Property Litigation Newsletter – March 2010
Good Harvest Partnership LLP v Centaur Services Limited
When is a guarantee not worth the paper it is written on? We take a look at the recent Good Harvest decision and consider its implications.
Good Harvest Partnership LLP v Centaur Services Limited is a case of major importance and has finally decided the much discussed point as to whether the Landlord and Tenant (Covenants) Act 1995 ("the Act") prevents a guarantor of a tenant's obligations from being required to give a further direct guarantee in respect of an assignee of a lease.
At the same time the Court also considered - although going no further than an expression of doubt - whether a guarantor's "sub guarantee" of an outgoing tenant's Authorised Guarantee Agreement "AGA", would also be enforceable.
The Facts
In this case, the tenancy was entered into on 5 October 2001, with the guarantor providing a guarantee of the tenant's obligations. The tenancy allowed the tenant to assign subject to a proviso that the tenant and its guarantor could be required to enter into an AGA. The tenancy was assigned in 2004, at which point the guarantor entered into an AGA that guaranteed the performance of the assignee's obligations until such time as a further lawful assignment occurred.
The assignee fell into arrears and the Landlord issued proceedings against the guarantor, seeking payment of the rent.
The Decision
The Court held that the AGA was invalid as a result of Section 25 of the Act and that, as such, the Landlord was not entitled to recover the arrears from the guarantor.
In reaching its decision, the Court looked at Sections 5 and 24 of the Act, which seek to ensure that a guarantor's obligations come to an end when a lease is assigned. The Court then considered Section 16 of the Act, which contains a general prohibition on a tenant guaranteeing an assignee, except by way of an AGA. The Court noted that Section 16 refers only to tenants and not to guarantors, and so took the view that according to the Act, there was no provision to allow a tenant's guarantor to guarantee an assignee. Finally, the Court noted that Section 25 of the Act contained comprehensive "anti avoidance" provisions, which are designed to ensure that the operation of the Act is not frustrated. The Court concluded that given all of these points, the guarantee which had been provided fell foul of Section 25 of the Act.
With regard to the issue of the "sub guarantee", although it was expressed that this type of guarantee might also fall foul of Section 25 of the Act, the Court went no further with this, as that was not part of the facts of the case and thus no decision was required on the point. This comment alone will, however, have an immediate effect because guarantors will no doubt rely upon what has been said by the Court to resist payment when a demand for payment is made on the basis of a "sub guarantee" of an AGA.
What now?
So where does this leave us? Guarantors that have provided similar guarantees of assignee's obligations in relation to "new tenancies" (in general, tenancies granted after 1 January 1996; the liability of former guarantors in relation to "old tenancies" remains unaffected) will be relieved to know that they would have no liability if the assignee defaults. Likewise, many Landlords will be disappointed to know that what they once saw as an avenue of recovery is no longer open to them, should the assignee default.
The position as to the "sub guarantee" point requires further case law before the issue is clarified. In the meantime, however, guarantors facing a "sub guarantee" claim will no doubt, as above, rely on the Court's comments to resist payment.
Due to the uncertainty caused by the Court's decision, a Landlord's approach to applications for the assignment of "new tenancies" will undoubtedly change, in light of the fact that the strength of the assignee's covenant takes on more importance than it did before. This is particularly important on assignments where the current tenant is insolvent but has a guarantor. In those circumstances, if the administrator or liquidator of the current tenant does not agree to enter into an AGA, then any further guarantee provided by the guarantor would directly guarantee the assignee's obligations, and would thus fall foul of Section 25 of the Act.
As we understand that permission to appeal has now been granted in relation to the Good Harvest case it seems that some form of "clarity" may shortly be to hand. We would also expect to see some form of decision made on the "sub guarantee" point, given the scope for litigation that the Court's comments has created. We await developments on all fronts with interest.
Rob Nicholson is a partner within the Michelmores property litigation team. For further information on the issues raised in this article, please contact Rob at robert.nicholson@michelmores.com.
This information has been prepared by Michelmores LLP as a general guide only and does not constitute legal advice on any specific matter and should not be relied upon as such. We recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of this information.
