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Never has the phrase ‘there are no guarantees in life’, been more true says commercial property agent prop-search, following a High Court decision that has far reaching implications for landlords and tenants.
Since the enactment of the Landlord and Tenant (Covenants) Act 1995 some 15 years ago, there has been much debate as to whether a tenant’s guarantor could be made to enter into an Authorised Guarantee Agreement (AGA), along with the tenant itself, to guarantee the assignee’s obligations. The Act introduced the concept of the AGA, whereby a tenant who assigned his lease to a third party was required by the landlord to guarantee that the assignee would perform the tenant's obligations under the lease.
In the case of Good Harvest Partnership LLP v Centaur Services Limited, the High Court ruled that an attempt to prolong a guarantor's liability by requiring the guarantor to guarantee the assignee - whether by way of an AGA or other form of guarantee - is rendered void, even if given voluntarily.
Samantha Jones, a Surveyor at prop-search, says: “A landlord can now only look to its original tenant in the event its assignee fails to pay the rents due under the lease, or fails to perform to the tenant covenants in the lease.”
The outcome of this Court case means landlords are likely to require additional security by way of a bank guarantee or rent deposit. Alternatively, they may require the guarantor to be a party to the lease, so that it is in the joint names of the tenant and the company or person who would ordinarily have been the guarantor.
As well as impacting on landlords, this ruling also affects tenants and tenant's guarantors of commercial leases. For tenants, the impact will come where the value of the covenant lies with the guarantor, which is frequently the case if say a holding or parent company guarantees a subsidiary or a new company set up for a specific purpose. And even if the tenant's guarantor wanted to guarantee the assignee, it would not be possible to do so due to the anti-avoidance provision which cannot be contracted out by the parties.
Both landlords and tenants need to be aware of its implications for both existing leases and new leases in the future. Further information and advice can be obtained from prop-search - Tel: 01933 223300.