29 April 2010
Good Harvest Partnership LLP v Centaur Services Limited [23 February 2010] High Court
A recent High Court decision has far reaching implications for landlords and tenants in the commercial property market.
The case of Good Harvest Partnership LLP v Centaur Services Limited centred around whether an outgoing tenant's guarantor can guarantee an assignee.
The High Court held that, where there is an assignment of a lease (which is a "new tenancy" under the Landlord and Tenant (Covenants) Act 1995) (the Act), an outgoing tenant's guarantor cannot give a direct guarantee for the assignee's performance of the tenant's covenants in the lease.
The decision, in favour of Centaur Services, is seen as bad news for landlords.
It means landlords are likely to require additional security by way of a bank guarantee or rent deposit, or alternatively 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, it 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.
Background:
At one time, a tenant had a contingent liability to the landlord throughout the term of a lease no matter how many times the ownership of the lease was transferred. Changes brought in under the Landlord and Tenant (Covenants) Act 1995 meant that after 1 January 1996, most outgoing tenants were simply responsible for their own default and any breach by an ingoing tenant/immediate assignee, provided that the outgoing tenant signed an "authorised guarantee agreement" ( "AGA"), but would not be liable for any default by any subsequent assignee.
However, one point which was uncertain in the legislation was the position of guarantors. Could a guarantor of the tenant's liabilities under a lease also be required to enter into an AGA to guarantee the obligations of the immediate assignee? This was important to landlords, especially where the tenant was financially weak, as the guarantor would only be responsible for the tenant’s default whilst that tenant was still the tenant under the lease, but not when that tenant was guaranteeing the obligation of an immediate assignee.
The Case of Good Harvest Partnership LLP v Centaur Services Limited:
Chiron CS Limited was granted a lease in 2001, guaranteed by Centaur Services Limited. The lease stated that the landlord could require that, as a condition for giving consent to the tenant assigning the lease, the tenant and its guarantor enter into an AGA.
In 2004 Chiron assigned the lease to a third party and the landlord, Chiron and Centaur entered into an AGA, under which Chiron and Centaur each covenanted with the landlord that the assignee would pay the rent and perform the lessee's covenants from the assignment until the next lawful assignment of the lease.
Subsequently, Good Harvest Partnership LLP became the landlord and brought proceedings to recover rent from Centaur under the AGA. Centaur disputed the claim, arguing that the AGA was void and unenforceable as against Centaur because of the Act's anti-avoidance provisions.
The High Court agreed with Centaur. The requirement for the tenant's guarantor (Centaur) to guarantee the assignee fell foul of the anti-avoidance provisions in the Act and was, consequently, unenforceable. Good Harvest was, therefore, unable to recover rent from Centaur.
The Court considered that the Act was meant to ensure that the tenant's guarantor's obligations ended on the tenant assigning the lease. The Act would be frustrated if the guarantor was required to enter into a further guarantee when the lease was assigned and an AGA was a specific (and exceptional) statutory provision with no equivalent provision for a tenant's guarantors.
It is possible that this decision may be appealed.
Note: One aspect which is still unclear is the position of a parallel guarantee. In view of the uncertainty in the original Act some leases required the tenant's guarantor to guarantee the outgoing tenant's obligations in the AGA, rather than guarantee the assignee directly on the basis that it was not a direct guarantee but a "parallel guarantee".
The Court did not think it was clear that the Act permitted a tenant's guarantor to sub-guarantee or enter into a parallel guarantee of a tenant's obligations under an AGA, but the Court did not have to decide that point in this case.
Call Michael Larcombe on 01753 279087, complete the complete the online enquiry form or email comproperty@bpcollins.co.uk. |
