The Landlord and Tenant (Covenants) Act 1995 provides that on an assignment of a lease created after 1 January 1996, tenants and their guarantors are released from liability under their leases. The 1995 Act contains a comprehensive anti-avoidance provision, which renders agreements that frustrate the operation of these provisions void.
However, tenants are allowed to enter into authorised guarantee agreements (AGAs) with their landlords when they assign their leases. An AGA contains a guarantee from an outgoing tenant that its assignee will comply with the lease – but the 1995 Act does not say whether an outgoing guarantor can accept similar liabilities to the landlord, even though most landlords expect them to do so.
The Landlord and Tenant (Covenants) Act 1995 provides that on an assignment of a lease created after 1 January 1996, tenants and their guarantors are released from liability under their leases. The 1995 Act contains a comprehensive anti-avoidance provision, which renders agreements that frustrate the operation of these provisions void.
However, tenants are allowed to enter into authorised guarantee agreements (AGAs) with their landlords when they assign their leases. An AGA contains a guarantee from an outgoing tenant that its assignee will comply with the lease – but the 1995 Act does not say whether an outgoing guarantor can accept similar liabilities to the landlord, even though most landlords expect them to do so.
A heated debates has raged concerning the validity of guarantees following the decision in Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch); [2010] 1 EGLR 29; [2010] 14 EG 114. The court decided that a guarantee given by the outgoing tenant’s guarantor in respect of the assignee’s liabilities under the lease was invalid. It also doubted whether subguarantees – that is, guarantees given by outgoing guarantors in respect of outgoing tenants’ liabilities under AGAs – were effective. The decision has caused difficulties for landlords and tenants and has put the brake on assignments between group companies.
The Court of Appeal has clarified the law. The good news is that although it has upheld the decision in Good Harvest, it has also upheld the validity of subguarantees. The decision in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904; [2011] PLSCS 198 confirms that outgoing tenants’ guarantors can guarantee an outgoing tenant’s liabilities under AGAs – but not the liabilities of the incoming assignee. However, once released from liability by an assignment, guarantors can provide fresh guarantees in respect of subsequent assignees.
The property industry will breathe a collective sigh of relief in the wake of this decision. However, some question marks still remain – especially in respect of intra-group assignments. The Court of Appeal did not say whether landlords can contract with the same guarantor through a string of intra-group assignments, using a series of guarantees and subguarantees, or whether an arrangement can be contrived that includes an additional step – that is, a double-assignment – in order to obtain a fresh guarantee from an outgoing guarantor.
More worryingly, the court suggested that tenants may be unable to assign leases directly to their guarantors. It did not explain why. Presumably, however, this is because the anti-avoidance provision in the 1995 Act renders any agreement relating to a tenancy void to the extent that it frustrates the operation of the Act – and an assignment will fix the guarantor with liability at a time when the Act provides for its release. This could have an unfortunate effect where leases have already been assigned to guarantors. If the Court of Appeal is correct, the assignor is still the legal tenant and the assignee will have no title to the lease. This would put the cat among the pigeons!None the less, the decision that subguarantees are valid is good news for the property industry and will put paid to some of the controversy arising out of “the AGA saga”.
Allyson Colby is a property law consultant
