Landlord and tenant dilemmas and the fall-out from the AGA saga
Two famous recent cases (Good Harvest v Centaur and K/S Victoria Street v House of Fraser) looked at the relationship between landlords, tenants and guarantors.
As a result, the main principles of the relationships are quite well understood:
1. When a Tenant assigns their lease they can directly guarantee the incoming tenant through an Authorised Guarantee Agreement (an “AGA”) - This has been known.
2. On assignment the outgoing tenant’s guarantor must be released and cannot directly guarantee the incoming new tenant - This is new.
3. But, the outgoing tenant’s guarantor can sub-guarantee the outgoing tenant’s obligations under the AGA - This was what was hoped for and is now confirmed.
But, how do you deal with these commonly occurring events?
1. The Tenant wants to assign to a sister company within their group
The deal may be sold to the Landlord on the basis that the existing parent company guarantor will stay in place and continue to guarantee. This looks rational and fair, especially if it is part of a larger reorganisation or corporate restructuring. But, unfortunately it cannot be done. The parent guarantor would have to be released and any attempted direct guarantee of the incoming sister company would be void.
2. The Tenant wants to assign to a third party that has the same guarantor (e.g. a bank)
This could just be an unfortunate coincidence, but if the guarantor is the same entity any new direct guarantee from them would be void.
3. The Tenant wants to assign to their guarantor
This seems very rational and would be difficult for the Landlord to argue against logically. After all if the party is good as a guarantor they should be good as the tenant. Sadly, there is some indication that this also would be void. As the guarantor must be released to the same extent as the outgoing tenant, then they cannot take on the tenancy obligations. As this does seem illogical, there is some suggestion that if the guarantor is taking genuine beneficial occupation then it may be valid. Although that is a gamble many landlords will not take.
4. Despite the decisions in the cases all parties are happy to proceed
The courts were quite clear, the motives and wishes of the parties are overridden. It was argued in court that this was interfering with freedom of contract, but the judges merely agreed that that is what legislation often does. The point was that it was too difficult to tell after many years what the parties wanted to do and why they did it.
1. Make use of the permitted sub-guarantee route to keep the guarantor on the hook for the time being.
2. Use alternative forms of protection such as rent deposits.
3. Landlords may need to be more selective in when they consent and any doubtful guarantee should be disregarded.
4. If all else fails (perhaps to save a larger transaction like a corporate restructuring) then a new lease could be granted. These rules only apply to the assignment of a lease. If a new lease is granted instead then the original guarantor can guarantee the new lease without problem.
For advice contact Paul Burbidge, Partner and Head of Commercial on 01622 689712 or email him at firstname.lastname@example.org