Readers will be aware of the decision in the Powerhouse case (see our briefing note, “Powerhouse - empowering landlords?”). Prudential Assurance Company Ltd v Ayres and another [2007] EWHC 775 is another case where a landlord was challenging whether its right to pursue a guarantor for the debts of the tenant had been compromised.

The tenant, a partnership, had taken an assignment of a lease from the defendants, who had given an authorised guarantee agreement (AGA) to the landlord. A supplemental deed was entered into in 2001 between the tenant and the landlord, under which it was agreed that the landlord’s right of recovery against the tenant or any previous tenant would be limited to the assets of the partnership. Although rather inelegantly expressed, the aim of the deed was clear: that the individual partners should not incur any personal liability beyond the partnership assets.

Subsequently the partnership fell into financial difficulties, and the landlord sought to recover from the defendants under the AGA. The defendants relied on the words “or any previous tenant” in the supplemental deed to limit their liability. The defendants were not a party to the supplemental deed and their defence was based on the Contracts (Rights of Third Parties) Act 1999.

The High Court ruled in the defendants’ favour, holding that the wording of the deed identified the defendants, as required by the Act, such that they could take the benefit of it.

The intention in including former tenants was to prevent the landlord being able to recover in full from the defendants under the AGA with the result that the defendants could then take action against the current tenant (under the indemnity which would have been given to the defendants on assignment) for an amount greater than that for which the partnership had agreed with the landlord to be liable. The fact that the AGA contained a provision stating that it would not be affected by any indulgence granted to the tenant, or any variation of the terms of the lease, did not assist the landlord since, if the supplemental deed granted an indulgence to the tenant, it also granted an indulgence to the defendants.

The result in this case is not surprising since it seems to fall squarely within the Act. However, the case is unusual because most commercial contracts, including real estate contracts, exclude the operation of the Act.