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Tenant guarantors can breathe a sigh of relief...
24 March 2010
Since the enactment of the Landlord and Tenant (Covenants) Act 1995
some 15 years ago, there has been much debate as to whether a
tenant’s guarantor could be made to enter into an Authorised
Guarantee Agreement (AGA), along with the tenant itself, to
guarantee the assignee’s obligations. The Act introduced the
concept of the AGA, whereby a tenant who assigned his lease to a
third party was required by the landlord to guarantee that the
assignee would perform the tenant's obligations under the
lease.
In the case of Good Harvest Partnership LLP v Centaur
Services Limited, the High Court has finally decided that an
attempt to prolong a guarantor's liability by requiring the
guarantor to guarantee the assignee (whether by way of an AGA or
other form of guarantee) is rendered void, even if given
voluntarily.
The landlord served notice of appeal on 16 March 2010, but
pending a successful appeal, for leases granted after 1 January
1996, a guarantor will be released from liability upon a lawful
assignment of a lease. A landlord can now only look to its original
tenant in the event its assignee fails to pay the rents due under
the lease or, fails to perform the tenant covenants in the
lease.
The rationale behind the decision is that, if a tenant's
guarantor could be required to give a guarantee for an assignee of
the tenant, its exposure could be unlimited since there is nothing
in the Act which limits the guarantor's exposure to the period
before that assignee himself assigns. The Act states that any party
liable under the lease, in the event of the tenant’s default, will
be released at the same time as the tenant. In most cases, this
would be on the assignment of the lease.
It still remains unclear whether a guarantee given by the
tenant’s guarantor would be held to be void if it guarantees the
outgoing tenant's (assignor’s) obligations under an AGA. The Judge
in Good Harvest expressed doubts over the enforceability
of such a direct guarantee (as opposed to a guarantee of the
assignee's obligations) but did not decide the point. Further case
law no doubt will put this issue beyond doubt.
For now however, it would seem that former guarantors who have
entered into AGAs on an assignment can breathe a sigh of relief and
not worry about landlords pursuing them for unpaid rent and
breaches of covenant by the assignee. It also remains to be seen
how applications for assignment will be treated by landlords,
especially in the current difficult economic climate, given that
they will no longer be able to insist upon existing guarantors
guaranteeing the incoming tenant.
If you would like any advice in relation to your obligations as
a guarantor, then please do not hesitate to contact us.
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