The High Court has finally decided the question of whether the guarantor of a tenant can be made to enter into an Authorised Guarantee Agreement along with the tenant upon assignment of a lease in the case of Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch).

The Facts

By an underlease dated 5 October 2001, Gladman Homes let business premises to Chiron CS Limited ("Chiron") for a term of 10 years. Centaur Services Ltd ("Centaur") was a party to the underlease as guarantor for Chiron. In 2004 Chiron assigned the underlease to Total Home Entertainment Distribution Ltd. Gladman agreed to the assignment subject to Chiron and Centaur entering into an Authorised Guarantee Agreement (AGA). In 2005 Good Harvest Partnership LLP bought the property and subsequently issued proceedings against Centaur to recover rent pursuant to the terms of the AGA.

Centaur argued that the AGA it had signed was actually void and unenforceable by reason of the Landlord and Tenant (Covenants) Act 1995, which provides for tenants and others to be released from their obligations when a lease is assigned.

The Decision

Newey J concluded that the AGA, insofar as it related to Centaur, was invalid and therefore unenforceable.

His reasoning was that section 24 of the 1995 Act was meant to ensure that any obligations undertaken by a person as guarantor for a tenant should come to an end on the assignment of the lease. If the guarantor was required to enter into a further guarantee when the lease was assigned it would frustrate the operation of the 1995 Act contrary to section 25(1)(a). Section 16 of the 1995 Act addresses the circumstances in which a tenant can give a guarantee for an assignment but there is no equivalent provision dealing with guarantors, nor does section 16 contain any reference to guarantors. In these circumstances the Judge held that the AGA given by Centaur was invalidated by section 25 of the 1995 Act.

It is unclear at present whether this decision will be appealed.

RPC comments

Tim Fogarty, head of Property Litigation at RPC, comments:

"Although this decision clears up a question which has often been debated, its implications are far reaching for landlords and tenants alike. The only guarantees upon which landlords can now rely (in post January 1996 leases) are those given by its current tenant's guarantor or by a former tenant pursuant to an AGA. As a result of this decision, both parties will have to change the way in which they deal with applications for licences to assign. It is more likely to result in landlords requesting assignees to provide a direct guarantor and therefore assignees will want to consider whether they are able to proffer a suitable guarantor when considering taking an assignment of a lease."