Authorised Guarantee Agreements: An Overview and Relevant Case Law

It was recognised that as tenant covenants are particularly onerous, landlords were protected excessively, and tenants needed some compromise to prevent situations as set out above.  Therefore, the Landlord and Tenant (Covenants) Act 1995 set out to release tenants and third parties of their obligations on assignment.  However, this is qualified, as the landlord has the option to require the outgoing tenant, on assignment, to guarantee the new tenant ‘the assignee’.  This is known as an Authorised Guarantee Agreement.  Although the position may not appear to have changed, the guarantee only lasts until the assignee assigns its interest.

Authorised Guarantee Agreements have generated some interesting case law over the past year, as to the position of guarantors, both on assignment, and in the case of an insolvent tenant under the Insolvency Act 1986.

Good Harvest LLP v Centaur Services Limited [2010]

The facts are as follows:  Centaur was guarantor of an Underlease taken by the tenant (Chiron).  When Chiron wanted to assign to Total Home Entertainment Distribution Limited, Centaur was required to enter into an Authorised Guarantee Agreement with the Landlord, which was Good Harvest LLP at the time of these proceedings.

The question Mr Justice Newey had to determine was whether The Landlord and Tenant (Covenants) Act 1995 precludes a guarantor from being required to give a further guarantee on assignment. 

It was held that in considering the Act, it was clear that Section 24 of the Act, regarding guarantors, relieved the guarantor “of any liability” on assignment, and to allow such a guarantee would undermine the purpose of the Act.  There is silence on guarantors and third parties, and if Parliament had intended that guarantors would be required to enter into a further guarantee, it would have stated so “explicitly”.

Comment: In the current economic climate, this decision will not hold favour with landlords, especially those who will depend on guarantees from the previous tenant’s guarantor.  Instead they shall have to rely solely on the previous tenant and the guarantor of the current tenant.  Therefore, it is important that landlords and their advisors consider obtaining guarantees elsewhere.

Shaw v Doleman [2009]

Facts: The defendant assigned its interest in a Lease that was granted by the claimant landlord’s predecessor.  As a condition of assignment, the defendant entered into an Authorised Guarantee Agreement of the assignee’s obligations.  The assignee became insolvent and the Lease was disclaimed as a consequence.  However, there were outstanding rent payments and the landlord claimed from the defendant (the guarantor) under the agreement.

The question the Court of Appeal had to determine was whether the liability period provided in the agreement had ended.  The defendant argued that the liability period was only limited to “the period during which the assignee is bound by the tenant covenants of the lease”, and as the Lease was disclaimed, the tenant and its guarantor were no longer liable.

However it was held that the liability period had to be read in the context of s.178 (4) (b) Insolvency Act 1986, which states that the tenant is no longer bound so far as its own obligations are concerned but is bound for the purpose of third party obligations, as in Hindcastle Ltd v Barbara Attenborough Associates Ltd.

Comment: Shaw v Doleman confirms that since the Landlord and Tenant (Covenants) Act 1995 came into force Hindcastle is still good law, and that read in the context of the Insolvency Act 1986, a guarantor of an insolvent tenant will still be liable to the landlord, even if the tenant no longer is.

For advice on any landlord and tenant matter, please contact Richard Gordon (rkg@silvermansherliker.co.uk) or Scot Tsang (sskt@silvermansherliker.co.uk) or call +44 (0)20 7749 2700.