UK: Good Harvest – Bad News?

Last Updated: 2 April 2010
Article by Peter Sugden, James Dodsworth, Simon Hartley and Nichola Padget

Originally published 31 March 2010

Keywords: Landlord & Tenant Act, covenants, Good Havest Partnership, Centaur Services, lease, authorised guarantee agreement , AGA

Last month – almost 15 years after the Landlord and Tenant (Covenants) Act 1995 ("the Act") came into force - the High Court decided in "Good Harvest Partnership LLP v Centaur Services Limited"1 ("Good Harvest") that a tenant's guarantor is released on a lawful assignment of a lease (entered into after 1 January 19962) and cannot be required to enter into an authorised guarantee agreement ("AGA").

Facts

Centaur Services ("CS") was a guarantor under a lease granted in 2001. In 2004 the tenant ("T") assigned the lease with the landlord's consent. As a condition of the landlord's consent being granted the lease required that both CS and T enter into an AGA, which they duly did.

In June 2009, the landlord issued proceedings against CS. Relying upon the AGA, it sought recovery of rent arrears owed by T's assignee. CS defended the claim, arguing that the AGA was void on the basis that it contravened the Act. The High Court agreed.

The Decision

Mr Justice Newey concluded that the AGA was void on the following grounds:

  • Tenants and their guarantors are released from liability in relation to the tenant covenants in a lease upon a lawful assignment pursuant to s5 and s24 of the Act.
  • The release is limited only by the provisions of s16 of the Act, which says that a tenant may provide an AGA guaranteeing the incoming tenant's liability. S16 does not refer to guarantors, which Mr Justice Newey interpreted as evidence of a parliamentary intention that guarantors should be unable to provide AGAs and, therefore, should be released unconditionally from them.
  • Any attempt to require a guarantor to enter into an AGA would frustrate the Act, which is contrary to the anti-avoidance measures in s25. S25 of the Act states that any attempt to "exclude modify or otherwise frustrate the operation of the Act" is void and, therefore, unenforceable.

Although irrelevant to the facts in Good Harvest, Mr Justice Newey went on to consider two further questions:

  1. Whether a tenant's guarantor can also volunteer to act as a guarantor of the assignee?
  2. Whether the landlord could have required CS to provide a sub-guarantee (a guarantee of T's obligations in the AGA) as an alternative to guaranteeing the assignee's obligations?

The Court held that both arrangements would be void. He went further: saying that where one subsidiary assigns a lease to another subsidiary the tenant's parent company guarantor can not provide a guarantee for the assignee "however much it wished to and however commercially desirable that it was".

Comment

The decision in Good Harvest means that landlords cannot require a guarantor to guarantee an assignee's obligations either by way of an AGA or a direct guarantee. Further, landlords will not be able to recover arrears owed by an assignee from a former tenant's guarantor even if it has entered into an AGA or guarantee stating otherwise.

The additional observations made in Good Harvest about the voluntary provision of guarantees and sub-guarantees are not related to the subject matter of the case. They are, therefore, not binding authority. However, the comments will still be treated as persuasive by other Courts and so should not be overlooked, particularly when dealing with inter-group assignments and parent company guarantees. Accordingly:

  1. Landlord's should be cautious in accepting parent companies as an assignee's sole guarantor where the parent company is a guarantor for the tenant. According to Good Harvest, the landlord would be left without valid security;
  2. Where assignments have already occurred, effectively transferring a parent guarantee from a former tenant to the assignee, a landlord cannot assume it will be able to rely upon the guarantee and so should consider alternative options for recovery;
  3. On an application to assign, landlords should look more carefully at the covenant strength of proposed assignee and, where appropriate, demand additional security from the assignee in the form of a guarantor, rent deposit or bank guarantee;
  4. Provisions requiring for guarantors to enter into sub-guarantees or AGAs should not be deleted from leases as the decision in Good Harvest may be overturned by the Court of Appeal.

Alternative options

It has always been the case that tenants' guarantors are not released on an under-letting. While landlords are unlikely to be able to insist that a tenant under-lets rather than assigns, if a landlord has reasonable grounds for objecting to an assignee on the basis of its covenant strength, it may be able to compel the tenant to under-let and, in that way, secure the benefit of the tenant's and the guarantor's continuing liability under the head lease. This may not be a particularly attractive option for tenants, who will not be released from their covenants upon the assignment of the under-lease in the way they would have been on a subsequent assignment of the lease.

Withdrawal of certain exemptions

Another alternative is to restructure a transaction so that the tenant assigns the lease to itself and the guarantor before they both assign it to the intended new tenant. Assigning to the guarantor has the effect of making the guarantor a tenant and, therefore, it should be able to enter into an AGA pursuant to s16 of the Act. However, given the Court's wide interpretation s25 of the Act, it is possible that this may be held to contradict the anti-avoidance provisions.

The Good Harvest decision has created considerable uncertainty and until the position is clarified it seems inevitable that it will lead to increasing discord between landlords, tenants and guarantors as to which guarantees can be enforced and what security a landlord can reasonably require as a condition of consent to assignment.

The case is being appealed. It is hoped that the Court of Appeal will take the opportunity to address the many questions posed by the judgment of the High Court and restore some commerciality to the protection of guarantors afforded upon the assignment of a lease.

Footnotes

1. [2010] EWHC 330 (Ch)

2. Good Harvest only applies to "new tenancies" under the Act: those completed after 1 January 1996 (s1(3) of the Act).

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Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2010. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

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