Tom Davies and David Holland QC deal with a landlord’s pressing query on authorised guarantee agreements.
Question
I am a landlord of commercial premises which were originally let in 2010 to an electronics company under a lease for a term of 20 years. The tenant subsequently assigned the lease in 2018 to a well-established clothing brand.
On assignment, the original tenant provided me with an authorised guarantee agreement (AGA). As part of the deal, a separate guarantee was also given in respect of the AGA obligations by the original tenant’s guarantor under the lease.
Until last year, the assignee had been trading well and meeting its liabilities under the lease as they fell due. However, the Covid-19 pandemic seriously impacted its business and the assignee has now gone into administration. Rent and service charges are owed under the lease and have been outstanding for more than a year. Can I recover these sums from the original tenant under the AGA, or, failing that, the guarantor under its sub-guarantee?
Answer
Possibly. Neither party – ie the original tenant under the AGA or its guarantor under the sub-guarantee – will be liable to pay the sums due from the current tenant unless the landlord has served it with a notice in accordance with section 17 of the Landlord and Tenant (Covenants) Act 1995. Such notice needs to have been served within six months beginning with the date that the arrears first became due.
Explanation
The 1995 Act brought about a significant change to the law of landlord and tenant, in that (among other things) it provided for the automatic release of a tenant from its contractual liability on assignment of its interest in the lease.
Under the previous law, an original tenant was liable on the covenants in a lease for the entirety of the term, with the liability of a guarantor of an original tenant being co-extensive with that of the original tenant. Assignees would only be liable under the covenants in the lease for the period during which the term was vested in them; however, it was common for assignees to enter into an express covenant with the landlord to comply with the covenants for the remainder of the term. Equally, if an assignee had given such a covenant, then any guarantor of such an assignee would also be liable for the remainder of the term. This law continues to apply to “old tenancies”, namely those entered into before 1 January 1996.
However, for “new tenancies” granted on or after 1 January 1996, a former tenant’s liability may be extended where the landlord requires it to enter into an AGA as a condition of granting consent to an assignment. Similarly, the former tenant’s guarantor can also be liable where it has given a sub-guarantee in respect of the former tenant’s liabilities under the AGA.
These principles are not, however, without nuance – something which is emphasised by the continuing pattern of case law arriving out of the 1995 Act.
Following the coming into force of the Act, it rapidly became clear that there was uncertainty over whether a guarantor of an original tenant (as opposed to the tenant himself) could be made to guarantee the obligations of an assignee. Good Harvest Partnership LLP v Centaur Services Ltd [2010] Ch 426; [2010] 1 EGLR 29 somewhat addressed this question, where it provided that only a former tenant can give an AGA, and that a contractual guarantor for the assignor cannot give a direct guarantee for the assignee. Whereas the case concerned a direct guarantee and not a sub-guarantee, the judge also expressed doubts as to the validity of the latter.
In K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] 2 EWHC 3179 (Ch); EGLR 11, the Court of Appeal upheld the essential reasoning of Good Harvest insofar as it concerned navigating the key principles of the Act, albeit with one important exception. It said that where the assigning tenant could validly be compelled to enter into an AGA, then there was nothing to prevent the assignor’s guarantor guaranteeing the assignor’s AGA (ie entering into a sub-guarantee).
EMI Group Ltd v Prudential Assurance Co Ltd [2020] EWHC 2061 (Ch); [2020] EGLR 33 appears as a recent example of a case in which the enforceability of a sub-guarantee was challenged. This case concerned the former HMV flagship store on Oxford Street, London, where the lease was assigned to Forever 21, which went into administration in September 2019 and had not paid rent since June 2019. The guarantor, EMI Group, unsuccessfully argued that the sub-guarantee it had given was void, and therefore was held liable for unpaid rent and service charges amounting to almost £5m. The case itself turned on more technical arguments surrounding the drafting of the sub-guarantee in question.
Therefore, you will potentially be able to recover outstanding sums under the AGA or sub-guarantee, but this will depend on their precise terms. It will also be necessary to serve a section 17 notice under the Act on the original tenant and/or guarantor of the original tenant within six months of sums falling due.
Irrespective of whether you are dealing with old tenancies or new tenancies, establishing liability is only the initial hurdle, and there are various pitfalls for both landlords and tenants to overcome in this area, whether that be at the point of drafting initial contractual arrangements or when seeking to recover sums under the relevant notices.
Tom Davies is an associate in the real estate disputes team at Charles Russell Speechlys LLP and David Holland QC is a barrister specialising in property law (and joint head of chambers) at Landmark Chambers
