A recent court decision, reported this week, has raised questions as to the enforceability of a guarantee of an Authorised Guarantee Agreement (commonly known as a "GAGA"). A direct guarantee of an assignee's obligations given by the guarantor of the former tenant was held to be unenforceable. The judge also questioned whether the alternative (and more common) drafting of a "sub-guarantee" by the outgoing guarantor of the outgoing tenant's obligations under an Authorised Guarantee Agreement (an "AGA") was enforceable.
The Landlord and Tenant (Covenants) Act 1995 ("1995 Act") radically changed the law relating to the enforceability of covenants against former tenants and former guarantors. With some exceptions, for leases granted on or after 1st January 1996, the tenant and its guarantor will automatically be released from all tenant covenants under the lease on an assignment. The 1995 Act provides for the circumstances in which the tenant may guarantee the performance by the assignee of the tenant covenants, but is completely silent on the position of whether guarantors can guarantee performance of the outgoing tenant's ongoing tenant covenants. The 1995 Act expressly states that, to the extent that any agreement attempts to exclude, modify or frustrate the operation of the 1995 Act, it will be void.
In Good Harvest Partnership LLP v Centaur Services Limited  EWHC 330 (Ch), the wording of the deed containing the AGA was unusual because the guarantor had given a direct guarantee to the landlord of the incoming tenant's obligations rather than a guarantee of the outgoing tenant's AGA. The judge concluded that this fell foul of the anti-avoidance provisions of the 1995 Act. However, what will be of concern to landlords is that, in the judgment, Newey J also expressed doubts as to the enforceability of a guarantor's "sub-guarantee" of a former tenant's obligations under an AGA, but was not required to reach a decision on this issue, as it was not directly applicable to the facts of the case. Until there is further case law specifically on this point, these comments will inevitably lead to uncertainty for landlords.
It has generally been thought that, in contrast with the position where the guarantor is directly guaranteeing the assignee's obligations, an outgoing guarantor can guarantee the former tenant's obligations under an AGA until the assignee itself assigns. This is the way that most AGAs and GAGAs are drafted. The judgment leaves open the question as to whether this is a correct interpretation of the 1995 Act. Our view remains that this structure does not fall foul of the anti-avoidance mechanisms of the 1995 Act.
This decision emphasises that an arrangement will be void where it requires an outgoing guarantor to enter into a direct covenant with the landlord to guarantee the covenants of the assignee under the lease. This may be particularly important if, for example, the assigning tenant is insolvent but its guarantor is not. Administrators and liquidators of insolvent companies are rarely willing to agree to enter into an AGA but, unless they do so, a guarantee from the solvent guarantor (which, by definition, would not constitute a "GAGA" in the normal sense) would be void. In practical terms, this means that the covenant strength of a proposed assignee itself rather than the combined assignee, tenant and guarantor package becomes all the more important, with the consequent risk that landlords may lay themselves open to a challenge that they are unreasonably withholding consent.
It is also worth noting that this prohibition also covers the situation where an existing guarantor is required to give a new guarantee of the assignee's obligations. In practice, this is most likely to arise on an intra-group assignment, where a parent company has guaranteed the outgoing tenant's obligations. On assignment to another group company, the parent company guarantor is not permitted under the 1995 Act to stand again as guarantor for the new group company assignee.
When the 1995 Act came in to force, its potential to lead to a dilution of covenant strength in an intra-group situation was appreciated and alienation provisions often prohibited intra-group assignments altogether. As time has gone on, landlords have become more relaxed. This case is bound to cause landlords to reconsider their position.
Some existing guarantors are likely to seek to escape liability as a result of this case and more litigation is likely to follow on the point. However, until there is a case directly concerned with a guarantor's guarantee of the outgoing tenant's obligations under an AGA, we recommend that, where appropriate, landlords continue to seek a GAGA from the tenant's guarantor.