UK: Landlords And Tenants - The Balance Of Power And Authorised Guarantee Agreements

Last Updated: 29 November 2011
Article by Sarah Godfrey

Many in the property industry have kept a keen interest in the development of the law relating to Authorised Guarantee Agreements ('AGAs'), particularly in the wake of the case Good Harvest Partnership v Centaur Services Limited 2010 EWHC (Ch).

The recent case of KS Victoria v House of Fraser (Stores Management) Ltd and others 2011 EWCA Civ 904 has clarified and reframed the law on AGAs.

The story began on 1st January 1996 with the advent of the Landlord and Tenant (Covenants) Act 1995 ('the 1995 Act'). Before the 1995 Act came into force landlords very much had the upper hand as they could pursue any former tenant of a lease for a breach of a lease by a subsequent tenant. The 1995 Act sought to redress the balance of power by legislating that once a tenant had assigned their lease, their liability ended.

However, so that landlords were still protected to a certain extent, the 1995 Act allowed Landlords to require assigning tenants to guarantee the immediate assignee's performance of the lease covenants. So if tenant A assigned to B, A would guarantee B's performance of the tenant's covenants in the lease, but once B assigned to C, A was off the hook. These guarantees are commonly known as AGAs.

What was not entirely clear though was whether the 1995 Act also prevented a tenant's guarantor from having continuing liability to the landlord for the performance of subsequent tenants. The 1995 Act contains strong 'antiavoidance' provisions which prevent any arrangements which are not true AGAs from being valid.

Good Harvest

Property professionals got very excited about the case Good Harvest Partnership v Centaur Services Limited. In that case the court ruled that a tenant's guarantor cannot be required to enter an AGA directly guaranteeing the assignee's performance of the tenant's covenants in a lease.

There was still a question mark however as to:

  • Whether it would be acceptable if a tenant's guarantor entered into such an AGA voluntarily. This happens frequently for example where a company assigns a lease to a group company and the parent company stands as a repeat guarantor; and
  • Whether as an alternative to a guarantor directly guaranteeing an incoming tenant in an AGA, they could guarantee the outgoing tenant's covenants in the AGA (commonly known as a 'subguarantee').
  • It was hoped that the Court of Appeal would clear up the ambiguity in the law. However on 29 June 2010 the parties settled out of court leaving these questions unanswered.

KS Victoria

KS Victoria - which centred on a sale and leaseback agreement which required a tenant's guarantor to stand as a direct guarantor for the assignee - has brought some welcome clarification to the law in this area, albeit not necessarily to the satisfaction of either landlords or tenants.

Firstly the case upheld the Good Harvest decision: a landlord cannot require a tenant's guarantor to enter an AGA to directly guarantee the performance by the assignee of the tenant's covenants in the lease. The case also addressed the unanswered questions above:

  • To the chagrin of landlords and some tenants the case went further than Good Harvest and ruled that a guarantor cannot even enter such an arrangement voluntarily; and
  • On the other hand the case brought some welcome news for landlords and confirmed that the subguarantee arrangement will be valid.

Implications going forwards

Certainly those hardest hit by the decision are those landlords who have already granted leases which permit intra-group assignments without requiring landlords consent, on the proviso that the tenant's guarantor gives a repeat guarantee in an AGA.

A recent example of a deal that has faltered because of the change in law is that of the Citi Tower in Canary Wharf, where potential investors have been put off buying the property as the lease is assigned to a subsidiary of Citi bank and there is uncertainty as to the validity of the guarantee.

The judgment isn't necessarily in tenants' interests either. For example, a repeat parent guarantee can often be a desirable mechanism for the parent company as it facilitates an assignment that a landlord might otherwise be unwilling to consent to (on the basis that often the tenant company may be a shell company without any financial standing). There are of course other options that the parties can look at such as using the sub-guarantee structure (but this will only work for the first assignment with a repeat guarantor) and rent deposits, but overall it is true to say that KS Victoria has fettered the ability of both landlords and tenants to make commercial bargains that are in many cases mutually advantageous.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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