Liability following assignment of a business tenancy and Authorised Guarantee Agreements

Generally, the position under the Landlord and Tenant (Covenants) Act 1995 (the Act) is that any lease granted on or after 1 January 1996 creates a “new” tenancy. There are exceptions to this which are not discussed here.

Where a lease is an “old” tenancy, the original tenant remains liable for its covenants under the lease even when the tenant has assigned the lease.

Where a lease is a “new” tenancy, the tenant is automatically released from its covenants under the lease when the tenant assigns the lease. The tenant however remains liable for any breach of covenants which take place before the release. Any guarantor of an outgoing tenant is also released at the same time, and to the same extent, under section 24(2) of the Act.

Where a landlord requires a tenant to enter into an authorised guarantee agreement (AGA) on an assignment, which is permitted under section 16 of the Act, the tenant will remain liable until the assignee is lawfully released from the tenant covenants in the lease.

An agreement is an AGA if, under it, the tenant guarantees the performance of the relevant covenants (being those covenants the tenant would otherwise be released from) to any extent by the assignee and it is entered into in the circumstances set out in section 16(3) of the Act and it complies with sections 16(4) and 16(5) of the Act (section 16(2) of the Act).

The Act is silent on whether an outgoing tenant’s guarantor can be a party to an AGA or guarantee the obligations of an assignee and this was examined in a couple of fairly recent cases, Good Harvest Partnership LLP v Centaur Services Limited (2010) and K/S Victoria Street v House of Fraser (Stores Management) Limited (2011). It is an important consideration where the outgoing tenant and assignee are both financially weak.

In Good Harvest the outgoing tenant and its guarantor entered into an AGA covenanting that the assignee would perform the obligations of the lease. The new tenant subsequently defaulted in paying the rent and the landlord commenced proceedings against the outgoing tenant’s guarantor on the basis of the covenant given under the guarantee agreement. The landlord argued that a new guarantee of the assignee’s obligations by the outgoing tenant’s guarantor did not fall foul of the anti-avoidance provision in section 25(1) of the Act (which provides that any agreement (other than an AGA) relating to a tenancy is void if it restricts the operation of the Act) as the guarantor would be undertaking new obligations and not reviving obligations released on assignment. The guarantor argued that section 16 of the Act (permitting AGAs), which was a specific exemption from the release of tenants under section 5 of the Act, was aimed at tenants only and only referred to tenants entering into an AGA.

It was determined that the Act did not permit an outgoing tenant’s guarantor to guarantee the obligations of the tenant’s assignee. Accordingly, an agreement requiring a guarantor to give an AGA will fall foul of the anti-avoidance provisions in section 25 of the Act.

The issue as to whether a guarantor could sub-guarantee the obligations of the outgoing tenant under an AGA was not decided in the case of Good Harvest but this was considered in the case of K/S Victoria Street. In a complicated arrangement, under a sale and lease back agreement House of Fraser (Stores Management) Limited took a lease of premises with House of Fraser plc acting as guarantor. The agreement provided for the lease to be assigned to another group company by a specified date, failing which the lease would be assigned to House of Fraser (Stores) Limited and that company’s obligations would also be guaranteed by House of Fraser plc. The lease was not assigned in accordance with the agreement and so the landlord sought an order for specific performance of the assignment to House of Fraser (Stores) Limited and the guarantee by House of Fraser plc.

It was found that the requirement in the lease agreement for House of Fraser plc (who was guarantor for the assignor) to act as the assignee’s guarantor was void. This would be wholly contrary to the purpose of section 24(2) of the Act releasing an outgoing tenant’s guarantor on an assignment to the same extent as the outgoing tenant. An outgoing tenant’s guarantor cannot guarantee an assignee even on a voluntary basis.

It was confirmed in K/S Victoria Street that an outgoing tenant’s guarantor could validly guarantee the outgoing tenant’s obligations under an AGA.

So where are we now?

Landlords may wish to consider adding provisions in their leases requiring a guarantor of an outgoing tenant to guarantee the obligations of the outgoing tenant under an AGA. Landlords should also consider other options of security open to it on an assignment, for example, a rent deposit or bank guarantee. Additionally, whilst a landlord may not unreasonably withhold consent to assign, it may protect itself in terms of the grounds on which it may withhold consent to assign and the conditions which may be imposed on any assignment. Strength-related conditions on assignment may become commonplace.

For tenants, they should be aware that landlords may now seek additional security from the assignee on receipt of an application for a licence to assign.

Guarantors who have guaranteed the obligations of an outgoing tenant and the assignee should carefully consider any claim from the landlord as the guarantee may now be void.

If you require advice on this topic please contact Caroline Pain (an Associate in our Commercial and Commercial Property Department) at [email protected] or Grahame Griffiths (Senior Partner) at [email protected]