Has the uncertainty over a guarantor’s liability following an assignment now been resolved?

Janice Northover

Following the decision in Good Harvest Partnership LLP v Centaur Services Limited last year, landlords were left with serious concerns over the enforceability of guarantees given by tenants’ guarantors on an assignment.

The Court held that a guarantee given by a guarantor jointly with a former tenant to guarantee the assignee’s liabilities was void under section 25 of the Landlord and Tenant (Covenants) Act 1995. Not surprisingly, the decision was met with a mixed reception. Tenants and guarantors welcomed the decision. Landlords worried about how the loss of guarantees would undermine the investment value of their reversionary interests while eagerly awaiting the outcome of an appeal. However, the appeal was compromised and it was feared that the question marks surrounding the Good Harvest decision would remain unanswered.

The decision in Good Harvest has recently been followed (albeit reluctantly) in the case of K/S Victoria Street v House of Fraser (Stores Management) Limited & Others. Despite the Deputy Judge having difficulties with parts of the reasoning of Mr Justice Newey in Good Harvest, he was not prepared to hold that it was wrong and therefore felt compelled to follow it. It is now clear that, until the Court of Appeal gives a ruling, Good Harvest is likely to be followed by the Courts in the first instance.

Landlords must now resign themselves to the fact that any guarantee given by a guarantor with a former tenant to guarantee the assignee’s liabilities (known as a direct guarantee) will not be enforceable. However, the issue over whether a guarantor guaranteeing the tenant’s liability under an AGA (known as a sub-guarantee or GAGA) is enforceable remains a grey area.

Some practitioners take the view that if section 25 is wide enough to avoid direct guarantees it must be wide enough to avoid GAGAs otherwise the landlord could circumvent the provisions of the Act by simply changing the name of the party being guaranteed. However, Mr Justice Newy’s comments on GAGAs were merely obiter and landlords should not therefore give up hope on the enforceability of GAGAs just yet.

Landlords might also want to consider alternative methods of protecting their interests on an assignment. One suggested method of getting around section 25 is to require the original tenant to assign the lease to its guarantor. The guarantor then assigns the lease to the third party (i.e. the party originally intended as the assignee) while entering into an AGA. In that instance the guarantor is entering into an AGA not as the original tenant’s guarantor but as the tenant. This idea is yet to be tested but until we have a ruling from the Court of Appeal there is nothing to suggest that it would not work.

It should also be borne in mind that landlords still have the right to refuse consent to assign in circumstances in which it is reasonable to do so. Withholding consent (reasonably) ultimately remains the landlord’s prerogative.

Has the uncertainty over a guarantor’s liability following an assignment now been resolved?

Janice Northover

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