In our Law-Now of 26 February 2010 (AGAs – Landlords must look forward and not back!) we pointed out the problems created by the decision in the case of Good Harvest Partnership LLP -v- Centaur Services Limited [2010] EWHC 330. The case was appealed and was to be heard by the Court of Appeal on 29 June 2010. The case settled before being heard. Unfortunately this leaves us with the unsatisfactory position that has resulted from the High Court's decision in January 2010.
The case is clear on one point – that because of the provisions of the Landlord and Tenant (Covenants) Act 1995 only a former tenant can give an AGA. A guarantor cannot give a guarantee to the AGA and will be released on assignment, regardless of any agreement to the contrary.
The most unsatisfactory consequences of the case however, arise from obiter dicta comments made by the judge, that is comments that do not form part of the judgment and thus are not binding in future cases but which provide guidance where there is no case in point. These comments bring into doubt the practice that has grown up around the provisions of guarantors on an AGA.
In our view, the practical consequences of the Good Harvest case are as follows:
- A company that has been a guarantor under an AGA cannot give a future guarantee, even if it is given voluntarily;
- The use of parallel guarantees and sub-guarantees are also likely to fall foul of the 1995 Act;
- There will be greater scrutiny by landlords of the covenant strength of the assignee alone rather than looking at the assignee, tenant and guarantor as a package;
- Landlords will introduce restrictions on inter-group assignments, if not total prohibitions. Currently it is often the case that the real covenant strength of group companies lies with the guarantor. Once used, this company cannot provide a guarantee again on any subsequent group re-organisation. Any such restrictions or prohibitions might, though, have an adverse impact on rent review;
- Landlords are likely to require additional security by way of a bank guarantee or rent deposit;
- Landlords may require the guarantor to be a joint tenant instead. There are accounting and tax reasons, though, why it is preferable for an occupier to have the lease held by a subsidiary guaranteed by its parent.
The anti avoidance provisions of the Landlord and Tenant (Covenants) Act 1995 are broad. Practitioners have spent time trying to come up with ways to circumvent the impact of the decision of Good Harvest. Unfortunately there are limited possibilities, leading us back to the conclusion reached in our earlier Law-Now - that Landlords must look forward, not back and concentrate on the strength of the prospective assignee.
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Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 02/07/2010.