Landlords and tenants alike have become very familiar, and comfortable, with Authorised Guarantee Agreements ("AGAs") since their introduction under the Landlord and Tenant (Covenants) Act 1995. However, whilst AGAs may have become routine on assignments, it has always been unclear whether an original guarantor can be required to guarantee the outgoing tenant's obligations under an AGA. Many leases have assumed they can.
The question was recently addressed in the case of Good Harvest Partnership LLP v Centaur Services Limited (2010) EWHC 330 (Ch). In this case, Good Harvest was attempting to recover arrears of rent from defendant, Centaur, pursuant to an AGA it had entered into as guarantor. It was held that any attempt to extend the guarantor's liability beyond the lease, by requiring it to enter into a further guarantee when the lease was assigned, would frustrate the operation of the Act, and fall foul of the anti-avoidance provisions under section 25 of the Act. The guarantee agreement in this case was, therefore, void giving Centaur a complete defence to the rent arrears claim.
So what does this mean for landlords who have taken comfort from having a guarantor party to a AGA?
In considering an application to assign, landlords must be forward looking and should focus less on preserving the covenant strength of the existing arrangement and the value (if any) of any AGA it will give. It is clear that any existing guarantor of the tenant cannot be party.
Instead landlords should focus on:
- the covenant strength of the proposed assignee and whether any additional security is required in the form of a surety, rent deposit deed or bank guarantee; and
- if there are concerns regarding the proposed assignee, whether it is more appropriate to require a new guarantor to take the lease in its own name rather than rely on a weaker covenant with security.
Whilst it remains to be seen whether this decision will be appealed, it is clear that landlords must look forward and ensure they get the best tenant covenant they can at each stage.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 26/02/2010.