Validity of Guarantees

Issue
Can a tenant's guarantor remain liable after a (post 1995) lease is assigned, if he agrees to stand as guarantor for the assignee?

Lawyers Paul Lawrence, John Whitfield

New law
No, the guarantor cannot be liable, whether by joining an Authorised Guarantee Agreement (AGA) or a sub guarantee of the original tenant's AGA. If it enters into an AGA it will not be enforceable.

Decision
In Good Harvest Partnership LLP v Centaur Services Ltd (23 February 2010), a tenant and his guarantor jointly gave an AGA when the lease was assigned. When rent was not paid by the assignee, the landlord claimed against the guarantor. Newey, J. said the anti-avoidance clause in the Landlord and Tenant (Covenants) Act 1995 precluded the guarantor from being liable. He said that no existing guarantor can validly take on liability for an assignee

Impact
Unless the decision is reversed, (or the law is changed), a number of existing guarantees (of leases which have been assigned) will be unenforceable.

Even if a guarantor voluntarily offers to provide a guarantee for an assignee, it cannot be accepted. It would be invalid.

On applications for consent to assign, in cases where the assignee has insufficient substance, it may well be reasonable to withhold consent if the outgoing guarantor offers to provide a guarantee – because the guarantee will be invalid.

Alternative covenant packages involving rent deposits and bank financial guarantees should be considered in relevant cases.

Full decision
This Alert is a summary of the decision. It should not be used as final legal advice without referring to the firm for detailed advice on any individual situation and no liability is accepted for the content of this summary.

For further information, please contact John Whitfield, Paul Lawrence, or your usual Taylor Wessing contact.