Leases often provide that when the tenant applies for consent to assign the lease, the landlord can require the outgoing tenant to enter into an authorised guarantee agreement (“AGA”) “when reasonable”. There is sometimes a worry that this means the tenant can be required to enter into an AGA unless the assignee is of financial standing equivalent to or higher than that of the tenant. Where the tenant is of considerable financial strength, this would translate into an almost automatic requirement for an AGA. The recent case of Landlord Protect Limited v St Anselm Development Company Limited [2008], while not principally on the point, sheds some useful light on it.

A vendor-purchaser dispute

The case was fought, not between landlord and tenant, but between the seller and buyer of a leasehold property. It was an auction sale, and was conditional upon landlord’s consent being obtained. The lease, granted in 1964 for a 99-year term, was conventional in requiring landlord’s consent to an assignment, not to be unreasonably withheld.

The buyer could not agree the terms of the licence to assign, and purported to rescind the contract once the long-stop date for obtaining landlord’s consent had passed. The seller then served a notice to complete, and in turn claimed to have rescinded the contract and forfeited the deposit.

So, the case was really about who got to keep the deposit; the legal issue, however, was whether the condition which the landlord sought to impose on its consent was reasonable. If it was, the buyer was not entitled to rescind, should have completed the purchase, and would lose the deposit; if not, the buyer was entitled to rescind, and the deposit should be returned.

Landlord’s requirement

The intending buyer was a dormant, non-trading company; unsurprisingly, the landlord required the provision of a guarantor: the guarantor offered was the buyer’s sole director and principal shareholder.

The buyer (effectively, of course, the guarantor) initially sought to limit the guarantee to a three-year duration, and went to court on the issue of whether or not it was unreasonable for the landlord to insist on anything further. The court held that it was not unreasonable.

With 66 years of the term left to run, though, it was to be expected that the buyer’s guarantor would want some limitation on the duration of the guarantee, and the argument turned to the circumstances in which the guarantee should be released.

The buyer’s guarantor wanted a release upon a subsequent assignment; the landlord insisted upon a proviso to this: that the subsequent assignee should have provided “reasonable alternative security”. The case was fought on the single issue of whether or not it was reasonable to impose this requirement.

An argument over nothing?

The law was not in dispute. The landlord, on this occasion as upon any subsequent request for consent to an assignment, was bound by section 1 of the Landlord and Tenant Act 1988 to give consent unless it was reasonable not to do so, and to impose only reasonable conditions. Mount Eden Land Limited v Straudley Investments Ltd [1996] establishes that it is not normally reasonable for a landlord to impose a condition which increases or enhances the rights which he has under the lease.

The buyer’s case was that the landlord was seeking to have a guarantor, or other continuing security, throughout the term, and they were not entitled to this under the lease.

The court held, however, that “security” need not refer to provision of a guarantor, or payment of a rent deposit. It could include the covenant of the subsequent assignee: if they were of sufficient financial strength, then a “reasonable alternative security” would have been provided, and the guarantee would be released. If they were not, then it would be perfectly reasonable for the landlord to require some other form of security: a guarantor or a rent deposit, typically, and unless it was provided they could refuse consent. Thus the guarantee would remain in place.

On this interpretation, the “reasonable alternative security” requirement did not give the landlord any more rights than they already had under the lease, and the buyer could not resist it. If the landlord had instead required “a reasonable alternative guarantor”, the decision would have gone the other way.

Outcome

The result is that the buyer has lost the deposit (£105,000), as well as the costs of two trips to court. It is irresistible to note that the buyer’s guarantor was the senior partner in a firm of solicitors, and possibly therefore more ready than most to dig in his heels on a point like this, and go to court about it.

That said, if the requirement gave the landlord nothing over and above the rights they already enjoyed under the lease, why were they so insistent on it? And the interpretation of the word “security” will look peculiar to most conveyancers, who usually understand it as meaning something over and above the covenant of the tenant or assignee.

The case is an illustration of the dangers of entering into agreements conditional upon negotiating a licence to assign.

Wider implication

The main interest of the case, though, lies in a subsidiary argument. The buyer raised the worry that the landlord’s requirement could be interpreted so as to mean that only a guarantor of equivalent or greater financial standing would suffice. The court rejected this, holding that a requirement for “reasonable” security does not entitle a landlord to “no less” security.

This is highly relevant to the standard provision in new leases that a landlord can require provision of an AGA upon an assignment “where reasonable”. This case should assist tenants of considerable financial substance in resisting an AGA upon assignment, so long as the assignee is of sufficient standing to give the landlord security that it will be able to perform the tenant’s obligations under the lease.