Where does the loss lie when a liquidator disclaims a lease? Does it fall on the landlord or the guarantor?
Modern leases usually require guarantors to accept a new lease of the premises for the unexpired residue of the term if the tenant becomes insolvent and their lease is disclaimed. The obligation used to be included in guarantees because it was believed that a disclaimer operates to determine the tenant’s lease, thereby releasing the guarantors from liability to the landlord. The ability to require a guarantor to accept a new lease creates a new liability that is not affected by the disclaimer.
Where does the loss lie when a liquidator disclaims a lease? Does it fall on the landlord or the guarantor?
Modern leases usually require guarantors to accept a new lease of the premises for the unexpired residue of the term if the tenant becomes insolvent and their lease is disclaimed. The obligation used to be included in guarantees because it was believed that a disclaimer operates to determine the tenant’s lease, thereby releasing the guarantors from liability to the landlord. The ability to require a guarantor to accept a new lease creates a new liability that is not affected by the disclaimer.
However, in a highly significant judgment in Hindcastle Ltd v Barbara Attenborough Ltd [1996] 1 EGLR 94; [1996] 15 EG 103, the House of Lords decided that disclaimer of a lease by a liquidator operates to accelerate the reversion as between the landlord and the current tenant without affecting the rights and liabilities of others. The tenancy ceases to exist as an estate in the land demised by the lease but all other relationships are treated as continuing: see section 178(4) of the Insolvency Act 1986. Consequently, landlords can continue to look to previous tenants and guarantors to fulfil their obligations in respect of the lease that has been disclaimed without requiring the guarantors to enter into another lease. None the less, landlords have continued to extract covenants that guarantors will enter into new leases, should they be required to do so. It is worth noting, however, that most leases require the landlord to serve a notice “putting” a new lease on the guarantor within a specified period, failing which the landlord’s “put” option will lapse.
The decision in Hindcastle concerned a lease that was granted before the Landlord and Tenant (Covenants) Act 1995 came into force. The litigation in Doleman v Shaw [2009] EWCA Civ 283; [2009] PLSCS 113 concerned a former tenant’s liability under an authorised guarantee agreement (AGA) under the 1995 Act. The parties had agreed that the AGA would remain in force “while the Assignee is bound by the tenant covenants of the Lease”. Was this wording sufficient to displace the decision in Hindcastle or did section 178(4) apply?
The Court of Appeal accepted that an AGA may expressly provide for the liability of the guarantor to be determined by a disclaimer of the lease. However, this was not the case here and it was impossible to decide what the AGA meant without referring to section 178(4). A clause in an agreement that limits the term of the guarantee to the period during which the assignee is bound does not, read in the context of section 178(4) as interpreted in Hindcastle, operate to terminate the guarantee when the lease is disclaimed. Consequently, the guarantor remained liable under the AGA, and the position was not altered by other provisions in the AGA (which gave the landlord the right to “put” a new lease on the guarantor) or in the 1995 Act.
Guarantors that want to limit their liability in the event of a disclaimer should provide for this expressly and they should also refuse to enter into “put options” that would require them to enter into fresh liabilities in the event that the tenant’s lease is disclaimed.
However, in view of the decision in Hindcastle and the fact that the 1995 Act specifically preserves the landlord’s right to put a new lease on a guarantor under an AGA, what landlord would accept this?
Allyson Colby is a property law consultant
