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Don't fall foul of the authorised guarantee agreement...

Commercial Property

Commercial Property:

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

The issue in question was how a guarantor can guarantee anoutgoing 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 thelicence to assign, the High Court held that the guarantee in the licence in theCo-Operative Group case, operated as a sub-guarantee and the guarantor was notreleased from its liability.

Privity of Contract:

The Landlord and Tenant Covenants Act came into force on 1January 1996. The Act abolished 'privity of contract'� - the relationshipbetween the parties in a contract which entitles them to sue each other, butprevents a third party from doing so - for all new commercial property leases,though in certain circumstances an outgoing tenant could be required to guaranteeits immediate assignee.

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

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

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

In the Co-Operative Group case, where the Act requires thaton an assignment of a new lease the outgoing tenant is released from the tenantcovenants 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 intoan AGA to guarantee the performance by the assignee of the tenant'�s covenantsin the lease. Subsequent case law has established that an outgoing tenant'sguarantor can guarantee the outgoing tenant's performance of its obligationsunder the AGA as a sub-guarantee.

But, the outgoing tenant'�s guarantor cannot guaranteeperformance of the tenant's covenants performed by the assignee as that wouldbe a direct guarantee and would be rendered invalid by the anti-avoidanceprovisions of the Act.

In the case of GoodHarvest Partnership LLP v Centuar Services Ltd, the High Court held that directguarantees by the outgoing tenant'�s guarantor to guarantee the obligations ofthe assignee in an Authorised Guarantee Agreement (AGA) are void under section25 of the Landlord and Tenant (Covenants) Act 1995.

If this were not thecase, a condition would have imposed obligations on the tenant'�s guarantorequivalent to those from which section 24 LTCA 1995 sought to release themthereby frustrating the aims of the Act. The effect of Good Harvest was thatany direct guarantee from on outgoing tenant'�s guarantor of an incomingassignee is unenforceable.

The Coop case was complicated by there being more than oneprovision in the licence to assign, but the crux of the matter is that landlordsand their solicitors need to be very careful when drafting to make the distinctionbetween a sub-guarantee and direct guarantee, to ensure that the outgoingtenant'�s guarantor only ever guarantees performance by the outgoing tenant andnot performance by the assignee.

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


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