and the “new lease” liability

The assignee defaulted, the assignor paid under the AGA, and later the assignee entered liquidation. The liquidator disclaimed the lease. The landlord then exercised the AGA “new lease” clause, requiring the assignor to take a new lease and pay the landlord’s costs of grant. The assignor sought to pass those losses to the parent company under the PCG.

3.3 Key clauses

PCG clause 3.2 (as agreed to be read with missing words supplied for appeal):

PCG clause 4.1.8: the guarantor’s liability is not reduced/discharged/otherwise adversely affected by “the disclaimer of the liability of the Assignee under the Lease”.

PCG clause 2.2: the PCG continues until the end of the lease term “(however it may end)” and during any “statutory continuation”, or until the assignor is fully released from AGA liability.

AGA clause 4 (new lease): if the lease is disclaimed, the landlord may require the assignor to accept a new lease and pay the landlord’s costs of grant.

4. Analysis

4.1 Precedents cited and how they shaped the decision

(a) FCA v Arch Insurance (UK) Ltd [2021] UKSC 1

The Court of Appeal treated FCA v Arch Insurance (UK) Ltd as stating the orthodox core approach: contracts are interpreted objectively—what a reasonable person with the relevant background would understand the language to mean. This underpinned the court’s insistence on reading clause 3.2 within the PCG as a whole (not in isolation), and against the commercial purpose of a PCG in an assignment/AGA structure.

(b) Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70

Hindcastle addressed the effect of disclaimer under Insolvency Act 1986, s 178(4): disclaimer ends the company’s rights/liabilities, but does not (save as needed to release the company) affect others’ rights/liabilities. The House of Lords emphasised the commercial rationale: the point of a guarantee is that insolvency risk falls on the guarantor, not the creditor.

The Court of Appeal deployed that rationale as a powerful “commercial purpose” indicator: it would be commercially incoherent if a parent-company backing for an assignee could be neutralised precisely when insolvency occurs (the scenario in which the protection is most needed).

(c) Ex parte Walton; In re Levy (1881) 17 Ch D 746

Cited (via Hindcastle) for the proposition that it would be surprising if bankruptcy/insolvency released a surety; the rhetorical question reinforced the baseline expectation that insolvency should not be treated as an “escape route” from guarantee risk.

(d) Shaw v Doleman [2009] EWCA Civ 283, [2009] BCC 730

Shaw v Doleman was cited for the “very clear words” requirement: if parties intend a guarantee to terminate on disclaimer, the contract must say so unmistakably, because insolvency is when guarantees are intended to bite.

The Court of Appeal found the PCG did not come close to containing such clear words; if anything, the express anti-disclaimer provision (clause 4.1.8) pointed the other way.

4.2 Legal reasoning

(a) “Failure” in clause 3.2 includes disclaimer in this commercial setting

The trial judge treated disclaimer as something that “determines” ongoing liabilities, and therefore not a “failure” to perform them. The Court of Appeal rejected that as inconsistent with the PCG’s structure and purpose.

Key features supporting the Court of Appeal’s construction:

• Commercial purpose: the PCG sits alongside an AGA; the assignor remains exposed to the landlord if the assignee cannot/will not perform. Disclaimer is a paradigmatic event that crystallises that risk.
• Express text (clause 4.1.8): it would be difficult to reconcile “disclaimer does not adversely affect liability” with an interpretation that, in substance, removes the indemnity when disclaimer occurs.
• Duration clause (clause 2.2): it continues during “any statutory continuation” and while the assignor remains liable under the AGA—both of which point away from a disclaimer-based cut-off.
• “Very clear words” threshold: far from clearly terminating liability on disclaimer, the PCG signposted the opposite.

On that basis, disclaimer was treated as a “failure” within clause 3.2 because it brought about (and evidenced) the assignee’s non-performance in a way that triggered the assignor’s AGA exposure.

(b) “Arising from” was satisfied: the new lease costs were sufficiently connected

The respondent argued that the new lease costs did not “arise from” the assignee’s failure because the landlord could have pursued other remedies. The Court of Appeal held the required causal connection was present:

• The landlord’s right to require a new lease under the AGA arose only upon disclaimer.
• Although disclaimer was effected by the liquidator, the chain of events (defaults → liquidation → disclaimer → AGA new lease) was “closely linked” in substance.
• The disclaimer was the reason the landlord demanded the new lease, and the sole contractual basis for that demand under the AGA mechanism.

The court therefore adopted a practical, commercially attuned reading of “arising from”, rather than a narrow “immediate cause only” approach.

(c) The “AGA words” point was left open (but became unnecessary)

The claimant also argued that the words “including for the avoidance of doubt any costs and liabilities … arising under any AGA” meant AGA liabilities were covered irrespective of “failure”. The Court of Appeal did not decide this, because it found (i) disclaimer was a “failure” and (ii) the new lease obligations arose from it, so the claim succeeded anyway.

4.3 Impact

• PCGs in lease assignments: the decision strengthens the assignor’s ability to rely on a parent-company deed where an AGA/new lease mechanism is engaged by insolvency disclaimer.
• Drafting lessons: if a guarantor truly intends its liability to end on disclaimer, it will require “very clear words”—and clauses like 4.1.8 will likely be fatal to that argument.
• Causation in indemnities: “arising from” can accommodate multi-step causal chains, especially where the triggering event is the contractual gateway to the claimant’s liability (here, the AGA new lease right).
• Insolvency risk allocation: the judgment reaffirms the orthodox allocation: insolvency/disclaimer does not, without clear agreement, shift loss away from the guarantor and onto the creditor/assignor.

5. Complex Concepts Simplified

• Authorised Guarantee Agreement (AGA): when a tenant assigns a lease, the landlord may require the outgoing tenant to guarantee the incoming tenant’s performance. If the assignee defaults, the outgoing tenant can be liable.
• Parent Company Guarantee (PCG): a promise by the assignee’s parent to cover specified losses if the assignee fails. In this case, it was framed as an indemnity for costs/liabilities arising from failures to pay rent/perform covenants.
• Disclaimer (Insolvency Act 1986, s 178): a liquidator can “disclaim” onerous property (like a loss-making lease). Under s 178(4)(a), the company’s rights/liabilities end; under s 178(4)(b), other parties’ rights/liabilities generally continue.
• “Very clear words” rule: because guarantees are meant to respond to insolvency risk, courts require unmistakable drafting if the parties intend disclaimer/insolvency to terminate the guarantor’s liability.
• “Arising from” in indemnities: typically denotes a sufficient causal connection, not necessarily the closest or only cause—particularly where the contractual scheme makes the event the “trigger” for the claimant’s liability.

6. Conclusion

Kiko UK Ltd v Jamino Ltd & Anor [2026] EWCA Civ 513 clarifies that, in a lease assignment backed by an AGA and a parent-company deed, a liquidator’s disclaimer can constitute a “failure” to perform for the purposes of an indemnity clause, and that downstream liabilities (including new lease costs compelled by an AGA disclaimer-trigger) can “arise from” that failure. The court’s approach is anchored in objective interpretation, the commercial function of guarantees, and the insistence—drawn from Hindcastle Ltd v Barbara Attenborough Associates Ltd and Shaw v Doleman—that only unmistakable drafting will disapply the normal expectation that guarantees bite most sharply on insolvency.