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Can guarantors reap a benefit from Good Harvest?

Posted
March 11, 2012
Business Litigation

The Landlord and Tenant (Covenants) Act 1995 (‘Act’) implements recommendations made by the Law Commission regarding continuing liabilities of tenants, and their guarantors, on assignment of leasehold interests. The Act requires tenants, upon assignment, to be released from tenant covenants (Section 5), together with any other persons bound by those covenants, ie a guarantor (Section 24(2)(b)). A tenant can thereafter act as guarantor for his assignee, but only under an Authorised Guarantee Agreement (“AGA”) (section 16).  Provisions regarding AGA’s are explicit.  Any other form of guarantee/agreement is prohibited, particularly those which ‘exclude, modify or otherwise frustrate the operation of any provision of the Act’’ (section 25(1)).  Such other agreements are potentially void and the question of tenant guarantors providing guarantees on assignment, and sub-guarantees under AGA’s has been discussed by the Court. Good Harvest Partnership LLP v Centaur Services Ltd [2010] discussed whether the Act prevents a guarantor from being required to provide a further guarantee upon assignment, whilst the case of K/S Victoria Street v House of Fraser (Stores Management) Ltd and Others [2011], considering Good Harvest, asked whether an agreement is void if it requires the guarantor of a lease to guarantee the liability of a specific assignee. GOOD HARVEST An under-lease was granted with ‘Centuar’ acting as guarantor for the tenant’s obligations.

The under-lease was assigned and the tenant and Centaur were required to act as guarantor for the assignee. Arrears accrued, and the landlord (Good Harvest) brought proceedings against Centaur, as guarantor, to recover the assignee’s debt.  Centaur argued the guarantee was void as it frustrated the operation of the Act, and furthermore the guarantee did not permit a sub-guarantee of the tenant’s obligations under an AGA.  The Court concluded the guarantee agreement engaged section 25 of the Act, invalidating it, but failed to answer the question of whether a guarantor could provide a sub-guarantee under an AGA. In its conclusions the Court stated “If the guarantor is required to enter into a further guarantee when the lease is assigned, it seems to me that the guarantee can, as a matter of language fairly be said to “frustrate the operation of any provision of [the] Act”…in that it would, if valid, impose on the guarantor obligations equivalent to those from which section 24 was designed to secure his release”. Looking at the question of guarantors providing sub-guarantees under a tenants AGA the Court took the view that “Section 16 addresses the circumstances in which a tenant can give a guarantee for an assignee, but there is no equivalent provision dealing with guarantors…Liability under an AGA given by a tenant has to come to an end when the tenants assignee assigns…Since however, section 16 makes no reference to guarantors, there would be no similar restriction on how long such a guarantors liability could continue”.

However, the Court left the question open and stated “even if a guarantor could sub guarantee a tenants obligation under an AGA, it would not necessarily follow that he should be able to give a direct guarantee for an assignee.  In short I do not think it helps to try and answer the question whether a guarantor can give a sub-guarantee”. K/S VICTORIA K/S agreed to enter into a sale and lease back agreement (‘Agreement’) with House of Fraser Ltd (“HoF”) of property owned by House of Fraser (Stores Management) Ltd (“Management”). The agreement required Management to accept a lease, HoF acting as guarantor, with an assignment within three months to another company in the HoF group. The Agreement also required HoF to enter into a further guarantee for the assignees liabilities upon assignment. The lease was not assigned, and HoF contended the requirement to act as guarantor on assignment was unenforceable.  As with Good Harvest the Court found that the terms of the Agreement frustrated the provisions of the Act and consequently the term requiring HoF to act as the assignees guarantor was void. In reaching its decision the Court stated “If a landlord could (a) when granting a tenancy, impose an obligation on a tenant’s guarantor to guarantee the liability of the assignee in the event of an assignment, and (b) on an assignment by a tenant, enforce that obligation, it would, as a matter of ordinary language “frustrate” the operation of section 24(2)”. The Court in dissecting Good Harvest indicated that ‘The effect of the reasoning of Newey J in Good Harvest appears to be that, on an assignment of a lease from the existing tenant to an assignee, section 25(1) invalidates a guarantee of the assignees liabilities by the person who was the guarantor of the assignors liabilities”. The Court accepted this interpretation of section 25(1) of the Act and in doing so stated “in our view, interpretation (i) is correct, albeit subject to a very important qualification, which relates to AGA’s under section 16.

It appears to us that principled objections to interpretation (ii) are correct [ie section 25(1) only invalidates an agreement if it was entered into at the insistence of the landlord]…By section 24(2), on any assignment, a guarantor of the assignor is only required to be released “to the same extent as the tenant”.  Accordingly, if, where section 16(2) applies, the landlord is entitled to require the assignor to resume liability under an AGA, it does not appear to us to be inconsistent with section 24(2), and hence it would not be void under section 25(1), for the landlord in such a case to require the guarantor to guarantee the liability of the tenant under the AGA.  Where an assignor is lawfully required to enter into an AGA, then, when he assigns the lease, he is released from his obligations under the lease, save to the extent that he re-assumes those obligations under the AGA.  There appears to be nothing inconsistent with section 24(2) if the assignor’s guarantor is required to guarantee the assignors liability under the AGA: the guarantor is released to precisely the same extent as the assigning tenant” Consequently, although the Court concluded that a tenant’s guarantor could not provide a guarantee of an assignees liability, the guarantor could act as a guarantor for the tenant’s obligations under an AGA, thereby resolving the issue left open by the Court in Good Harvest. CONCLUSION In deciding these cases the Court has explained and clarified the effect of sections 24 and 25 of the Act, and it is clear that guarantors are not liable for the liabilities of assignees on assignment.  However, it does appear that the way has been paved for guarantors to provide sub-guarantees under AGA’s when tenants are required to provide them when assigning.  A vigilant landlord will look to ensure satisfactory provision is made for such an event in its lease. In summing up the position the Court in K/S Victoria provided a helpful conclusion as to the current position and indicated the following effect of the Act on existing guarantors: 

“i)        an existing or contracting guarantor of a tenant cannot validly be required to commit himself in advance to guarantee the liability of a future assignee, 

ii)             subject to (iii) and (iv), a guarantor of an assignor cannot validly guarantee the liability of the assignors assignee, 

iii)            such a guarantor can validly do so by being party to an AGA which otherwise complies with section 16, and 

iv)            such a guarantor can in any event validly guarantee the liability of an assignee on a further assignment.” If you are entering into an agreement to provide a guarantee or you are being asked to act as a guarantor of an AGA, you should seek specialist advice from a Landlord and Tenant solicitor. 

This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.

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