No guarantees

With many local authorities still holding sizeable commercial property portfolios, Bill Chandler reviews the significant and far-reaching implications for all landlords of Good Harvest Partnership LLP v Centaur Services Limited, one of the most important landlord and tenant cases of recent years.

The 1995 Act and ‘new tenancies’

The Landlord and Tenant (Covenants) Act 1995 changed the landlord and tenant landscape forever. The Act drove a coach and horses through the established legal principle of privity of contract, under which landlords had traditionally been able to pursue any previous tenant under a lease.

For leases granted after 1 January 1996 (so-called ‘new tenancies’) the landlord can only pursue the current tenant, together with the immediately previous tenant if they entered into an Authorised Guarantee Agreement, or ‘AGA’.

The problem with guarantors

The position with outgoing tenants is relatively straightforward, but what happens when there is a guarantor involved? The Act is not clear and after fourteen years of discussion and conjecture the matter has finally been resolved by the courts … to a degree.

If a landlord is sufficiently concerned about the covenant strength of a prospective tenant to require a guarantor, then it goes without saying that the landlord will expect the guarantor to stand behind the tenant if the landlord has to pursue the tenant under an AGA following the assignment of the lease.

However, the Act provides that on assignment of a new tenancy the outgoing tenant and its guarantor are released, but then only allows the outgoing tenant to enter into an AGA; there is no provision allowing the guarantor to enter into the AGA. This has led to much debate as to whether the outgoing tenant’s guarantor can be kept on the hook at all following assignment.

There are two main methods of attempting to keep the guarantor on the hook following assignment:

• requiring the guarantor to enter into the assignor’s AGA so that assignor and guarantor both directly guarantee the assignee (the ‘direct guarantee’ route); or
• requiring the guarantor to guarantee the assignor’s obligations under the AGA, either within the AGA or by drafting the original guarantee to include not only the tenant’s liabilities under the lease but also under any AGA (the ‘sub-guarantee’ route).

Good Harvest – the facts

The case of Good Harvest Partnership LLP v Centaur Services Limited concerned the direct guarantee route.

Interestingly, it did not concern a guarantor arguing that it should not be required to join in the AGA, but instead it concerned a guarantor who willingly entered into the AGA and only tried to argue that it was void under the wide-ranging anti-avoidance provisions in section 25 of the Act when the landlord came to enforce the AGA several years later.

Chiron CS Limited, the outgoing tenant under a new tenancy granted in 2001, and its guarantor Centaur Services Limited had given an AGA on the assignment of the lease to Total Home Entertainment Distribution Limited in 2004. Good Harvest Partnership LLP, who had become landlord in 2005, commenced proceedings against Centaur in 2009 following non-payment of the December 2008 and subsequent rents by the assignee.

The decision

In February 2010, Mr Justice Newey in the Chancery Division of the High Court accepted that the Act does not allow any guarantee of the assignee to be given by the outgoing tenant or its guarantor other than an AGA given by the assignor, and accordingly the guarantee given by Centaur in the 2004 AGA must be void. Unfortunately, the judge expressly refused to pass comment on whether the sub-guarantee route, which is more widely used in practice, would have succeeded.

An appeal of the High Court’s decision was due to be heard by the Court of Appeal starting on 29 June. With a high-powered panel assembled for the occasion, including Master of the Rolls and eminent property expert Lord Neuberger, the property world eagerly anticipated an authoritative judgment which would constitute the leading authority on the guarantor’s position in a direct guarantee scenario and which would also provide a learned opinion on whether the position would have been any different in a sub-guarantee scenario.

Unfortunately for us, the parties settled before they reached the Court of Appeal. We are therefore left with a High Court decision on the direct guarantee route and further debate on the effectiveness of the sub-guarantee route.

The way forward?

Until the issue comes before the courts again, landlords must:

• assume that guarantors under ‘new tenancies’ cannot be pursued following assignment of the lease by the tenant they guaranteed; a sub-guarantee may be safer than a direct guarantee and should still be taken but could well be struck out by a future case
• be wary on assignments between group companies; Good Harvest suggests that any guarantee of the assignee offered by a parent company or director who also guaranteed the assignor would be void
• not assume that they have won the battle because the guarantor has willingly signed the AGA; Good Harvest shows that the guarantor can still challenge the validity of the guarantee several years later
• consider at the outset whether to add the guarantor as joint tenant if the ability to pursue the guarantor is of crucial importance to the landlord.

Bill Chandler is a Legal Director at leading national law firm Hill Dickinson LLP.  He can be contacted on 0151 600 8725 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it.