Still no end to this AGA Saga
Good Harvest Partnership LLP v Centaur Services Limited was settled out of court depriving guarantors, landlords and tenants of judicial guidance by the Court of Appeal.
The Landlord and Tenant (Covenants) Act 1995 (‘the Act’) provides that for a lease granted after 1 January 1996, generally a tenant and its guarantor will automatically be released from all tenant covenants on assignment of the lease. However, the landlord is permitted to ask the tenant to guarantee performance by the assignee of the tenant covenants in the form of an authorised guarantee agreement (‘AGA’).
There has been debate over the years about whether a landlord can require an outgoing tenant’s guarantor to guarantee performance of the assignee’s obligations under a lease, an issue which the Act does not address.
In this case, Centaur Services, the assigning tenant's guarantor, had been required to enter into such a guarantee when the tenant wanted to assign the lease. Subsequently, when the assignee failed to pay rent, the landlord, Good Harvest, claimed it from Centaur under the guarantee.
The High Court decided that only a former tenant can give an AGA and any requirement for the tenant’s guarantor to give a direct guarantee for the assignee was unenforceable because it fell foul of the anti-avoidance provisions in the Act. The Court considered that the Act’s operation would be frustrated by this attempt to prolong a guarantor’s liability - even if the guarantee had been given voluntarily.
It remains unclear whether a guarantee given by the tenant’s guarantor would be held to be void if it guarantees the outgoing tenant's obligations under an AGA. The Judge in Good Harvest expressed doubts over the enforceability of this type of subguarantee but was not required to decide the point. Further case law is needed to put this issue beyond doubt.
For now however, it would seem that the only guarantee on which landlords can rely completely (in relation to post-1995 Act leases) are those given by its current tenant’s guarantor or by a former tenant under an AGA.
So what now?
It remains to be seen how applications for assignment will now be treated by landlords. It is likely that they will be more careful to try to secure financially strong tenants. Landlords will also increasingly be looking for additional security in the form of a bank guarantee or rent deposit or may require the prospective guarantor to be a party to the lease as a joint tenant. Difficulties in tenants satisfying landlord’s assignment requirements leading to delay or refusal of consent would be bad for the market.
All parties must be aware of this continuing uncertainty and seek advice at an early stage in negotiations, until the matter is finally clarified by the court.
To speak to someone who can help with your commercial property matters call, email or request a call back from one of our specialist lawyers.
This article contains information of general interest about current legal issues. It does not give legal advice and specific advice should always be sought about your particular circumstances. We will be happy to assist.