01 Dec 2014

The guarantor AGA saga continues … don't be caught out!

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Tenants are automatically released from all future liabilities when they assign a "new lease", if they comply with the terms of the lease on assignment. Guarantors' liabilities will also end when the tenants' liability ends.

Usually a landlord can require an authorised guarantee agreement (AGA) from assigning tenants, by which they guarantee the incoming tenants' obligations, but only up to the point when that incoming tenant itself assigns. In addition, a landlord can usually require any guarantor to guarantee the outgoing tenant's obligation in the AGA. However, that guarantor cannot guarantee the incoming tenant's obligations in the lease. Any agreement that tries to impose an obligation on the current guarantor to guarantee any incoming tenant's obligations is void. This can cause problems where leases are taken by subsidiaries of a strong parent, and then the tenant wants to assign intra group.

A recent case (Tindall Cobham 1 Ltd and others v Adda Hotels) highlighted the problem of continuing guarantees and intra group company assignments. In this case the tenant wished to assign its leases to subsidiary companies. The leases were guaranteed by a parent company that was of strong covenant strength. The lease could not be assigned to a group company without the landlord's consent although the landlord could not refuse consent if the existing guarantor agreed to act as guarantor for the incoming tenant.

The tenant assigned the leases without seeking the landlord's consent and the landlord applied for a declaration that the assignments were unlawful. The tenant argued that it did not need consent as the guarantor provision was void. The requirement that the existing guarantor act as guarantor for the incoming tenant was void, however the Court of Appeal did not say that the whole clause was invalid. The Court of Appeal held that the tenant was still obliged to obtain consent from the landlord for an intra group assignment. No consent from the landlord had been sought and the Court of Appeal held that the assignments were unlawful.

The Court of Appeal decided that to hold the entire clause void would create an imbalance in the contract by allowing the tenant to assign to a group company without consent. Sadly for Landlords, this does not however mean that where a lease permits assignment to group companies without obtaining landlord's consent, subject to continuing guarantees (which is void), that these provisions will simply be replaced with a general requirement that the consent of the Landlord will be required (such consent not to be unreasonably withheld or delayed). The Court's decision was heavily dependent on the facts of the case and a different set of facts could have resulted in a different conclusion. The law requires further clarification to regulate the position on intra group assignments and in the meantime exercise caution in your due diligence.

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James Trundle

James Trundle
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