Case notes
Can the Guarantee of a Former Guarantor under an AGA be enforced?
Good Harvest Partnership LLP v Centaur Services Limited [2010] EWHC 330
Soon after the Landlord and Tenant (Covenants) Act 1995 (“the Act”) came into force the property industry began to ask whether the guarantor of a former tenant could be required on assignment of the lease to enter into an Authorised Guarantee Agreement (“AGA”).
The recent summary judgment in Good Harvest v Centaur has answered ‘no’ to that question.
The Act
The purpose of the Act was to prevent the original parties being held liable until the end of the term of a lease, by virtue of privity of contract, notwithstanding assignment.
In line with that purpose, ss. 5 and 24(2) of the Act release a tenant and guarantor respectively on assignment. S25 prevents the parties from contracting to avoid the Act’s consequences.
By way of exception, under s16, on assignment, a former tenant is able to enter into an AGA to guarantee the performance of the tenant’s covenants by the assignee.
Facts
Centaur Services Limited (“Centaur”) entered into an underlease as guarantor for the tenant, an associated company.
As a condition of granting consent to an assignment of the underlease, the landlord required Centaur and the tenant to enter into a direct guarantee, under an AGA, that the assignee would pay the rent, and otherwise perform the lessee covenants from the date of the assignment.
When the assignee failed to pay the rent Good Harvest Partnership LLP (“Good Harvest”), which by that time was the landlord, sought payment from Centaur under the terms of the AGA.
Centaur resisted and argued that it was released from any liability by virtue of s24(2) of the Act and that the AGA was unenforceable against it as it fell foul of the anti avoidance provisions in s25.
Good Harvest argued that by entering in to the AGA Centaur took on new obligations so the AGA did not exclude, modify or otherwise frustrate the operation of the Act as set out in s25.
Decision
Summary judgment was given in favour of Centaur thus barring Good Harvest’s claim against it for breaches of covenant by the assignee.
The judge held that s24(2) of the Act released Centaur from its liabilities on assignment. By imposing further liabilities on Centaur the AGA fell foul of s25 of the Act.
There was nothing in the Act which would allow a guarantor of a former tenant to give a direct guarantee under an AGA. S16 applies only to tenants. Good Harvest has been given permission to appeal.
Comment
As a result of this decision a landlord may find that, in the case of default by his assignee tenant, the strength of the covenants provided in an existing AGA are not what he thought they might be.
A landlord receiving an application for consent to assign should now be asking for a direct guarantee for the assignee from a party other than the current tenant’s guarantor.
On the other hand, a former guarantor that entered into an AGA on assignment may now no longer have to worry about contingent liabilities if the assignee defaults.
Alex Wilson is a property litigation solicitor at Osborne Clarke
