What value is a guarantee?

FOR all commercial leases entered into since January 1, 1996, an original tenant has, by virtue of the provisions of the Landlord and Tenant (Covenants) Act 1995, automatically been released from its obligations to the landlord under the terms of the lease following a lawful assignment to an incoming tenant.

However, the 1995 Act does permit the landlord (in certain circumstances) to require the outgoing tenant to enter into an authorised guarantee agreement (AGA) whereby the outgoing tenant guarantees the performance of the tenant covenants in the lease by the incoming tenant.

Many landlords have sought to improve upon the above position by requiring that any guarantor of the outgoing tenant also enters into the AGA, so that following completion of the lease assignment the landlord may rely on the covenant strength of the incoming tenant, the outgoing tenant and its guarantor.

This has on occasion led to arguments between the landlord’s and the tenant’s respective professional advisors, with the tenant arguing that the landlord is being unreasonable in its requirements and the landlord seeking as much covenant support as the law and the bargaining position of the parties allows.

However, the recent High Court decision in Good Harvest Partnership LLP v Centaur Services Limited has suggested that a guarantee given by a former tenant’s guarantor following the assignment of the lease was not enforceable and went beyond the spirit of the 1995 Act.

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This may be good news for guarantors, but landlords should now look carefully at existing guarantees and lease agreements to assess whether any guarantees may no longer be relied upon.

For future lease purposes, a landlord may wish to seek other support for the incoming tenant’s covenant; this may involve guarantors for the incoming tenant, or a rent deposits, etc, if any tenant guarantor will be lost on assignment of the lease.

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The Good Harvest Partnership LLP v Centaur Services Limited case has been appealed, with a return date of today in the Court of Appeal.

This hearing may provide further guidance, details of which will appear on Ashton Graham’s website once a decision has been made.

Tenants, guarantors, and landlords of commercial premises will no doubt await the decision with interest.

This article is for general information purposes only and does not constitute legal or other professional advice. You should not act or rely upon this information.

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