When a lease is assigned, the lease will normally require the existing tenant to guarantee the performance of the tenant to whom they have assigned the lease. Such arrangements are governed by the Landlord and Tenant (Covenants) Act 1995 (LTCA) and are known generally as authorised guarantee arrangements, or AGAs. One question that has been unanswered until now is what happens in the situation in which there is a guarantor for the lease of the original tenant (A), which is then assigned to another tenant (B). Does the guarantor’s guarantee survive the transfer of the lease, so that the guarantee originally given with regard to tenant A’s lease then serves as a guarantee with regard to tenant B?
A recent case showed the limitations of the applicability of an AGA. The original tenant’s performance of its obligations under the lease was guaranteed by another company, with the guarantee running until the ‘next lawful assignment of the lease’. The original tenant assigned the lease and it and the original guarantor entered into an agreement with the landlord to guarantee the performance of the new tenant. The original tenant was later dissolved and the new tenant did not pay the rent, so the landlord sought to rely on the AGA to obtain its outstanding rent from the guarantor.
This seems straightforward but, unfortunately for the landlord, Section 16 of the LTCA specifically provides that the liability of the guarantor ends on assignment of the lease. Whilst the landlord could rely on a guarantee from the outgoing tenant (useless, as it had ceased to exist), it could not rely on the guarantee given by that company’s guarantor. Therefore, the guarantee given was void.
This decision has serious implications for landlords and tenants alike.