Landlord and Tenant: Can Landlords enforce guarantees of AGAs?
MARCH 2010
The Landlord and Tenant (Covenants) Act 1995 (“the Act”) included provision that for leases granted on or after 1 January 1996 the tenant would automatically be released from future liability under the lease once the tenant had lawfully assigned the Lease. Any guarantor of the tenant would be released at the same time as the tenant. However Section 16 of the Act permits landlords to include in leases provisions whereby the landlord can require the outgoing tenant to enter into an authorised guarantee agreement (“AGA”) guaranteeing the obligations of its immediate successor in title, (ie the incoming tenant) for as long as the incoming tenant holds the lease. However the Act fails to make clear whether or not guarantors of an outgoing tenant can also be made to guarantee the outgoing tenant’s obligations under an AGA. Section 25 of the Act provides that any agreement seeking to exclude, modify or otherwise frustrate the operation of the Act will be void.
In a recent case, Good Harvest Partnership LLP v Centaur Services Limited, Mr. Justice Newey reviewed the provisions of the Act and expressed a clear view that Section 25 of the Act does effectively prohibit a guarantor of the outgoing tenant from joining in an AGA to guarantee the obligations of the outgoing tenant. In Good Harvest the facts of the case were that the guarantor of the outgoing tenant signed a guarantee of the obligations of the incoming tenant rather than the obligations of the outgoing tenant. It was found that such a guarantee contravened the anti-avoidance provisions in Section 25 of the Act. Mr Justice Newey’s views in relation to the more common situation where a guarantor of an outgoing tenant guarantees the outgoing tenant’s obligations under an AGA could therefore be “obiter” (meaning that it is not a binding authority but merely persuasive).
However in the absence of any other judicial guidance it is likely that:-
1. Landlords may have to accept that, in respect of AGAs which have already been completed, whilst they can continue to look to the guarantee of the outgoing tenant, any guarantee obtained from the guarantor of the outgoing tenant may no longer be enforceable.
2. Guarantors who have in the past made payments to landlords as a result of having entered into guarantees of an outgoing tenant’s obligations under an AGA may now be able to reclaim the money that they paid to the landlord.
3. When considering applications for licence to assign, landlords will have to look more carefully at the quality of covenant offered by the proposed assignee and the existing tenant and will have to disregard the quality of covenant offered by the existing tenant’s guarantor. Landlords are therefore more likely to require new guarantors to be provided for the proposed assignee and/or to call for rent deposits or other forms of security.
4. Landlords who still seek to call for guarantors of outgoing tenants to join in AGAs to guarantee the outgoing tenant’s obligations in the hope or expectation that a subsequent decision may change the law in this regard may have to accept that such guarantees can not be enforced and any recovery they make under such guarantees may have to be refunded.
5. Inter-group assignments are likely to become more problematic since if the outgoing tenant was guaranteed by a parent company the Act precludes that parent company from guaranteeing the liabilities of the assignee company directly and this case would appear to preclude the parent company from guaranteeing the outgoing tenant company’s liabilities under an AGA.
If you would like any further information about the issues raised in this article please contact Simon Catt or any other member of Goodman Derrick LLPs property department on 0207 404 0606.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice.
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