Is Your Guarantee Enforceable?

May 26, 2010

The High Court decision in the recent "Good Harvest" case has provoked intensive discussions on what has become known in the industry as the "AGA Saga". Authorised Guarantee Agreements ("AGA's") are the product of the Landlord & Tenant (Covenants) Act 1995 ("the Act") which abolished the long established legal principle of privity of contract whereby the original tenant of a lease was liable to the landlord for the entire length of the lease notwithstanding any number of assignments during the course of the term. Instead the Act introduced the automatic release of a tenant on assignment permitted by the lease. The loss of the right to recover arrears from a previous tenant would clearly have a considerable detrimental effect on the value of a landlord’s interest and as a concession to landlords the Act provided that a landlord could require an outgoing tenant to give a guarantee ("an AGA") for the obligation of its immediate assignee.

The statutory release also applies to any guarantee which may have been given by a tenant’s guarantor. Unfortunately the Act left unanswered whether a landlord could either (a) require a tenant's guarantor to enter into an AGA for the assignee (a "guarantor's AGA") or (b) require a tenant’s guarantor to give a guarantee for the tenant's AGA ("a sub-guarantee"). Most leases will assume that a sub-guarantee is permissable and the practice is widespread. A requirement for the tenant’s guarantor to give an AGA for an assignee is much more unlikely.

The Act contains anti-avoidance provisions designed to prevent frustration of the Act. The case of Good Harvest has tested whether a guarantor's AGA breached the anti-avoidance provisions and was unenforceable and concerned a case involving a lease in which the landlord required the tenant’s guarantor to give an AGA which the landlord subsequently tried to enforce. The High Court has determined that the requirement for a guarantor’s AGA breached the extensive anti avoidance provisions in the Act and was thus unenforceable. It appear that even an AGA volunteered by a tenant’s guarantor would fall foul of this legislation.

Although leave to appeal the decision in Good Harvest has been granted there are many that consider that there is no distinction between an guarantor's AGA and a sub-guarantee and that both are contrary to the intention of the Act and thus vunerable. General opinion is that it would be surprising if the Court of Appeal overturned the Good Harvest decision. Any comments from the Court about the regularity of sub-guarantees will be obiter and therefore not binding but none the less they will be significant.

The message to landlords and lenders for the moment is to be cautious in relying on either AGA's or sub-guarantees whether already given by the guarantor of a former tenant or being required or offered by an assignee in conjunction with an application for a licence to assign, as it is very possible that the validity of either or both may be challenged if ever called upon in the future. A prudent landlord would be wise to require alternative security for a weak tenant covenant perhaps by way of a rent deposit, bank guarantee or letter of credit. The current message to a tenant guarantor is to consider challenging any call by a landlord on a guarantee given for a former tenant be it an AGA or a sub-guarantee.


Related pages:

Real Estate more

icons Addthis Print Contact Register

Contact

tel: +44 (0) 20 7628 2000
10 Finsbury Square, London, EC2A 1AF
View map


For more information

 image

Elizabeth Ruff
Partner
Direct dial: +44 (0)20 7614 2514
eruff@foxwilliams.com

Accreditations

  • Top Ranked Chambers UK 2014 - Leading Firm
  • Ranked in Chambers Europe 2013 - Leading Individual
  • Ranked in Chambers Global 2014 - Leading Firm
  • Legal 500 - Leading Firm
  • The Lawyer UK 200 - Listed Firm
  • The Law Society Excellence Awards 2012 - Shortlisted
  • Investors in People - Bronze