The enactment of the Landlord and Tenant (Covenants) Act 1995 sparked heated debates concerning the validity of lease provisions requiring tenants’ guarantors to enter into authorised guarantee agreements (AGAs) with the tenants whose obligations they have guaranteed if and when a lease is assigned.
It will come as no surprise that the recession has prompted a test case on the validity of such guarantees in the shape of Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] PLSCS 55. The decision will dismay landlords but will relieve tenants and their guarantors. The court ruled that parliament had intended to curtail liability under guarantees and had included anti-avoidance provisions in the legislation that invalidate provisions designed to frustrate the way in which the Act operates. Consequently, the guarantee given by the tenant’s guarantor was unenforceable.
The enactment of the Landlord and Tenant (Covenants) Act 1995 sparked heated debates concerning the validity of lease provisions requiring tenants’ guarantors to enter into authorised guarantee agreements (AGAs) with the tenants whose obligations they have guaranteed if and when a lease is assigned.
It will come as no surprise that the recession has prompted a test case on the validity of such guarantees in the shape of Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] PLSCS 55. The decision will dismay landlords but will relieve tenants and their guarantors. The court ruled that parliament had intended to curtail liability under guarantees and had included anti-avoidance provisions in the legislation that invalidate provisions designed to frustrate the way in which the Act operates. Consequently, the guarantee given by the tenant’s guarantor was unenforceable.
The judge was unmoved by arguments that his decision would cause difficulties in relation to intra-group assignments and that many would regard it as uncommercial. He reasoned that: (i) nothing in the legislation indicates that AGAs can include guarantees from any party other than an outgoing tenant; and (ii) if a guarantor could be required to give a further guarantee for an assignee, there would be nothing to prevent a landlord from requiring that guarantee to continue throughout the remainder of the term (because the restrictions in the legislation limiting tenants’ liability under AGAs until the assignee itself assigns do not apply to guarantors).
The decision does not affect guarantees provided by outgoing tenants in AGAs. However, it appears that guarantors’ guarantees in AGAs are now worthless. The decision also casts a shadow over the validity of guarantees in leases that obviate the need for guarantors to become parties to AGAs (because the guarantor’s guarantee relates not only to the tenant’s liability under the lease but also to any extended liability under an AGA). The remarks made by the judge suggest that the anti-avoidance provisions in the statute must be widely interpreted to prevent landlords from driving a coach and horses through the legislation.
One suspects that we have not heard the last of this case and that the Court of Appeal may have an opportunity to opine. In the meantime, landlords should expect guarantors to resist requirements to enter into AGAs, and may have to revisit their leases in the light of this decision. One of the suggestions made when “the AGA saga” first emerged was that if the guarantor’s covenant is essential, landlords should consider asking guarantors to become tenants, instead of accepting a guarantee.
Where does this leave freely negotiated guarantees given by outgoing guarantors for incoming tenants with weak covenants? Is it safe for a landlord to accept an unsolicited offer of a further guarantee or must it insist on a new guarantor (or some other form of security)? Ironically, this long-awaited decision clarifies the law but muddies the waters for parties whose freedom of contract has been curtailed by this judgment.
Allyson Colby is a property law consultant
