Summary

In the recent case of Good Harvest Partnership LLP v Centaur Services Limited, the High Court considered whether, upon an assignment of a lease, the guarantor of an original tenant can be made to enter into an Authorised Guarantee Agreement (“AGA”) along with the original tenant. The High Court found that any direct guarantee of an assignee’s obligations, given by the guarantor of the original tenant, would be void and unenforceable by virtue of Section 25 of the Landlord and Tenant (Covenants) Act 1995 (“LTCA 1995”).

Background

The LTCA 1995 radically changed the law in relation to the enforceability of covenants against former tenants and former guarantors. But for a few exceptions, the LTCA 1995 provides that for a lease granted after 1 January 1996 a tenant and its guarantor will automatically be released from all tenant covenants under the lease on an authorised assignment. Notwithstanding this the LTCA 1995 stipulates various circumstances in which the Landlord can require the tenant to guarantee the performance by the assignee of the tenant’s covenants, by the giving of an AGA.

The terms of an AGA are governed by the provisions of Section 16 of the LTCA 1995. The LTCA 1995 does not actually define an AGA. Instead it sets out what an AGA must do, what it may do, what it must not do and the circumstances when it can be entered into. An AGA becomes effective when the assignee becomes bound by the tenant’s covenants in the lease as set out in Sections 16(1) and Sections 3 and 5 of LTCA 1995.

When is an AGA Void?

Section 25(1)(a) of the LTCA 1995 confirms that any agreement which excludes, modifies or otherwise frustrates the operation of the LTCA 1995 will be void. As stated above AGAs are an exception to this, however, they must satisfy all the requirements of Section 16 of the LTCA 1995 if they are to benefit from the exception. For instance, if an agreement tries to impose on an outgoing tenant any requirement to guarantee liability of anyone other than the assignee, or it provides for any requirements in relation to any time after the assignee is released by virtue of the LTCA 1995, it will be void as it would not comply with the requirements of Section 16(4) of the LTCA 1995.

The Facts

The tenant (“Gladman Homes”) granted a sublease of the property to the subtenant. The subtenant (“Chiron CS Limited”) provided a guarantor (“Centaur Services Limited”). The sublease contained a provision giving the tenant the right (as a condition of granting consent to assign the sublease) to require the subtenant and the guarantor to enter into an AGA. The subtenant assigned the sublease. The formal licence to assign included a guarantee agreement under which the subtenant and the guarantor covenanted that the assignee would pay the rent and perform the other tenant’s covenants in the sublease from the date of the assignment.

The tenant surrendered its lease and the landlord became the direct landlord of the assignee. The assignee failed to pay the rent due and the landlord claimed the money from the guarantor under the guarantee agreement.

The Decision

Newey J held that the guarantee agreement was void and, therefore, unenforceable by reason of Section 25 of the LTCA 1995. Section 24 of the LTCA 1995 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 the guarantee could, as a matter of language, fairly be said to “frustrate the operation of any provision of [the] Act” as per Section 25(1)(a). This was because, if valid, it would impose on the guarantor obligations equivalent to those from which Section 24 was designed to secure the release.

It was thought that had Parliament intended for a tenant’s guarantor to be able to guarantee the obligations of an assignee, it would have been expected to say so explicitly. This was thought to be particularly relevant since guarantors were mentioned expressly in the LTCA 1995 more than once. Section 16 of the LTCA 1995 addressed the circumstances in which a tenant could give a guarantee for an assignee, but there was no equivalent provision dealing with guarantors.

Comment 
This is a decision of major importance as the belief that the LTCA 1995 imposes a restriction on the freedom of contract by preventing a tenant’s guarantor from providing a guarantee for an assignee voluntarily is worrying.

However, a distinction must be drawn between a guarantor guaranteeing the period during which the tenant is bound by an AGA and a guarantor guaranteeing the performance of the assignee.

This case concerns circumstances under which the guarantor entered into a lease which required it to guarantee the performance of the tenant’s assignee in the case of an assignment of the lease. This was held to be void. However, the perhaps more common circumstances of a guarantor continuing to guarantee the tenant for the period during which the tenant is bound to guarantee the assignee under the terms of an AGA, is a distinctly different situation which the Court was not required to consider in this case.

The facts of this case will be of concern to landlords on the basis that even in circumstances where a guarantor voluntarily contracts to provide a guarantee for a tenant’s assignee, this will be void. This decision will most likely be appealed with the main point of contention likely to be the difference (if any) between a guarantee (for an assignee) given under a binding obligation and one given voluntarily.

Undoubtedly there will be more litigation as guarantors try to evade liability, but until a case directly concerned with a guarantor’s guarantee of the outgoing tenant’s obligations under an AGA is decided it is advisable for landlords to continue to seek protection from a tenant’s guarantor for the period of the AGA.

In the meantime, this case is likely to have a negative impact for both landlords and tenants as the case limits what can be agreed between fully advised contracting parties and will no doubt make it harder for deals to be agreed. Landlords will only be able to rely on guarantees which are given by the current tenant’s guarantor, or the former tenant, which will have implications for the common situation of a chain of parent company guarantees which a Landlord will now be hard pushed to rely on.

For further information please contact Simon Geoghegan or the Partner with whom you usually deal