In a significant decision, the High Court has held that a tenant’s guarantor could not be required to guarantee an assignee of the lease.
It is now over 14 years since the Landlord and Tenant (Covenants) Act 1995 (“Act”) abolished “privity of contract” for leases entered into on or after 1 January 1996. With the abolition of “privity”, landlords could no longer rely on an original tenant being liable for the entire term of the lease (even after it had assigned the lease). The sop provided to landlords by the Act was their ability, in most situations, to be able to require the outgoing tenant to guarantee, in an “authorised guarantee agreement” (known colloquially as an “AGA”), the lease obligations of its immediate assignee (but not any further assignee).
A key issue for landlords had been whether a guarantor for the tenant’s liabilities under the lease could also be required to enter into the AGA to guarantee the immediate assignee. This was a crucial matter, especially where the tenant was financially weak and the tenant’s guarantor had the covenant strength. In that situation, if the landlord were only able to require the weak tenant to enter into the AGA, that could have a significant adverse impact on the landlord.
While many considered that the Act was not entirely clear over whether landlords could require tenant’s guarantors to enter into AGAs, the property industry, in lease drafting, appeared to assume that landlords could. However, the Sword of Damacles of the Act’s “anti-avoidance” provisions hung over landlords’ heads. If a court decided that such a requirement frustrated the operation of the Act, it would be void and unenforceable with serious implications for landlords.
After 14 years, the courts have finally considered the issue in Good Harvest Partnership LLP v Centaur Services Limited [23 February 2010], a decision that will dismay landlords.
Chiron CS Limited was granted a lease in 2001, guaranteed by Centaur Services Limited. The lease stated that the landlord could require that, as a condition for giving consent to the tenant assigning the lease, the tenant and its guarantor enter into an AGA.
In 2004 Chiron assigned the lease to a third party and the landlord, Chiron and Centaur entered into an “authorised guarantee agreement” (“Agreement”), under which Chiron and Centaur each covenanted with the landlord that the assignee would pay the rent and perform the lessee’s covenants from the assignment until the next lawful assignment of the lease.
Subsequently, Good Harvest Partnership LLP became the landlord and brought proceedings to recover rent from Centaur pursuant to the Agreement. Centaur disputed the claim, arguing that the Agreement was void and unenforceable as against Centaur because of the Act’s anti-avoidance provisions.
The High Court agreed with Centaur. The requirement for the tenant’s guarantor (Centaur) to guarantee the assignee fell foul of the “generous” anti-avoidance provisions and was, consequently, unenforceable. Good Harvest was, therefore, unable to recover rent from Centaur.
The Court considered that the Act was meant to ensure that the tenant’s guarantor’s obligations ended on the tenant assigning the lease. The Act’s operation would be frustrated if the guarantor was required to enter into a further guarantee when the lease was assigned. Unlike the specific (and exceptional) statutory provision allowing for the outgoing tenant to enter into an AGA, there was no equivalent provision for tenant’s guarantors. Also if the tenant’s guarantor could guarantee an assignee, there would be nothing in the Act to end the guarantor’s liability when the assignee himself assigned, which would drive a “coach and horse” through the legislation.
Even if the tenant’s guarantor wanted to guarantee the assignee and it was commercially desirable to do so, this would still appear to be void.
The Court did not think it was by any means clear that the Act permitted a tenant’s guarantor to sub-guarantee a tenant’s obligations under an AGA, but the Court did not have to decide that point in this case.
It is possible this decision may be appealed, but, in the meantime, a requirement for a tenant’s guarantor to guarantee an assignee is unenforceable. Where possible and if appropriate, landlords should seek alternative security where there is an assignment.