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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 tenants guarantor could be made to enter into an Authorised Guarantee Agreement (AGA), along with the tenant itself, to guarantee the assignees 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 tenants 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 guarantors 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 tenants 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 guarantors exposure to the period before that assignee himself assigns. The Act states that any party liable under the lease, in the event of the tenants 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 tenants guarantor would be held to be void if it guarantees the outgoing tenants (assignors) 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 assignees 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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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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