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Enforceability of Guarantees:Good Harvest Partnership LLP v Centaur Services Ltd

15 April 2010

In this article (first published in FM World), we look at the case of Good Harvest Partnership LLP v Centaur Services Ltd in which a court held that a guarantee given by the contractual guarantor of an assignor for the assignee is not enforceable.

What does this mean for tenants and guarantors?

Facts

The original tenant was supported by a contractual guarantor. As a condition of the landlord’s consent to assign, both the tenant and its guarantor were required by the lease to enter into an authorised guarantee agreement (AGA) for the liabilities of the assignee. The assignee failed to pay the rent and the landlord claimed against the contractual guarantor.

What’s an AGA?

Under the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) tenants are released from liability under a lease on lawful assignment and their contractual guarantors are released “to the same extent”. The only exception is that the landlord can require the assignor to give an AGA (a limited statutory form of guarantee) for its immediate successor. What has never been clear is whether the liability of a tenant’s contractual guarantor (typically its parent company) can be extended to include the period during which the assignor is bound by an AGA.

Decision

The High Court held that:

  • Only a former tenant can give an AGA.
  • A contractual guarantor for the assignor cannot give a direct guarantee for the assignee.
  • The 1995 Act may not allow a contractual guarantor to stand behind the assignor’s AGA. The most common form of drafting only requires the contractual guarantor to guarantee the assignor’s AGA, not to guarantee the assignee directly. The judge did not have to decide this point but his comments do indicate the view which another court might take when faced with the question.

Consequences for tenants

If you are part of a group and there is the possibility of future reorganisations which would require the lease to be assigned, think carefully when you choose which company to offer as tenant and which as guarantor. Bear in mind that leases typically require a group assignee to provide a package of equivalent financial strength to the assignor’s. This may be difficult to comply with if you have offered your strongest group company as your own contractual guarantor as it will not be able to guarantee any assignee (eg G guarantees T1. T assigns to T2. G cannot guarantee T2, even if it wants to).

Be prepared for your landlord to point out that the conditions imposed by the lease are invalid if they require your contractual guarantor to give an AGA or other direct guarantee for the assignee. Your landlord may require additional security from the assignee because of the weakness of your unsupported AGA.

Consequences for guarantors

If you have given any form of continuing guarantee for the period after the tenant has assigned and the landlord claims against you for the assignee’s default, take advice on the terms of your guarantee before making any payment. You may find that you have no liability or that it is worth arguing about it.

Case: Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch)

Postscript, 28 July 2011:
The Good Harvest v Centaur Services decision that was upheld in last year's first instance decision of K/S Victoria Street v House of Fraser (Stores Management) Ltd has now been affirmed by the Court of Appeal.  The Court of Appeal has confirmed that a guarantor for an outgoing tenant cannot guarantee the obligations of an assignee (although it can guarantee the obligations of alternate, as opposed to successive, assignees). This will come as bad news for landlords who have taken on such guarantees, for example following an intra-group assignment. In addition, the Court of Appeal has endorsed the use of "sub-" or "parallel" guarantees, which means that a contractual guarantor can guarantee the original tenant's obligations to the landlord in respect of an assignee under an authorised guarantee agreement (AGA).