Author: Roy Perrott
Ever since the Landlord and Tenant (Covenants) Act 1995 came into force, there has been a debate about whether the Act allowed a landlord to insist on the outgoing tenant’s guarantor guaranteeing the tenant’s AGA. This debate has now been resolved (in a case called Good Harvest v Centaur Services Limited), but not in a way that will please landlords.
First, let’s take a step back and remind ourselves how the 1995 Act works. Historically, a tenant remained liable throughout the term of the lease for breaches of the tenant’s covenants. It did not matter that the tenant had long since assigned the lease to someone else. Even if there had been several subsequent assignments, a tenant remained on the hook. This was clearly unfair. If the current tenant defaulted, the landlord could look to recover from whichever of its previous tenants had the deepest pockets, even if that tenant was in no way connected to the current tenant and was in no way to blame for the current tenant’s default.The 1995 Act abolished privity of contract in leases but allowed landlords to require, as a condition of the assignment, that the outgoing tenant guarantee the assignee’s obligations in the form of an authorised guarantee agreement (AGA). An AGA lasts for one assignment only. On the second assignment, the tenant is released. The 1995 Act contains a wide anti-avoidance provision, which says that any attempt to circumvent the legislation will be void. In the absence of privity of contract, AGAs are critically important to landlords. If the current tenant defaults, the landlord can invoke the AGA and require the outgoing tenant to make good the landlord’s loss. But what if the outgoing tenant is itself of dubious financial standing, such that the landlord insisted upon (and obtained) a guarantor for that tenant at the time the lease was granted. Can the landlord insist that the guarantor guarantee the AGA?It is a bit surprising that it has taken more than 14 years to get an answer to this question but we do now have an answer. Sadly for landlords, it is not the answer that they were hoping for. The issue arose in the context of a letting of retail premises in Staffordshire. A company in the Woolworths group took an assignment of the lease in 2004. When Woolworths got into financial difficulties, the landlord sought to recover the rent arrears under an AGA given by the previous tenant. But the landlord did not pursue the previous tenant as it, too, had gone bust. Instead, the landlord looked to the previous tenant’s guarantor, which had guaranteed the AGA. The guarantor, however, refused to pay, arguing that the AGA was void under the anti-avoidance provisions in the 1995 Act. The High Court agreed. The Act makes it clear that, subject to the ability to call upon the outgoing tenant to give an AGA, the outgoing tenant and any “other person bound by a covenant of the tenancy” are released on an assignment. The Act allows the landlord to require the outgoing “tenant” to enter into an AGA. However, there is no mention of guarantors. The judge concluded that, if Parliament had intended guarantors to be bound, the legislation would have said so.It was expected that the decision would be appealed but the appeal was settled out of court. It may be that the issue will come before the courts again at some point but, for now, the decision in Good Harvest stands. As the judge himself acknowledged, the consequences of his judgment are profound. On his interpretation of the 1995 Act, there is no difference between a guarantor voluntarily agreeing to guarantee the AGA and a guarantor that is required to guarantee the AGA by the express terms of the lease. Moreover, on an inter group assignment any attempt to extend a parent company guarantee to the assignee would be void.Assuming the judge is correct, are there any ways of getting around the judgment? In Good Harvest, the guarantor had agreed in the AGA to guarantee the performance of the tenant covenants by the assignee. In many AGAs, however, the guarantee is drafted so that the guarantor guarantees the outgoing tenant’s obligations rather than those of the assignee (i.e. a form of sub-guarantee). There might, therefore, be an argument that Good Harvest only applies to guarantees of the assignee’s obligations: the guarantor will still be able to guarantee the outgoing tenant’s obligations. The end result is, however, the same, so it must be doubtful whether this will work. Let’s not forget also that this decision might, ultimately, be bad news for tenants. We may see a return to the days of blanket prohibitions on inter group assignments and/or an increasing reliance on alternative forms of security such as rent deposits or even bank guarantees. Assignees are also more likely to have to offer their own guarantor.
Roy Perrott, Professional Support Lawyer, Fladgate LLP (email@example.com)