Don’t fall foul of the authorised guarantee agreement…

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Commercial Property:

A recent High Court decision in Co-Operative Group Food Ltd
v. A&A Shah Properties Ltd (2019) relates to an authorised guarantee
agreement (AGA) dispute, in this case an agreement involving a guarantor of the
outgoing tenant.

The issue in question was how a guarantor can guarantee an
outgoing tenant’s obligations in an authorised guarantee agreement (AGA)
without falling foul of the Landlord and Tenant (Covenants) Act 1995.

Although there was some confusion given the terms in the
licence to assign, the High Court held that the guarantee in the licence in the
Co-Operative Group case, operated as a sub-guarantee and the guarantor was not
released from its liability.

Privity of Contract:

The Landlord and Tenant Covenants Act came into force on 1
January 1996. The Act abolished “privity of contractâ€� – the relationship
between the parties in a contract which entitles them to sue each other, but
prevents a third party from doing so – for all new commercial property leases,
though in certain circumstances an outgoing tenant could be required to guarantee
its immediate assignee.

Before the Landlord and Tenant (Covenants) Act 1995, the
first tenant remained liable for the rent, etc., throughout the term of the
tenancy, regardless of assignment. An assignee default at any time meant the
original tenant could suddenly be presented with a demand for rent at any time.

The Act did not change the rules on underletting, but it
meant that with any commercial lease the parties were permitted to enter into
an agreement, usually explicitly in the lease, specifying those circumstances
in which consent to assignment can be withheld, or any conditions subject to
which consent can be granted.

In return for the loss of their rights under privity of
contract, landlords were given greater powers to control assignments and the
Act. It also amended s.19 of the Landlord and Tenant Act 1927, and introduced for
both new and existing leases a procedure under which landlords had to notify
former tenants, and their guarantors, within six months of a current tenant’s
breach of certain covenants. If in these circumstances the notified tenant or
guarantor was to remedy the breach, it is able call for an overriding lease.

In the Co-Operative Group case, where the Act requires that
on an assignment of a new lease the outgoing tenant is released from the tenant
covenants and, at the same time, any guarantor of that outgoing tenant is also released,
there is a qualification.

That is, the outgoing tenant may be required to enter into
an AGA to guarantee the performance by the assignee of the tenant’s covenants
in the lease. Subsequent case law has established that an outgoing tenant’s
guarantor can guarantee the outgoing tenant’s performance of its obligations
under the AGA as a sub-guarantee.

But, the outgoing tenant’s guarantor cannot guarantee
performance of the tenant’s covenants performed by the assignee as that would
be a direct guarantee and would be rendered invalid by the anti-avoidance
provisions of the Act.

In the case of Good
Harvest Partnership LLP v Centuar Services Ltd, the High Court held that direct
guarantees by the outgoing tenant’s guarantor to guarantee the obligations of
the assignee in an Authorised Guarantee Agreement (AGA) are void under section
25 of the Landlord and Tenant (Covenants) Act 1995.

If this were not the
case, a condition would have imposed obligations on the tenant’s guarantor
equivalent to those from which section 24 LTCA 1995 sought to release them
thereby frustrating the aims of the Act. The effect of Good Harvest was that
any direct guarantee from on outgoing tenant’s guarantor of an incoming
assignee is unenforceable.

The Coop case was complicated by there being more than one
provision in the licence to assign, but the crux of the matter is that landlords
and their solicitors need to be very careful when drafting to make the distinction
between a sub-guarantee and direct guarantee, to ensure that the outgoing
tenant’s guarantor only ever guarantees performance by the outgoing tenant and
not performance by the assignee.

In the end, in the Coop case, purely because of one provision
in the licence to assign, the AGA was held on this appeal to be an enforceable
sub-guarantee.

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