Guarantor’s liability on assignment

When faced with a tenant’s request for consent to assign a lease which benefits from a guarantee (by a parent company or otherwise), landlords should be aware that the guarantor cannot be required to provide a direct guarantee for the performance of the new tenant’s obligations under the lease.  In Good Harvest Partnership LLP v Centaur Services Limited [2010] EWHC 330 (Ch), it was ruled that such a requirement would be contrary to the Landlord and Tenant (Covenants) Act 1995. It is unclear from the judgment whether a “sub-guarantee” (i.e. a guarantee provided for the performance of the outgoing tenant’s obligations under an authorised guarantee agreement (“AGA”) and not for the performance of the new tenant’s obligations under the lease) would be lawful or not, or whether a guarantor can voluntarily provide a direct guarantee. Further testing will be required in the courts for us to have a definitive answer on these points.

The Good Harvest decision is particularly pertinent where the covenant strength of the new tenant guaranteed under the AGA by the outgoing tenant is less than that of the outgoing tenant guaranteed by the guarantor. As this may have valuation implications, landlords may wish to consider requiring further security from the new tenant in order to negate any impact on tenant covenant strength.

In intra-group assignments, the uncertainty over voluntary direct guarantees casts doubt on whether a parent company can guarantee a group company which is taking a lease assignment if it has already acted as guarantor for the group company that is assigning. The potential for dilution of covenant strength through intra-group assignments may lead landlords to prohibit such assignments in new leases altogether.

 

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Jury O'Shea