Under the Landlord and Tenant (Covenants) Act 1995, when a "new" lease is assigned, the outgoing tenant is automatically released from liability. However, the landlord may be able to require the tenant to enter into an authorised guarantee agreement (AGA), under which the tenant provides a guarantee for its assignee. The permissible terms of an AGA are regulated by statute and the guarantee can only last for as long as the lease is vested in the assignee. AGAs often contain express drafting which reflects this statutory limitation.

In Shaw v Doleman, the AGA provided that the guarantee by the outgoing tenant would apply "throughout the period during which the assignee is bound by the tenant covenants of the lease". The assignee went into liquidation and the liquidator disclaimed the lease. Under section 178(4) of the Insolvency Act 1986, this determined the liabilities of the assignee in relation to the lease. However, the Act provides that this does not affect the liabilities of any other person.

The tenant argued that, since the assignee's liabilities under the lease had been terminated, the AGA no longer applied, on the basis that the assignee was no longer bound by the tenant covenants of the lease.

This argument was rejected by the High Court. It ruled that, following Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997], although the effect of the disclaimer was to release the assignee from liability on the tenant covenants of the lease so far as its own obligations were concerned, the relationship of landlord and tenant was preserved notionally for the purpose of the liability of other parties (such as guarantors). Therefore, the assignee was, for these purposes, treated as still bound by the tenant covenants as if the lease had not determined. On that basis the AGA remained enforceable.

The AGA also contained a standard clause under which the landlord could require the tenant to take a new lease of the premises if the existing lease was disclaimed. The tenant submitted that that was the clause which was intended to deal with the effect of disclaimer, and that it was not necessary to extend the landlord's protection beyond that. The court disagreed and held that the inclusion of this clause was not inconsistent with the continuation of the guarantee obligation following disclaimer.

Things to consider

Although the case turned on the interpretation of the terms of the contract that the landlord and the outgoing tenant had entered into, the result is consistent with the language of the 1995 Act itself. Section 16(4) provides that an AGA cannot impose liability on the guarantor in relation to a period after the assignee is released by virtue of the Act. Here, the assignee's release arose as a result of the operation of section 178(4) of the Insolvency Act, not the 1995 Act. Some precedent AGAs mirror section 16 and provide that the guarantee will last until the assignee is released from liability by the 1995 Act (i.e. until a lawful assignment by the assignee). The argument run by the tenant in this case would not have been possible on this wording. The decision in Shaw will nonetheless be comforting for all landlords, regardless of how their particular AGAs are worded – which will be especially welcome news in the current climate.

However, the court left open the possibility that an outgoing tenant could still achieve a complete release from an AGA on disclaimer by clear drafting to that effect. Tenants may renew their attempts to amend AGAs so that they are released entirely on a disclaimer. Landlords will wish strongly to resist this on the grounds that the liquidation of the assignee is one of the circumstances that the AGA is designed to protect against. The difficulty for a former tenant who has given an AGA which continues to operate after disclaimer is that it will not be entitled to call for an overriding lease of the premises. It may be able to ask for an order vesting the lease in the former tenant under section 181 of the Insolvency Act 1986, but this request must be made within three months of becoming aware of the disclaimer.