Since the Landlord and Tenant (Covenants) Act 1995 (the Act) came into force, there has been an ongoing debate as to whether an outgoing tenant’s guarantor could be party to an Authorised Guarantee Agreement entered into by the outgoing tenant.

The law
The Act states that on a lawful assignment of a ‘new lease’ (leases granted on or after 1 January 1996) the outgoing tenant and guarantor are released from liability.

Anti-avoidance provisions are set out in section 25 of the Act.  Any agreement is void if it excludes, modifies or otherwise frustrates the operation of any provision of the Act.

Authorised Guarantee Agreements (AGAs) are an exception to this. However, an AGA must not impose on the outgoing tenant any requirement to guarantee in any way the performance of any person other than the assignee or  impose on the outgoing tenant any ‘liability, restriction or other requirement’ in relation to any time after the lease is lawfully assigned by the assignee.

The facts
In Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch), Chiron CS Limited (Chiron) was granted a sublease by Gladman Homes (Gladman). Centaur Services Limited (Centaur) acted as Chiron’s guarantor. With the landlord’s consent, Chiron assigned the sublease to Total Home Distribution Limited (the assignee).  The licence to assign incorporated an AGA and was entered into by Gladman, Chiron and Centaur. The licence contained a covenant for Chiron and Centaur to guarantee the assignee’s obligations under the lease from the date of assignment until the next lawful assignment.

The assignee then failed to pay two quarters’ rent.  The landlord sought to enforce the AGA against Centaur because Chiron had been dissolved. Centaur claimed that the AGA was void and unenforceable by virtue of section 25 of the Act.

The decision
The High Court ruled that:

• The anti-avoidance provisions under section 25 of the Act should be interpreted generously.
• If a guarantor could be required to guarantee an assignee’s obligations on a lawful assignment, this would frustrate the operation of the Act as it would impose equivalent obligations from those it was just released from.
• Section 16 of the Act only permits the form of guarantee described in the Act. If Parliament had intended for an outgoing tenant’s guarantor to be able to guarantee the obligations of an assignee, it would have expressly provided for it. There is no such provision.
• Section 16 provides for an outgoing tenant’s release on a lawful assignment however does not provide for the guarantor’s release.  If a guarantor could guarantee an assignee’s obligations, its exposure would be unlimited and potentially apply to future assignees.
• It made no difference that the guarantor’s obligations were ‘new’ obligations and not a continuance of its existing obligations. It was clear that Parliament intended to restrict obligations to those permitted by section 16.

Comment
The case is of great importance.  If, as a pre-condition for landlord’s consent a tenant’s guarantor is required to enter into an AGA , it will be void under section 25 of the Act.

It should be noted that this case only deals with the situation where a guarantor guarantees the assignee’s obligations under a lease.  In some leases it is a pre-condition that the guarantor guarantees the outgoing tenant’s obligations under an AGA (a sub-guarantee).

The court did not think that it was clear that a sub guarantee was permitted by the Act but unfortunately, did not conclusively decide the point.

What does this mean for landlords?
Landlords should act promptly and take action against former tenants under an AGA when a current tenant is in default as they may not be able to pursue the former tenant’s guarantor.

If landlords have granted existing leases containing such drafting, then it will not work.  Landlords must therefore review the covenant strength of any proposed assignee more carefully if the only security they are relying on is an AGA that includes the tenant’s guarantor.

What does this mean for tenants?
Following this decision, landlords may be less flexible on the grant of new leases. They may decide to grant leases to parent companies only and not the subsidiaries.

On an assignment, the landlord has a duty to act reasonably which would usually include an obligation to assess the financial strength of an assignee together with any guarantor. However, on a lawful assignment, the financial strength of a guarantor would be lost leaving the landlord with a potentially weak covenant under the AGA.  That may result in landlords taking a less flexible approach to applications for licence to assign by tenants.

Has the debate ended?
We have heard that permission to appeal the decision has been granted…..so the debate continues!