Under the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) tenants and any guarantor are both released from liability under a lease following a lawful assignment. The 1995 Act has introduced the ability for landlords on any assignment to require the outgoing tenant to enter into an authorised guarantee agreement (or AGA) in support of the incoming tenant. However the 1995 Act is silent as to whether an existing guarantor can be required to join in any or AGA or give a fresh guarantee. It is not possible to enter into a contract which has the effect of avoiding the effect of the 1995 Act.
Many leases require, as a precondition to the grant, that the guarantor will continue to guarantee a tenant’s chosen assignee.
The two methods
In practice, there are two common methods that a landlord may adopt to keep a tenant’s guarantor on the hook following an assignment by the tenant:
- it may require the guarantor to guarantee the obligations of the assignee by entering into a new AGA; or
- it may require the guarantor to guarantee the tenant’s obligations under the AGA it gives to the landlord (a sub-guarantee).
Facts of the Good Harvest case
The facts of Good Harvest Partnership LLP v Centaur Services Limited (2010) are as follows. A tenancy was entered into on 5 October 2001, with the defendant (Centaur Services) standing as guarantor to the tenant. The original tenant assigned the Lease in 2004, at which point the tenant and defendant entered into an AGA to guarantee performance of the lease obligations by the assignee until such time as a further lawful assignment took place (ie in accordance with method no.1 above). The assignee failed to pay the rent and the claimant landlord (Good Harvest) claimed against the defendant, as contractual guarantor.
The High Court held that a tenant’s guarantor is released on a permitted assignment of a lease and because the 1995 Act does not provide that a landlord can call for the guarantor of the assignee to remain a guarantor of the assignor, the landlord cannot call for it. The decision does not create a binding precedent. It was due to be appealed on 29 June 2010 but settled on the eve of the hearing. It had been hoped that the appeal (which would create a binding legal precedent) would overturn the decision or, if upholding the decision, at least to also provide some guidance on position in relation to sub-guarantees. Unfortunately we are now left with uncertainty in relation to the position of the guarantor and it is also difficult to structure new leases where the landlord wants a guarantor to have continuing liability.
Given the current uncertainty the practical point to take away is that landlords cannot assume that guarantors will be available to underpin an assignee’s obligations under an AGA (or to provide a sub-guarantee) and that may affect applications for consent to assign and freehold values. Landlords may require additional security from the assignee because of the weakness of an unsupported AGA. It is likely that the Good Harvest case will make landlords more inclined to limit tenants’ rights to assign leases by using restrictive alienation covenants in leases.