The dust has now settled on the recent cases involving discussion on the continuing AGA, GAGA situation and its inter play with section 25 of the Landlord and Tenant (Covenants) Act 1995.
The second case has given us just a little bit more certainty about how lease guarantees on an assignment can be made to work whilst not introducing anything radically new. (See our previous post on the first case here)
Our advice to investor landlords is –
- As previously the best understanding we have from the cases is that a guarantor may guarantee the obligations of the outgoing tenant on an assignment in the AGA (often now called a GAGA or a sub guarantee).
- Repeat guarantees are not valid so a current guarantor may not validly stand as guarantor for the obligations of the incoming assignee.
- We have contradictory statements in the cases about whether a tenant can assign to its guarantor and for landlords the safe advice is to prohibit this.
- There is no way round the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995 by setting up a pre-agreed arrangement to ensure that the guarantor will stand in again. The anti-avoidance provisions of Section 25 of the Act are as wide as we all feared and pre arrangements will fall foul of the Act.
- In rare instances where tenants have assigned leases without landlord’s consent the assignment of the lease back to the original tenant with a guarantee given by the original guarantor is possible. This is because assignments in breach of a lease do not create a release of the liabilities in the first place.
For tenants, particularly those in a large group but with one valuable parent guarantee to offer the outcome of the cases still feels like a restriction on freedom to contract when leases prohibit assignments intra group (which many now do).
What next? Most leases being granted now contain appropriate provisions for dealing with this thorny issue of the guarantee on an assignment but we are seeing issues arising is in investment sales and purchases where the tenant has a parent company guarantee and the lease wording pre-dates our modern understanding of the law. Some investment purchases are delayed whilst a deed of variation to the lease is negotiated. Investors looking at new assets to purchase should take a close interest in this subject.