Bruce Dear takes an optimistic view of one element of the Landlord & Tenant (Covenants) Act 1995 which causes problems for landlords and tenants.
In broad terms, the Landlord and Tenant (Covenants) Act 1995 (the Act) has worked well. It gave tenants a substantial reduction in the ambit of privity of contract and placated landlords with authorised guarantee agreements and a measure of increased control over assignments. But it left one question in no man’s land: can guarantors be obliged to guarantee the obligations of a former tenant in an authorised guarantee agreement (AGA)?
Surely, any landlord ought to have the right to have the AGA obligations of a weak former tenant guaranteed by the same entity who stood behind the tenant under the lease? The Act assumes that the answer to this question is “yes”, but never says so in clear terms. It has, in effect, left the point undecided.
Section 24(2) of the Act tells us that the guarantor is released to the same extent as the tenant. That would seem conclusive. When the tenant goes, the guarantor goes; full relief for both tenant and guarantor at the moment of assignment. Some say, going further, that section 24(2) means that guarantors cannot be forced to guarantee the obligations of tenants under AGAs when those tenants come to assign the lease. They argue that any attempt contractually to bind the guarantor into guaranteeing any obligations of a former tenant under an AGA must fail because it would be an attempt to frustrate or modify the intention of section 24(2). The savage teeth of the Act’s anti-avoidance provisions, contained in section 25, the argument continues, would bite any such attempt and render it void.
So how is the investment market responding to this problem? Almost every one of the major landlords appears (on the advice of their lawyers) to be trying one of the following solutions:
- Asking the guarantor to become a co-tenant or the only tenant (this often meets resistance) or;
- Attempting to force guarantors to enter into parallel guarantees of AGAs; or
- In a few cases, (mistakenly, it seems) asking guarantors to join in AGAs;
- Making it a condition of assignment that a rent deposit, bank guarantee or other alternative security reasonably required by the landlord should be given to support the AGA;
- Making it a condition of assignment that a third party is procured to guarantee the AGA.
It is like a hydra; as soon as some smart Alec (or Alicia) writes an article demolishing one of the proposed solutions several more so-called conclusive answers spring up in its place.
So, who is right, and who is wrong? The short answer is: no one knows until the Court has decided the question. However, a careful reading of the Act appears to reveal a clear solution to the problem.
Tenants are not released from everything by the Act at the moment of assignment. They are only released from their “tenant” covenants (section 5(2)). A guarantor is released “to the same extent” as the tenant it is guaranteeing. That is, when the tenant is released from its own “tenant covenants” the guarantor is also released from any obligation to perform those “tenant covenants” as surety.
A “tenant covenant” is one “falling to be complied with by the tenant of premises demised by the tenancy” (section 28(1)) and a “tenant” is the “person entitled for the time being to the term of the tenancy”. The Act expressly allows the tenant to enter into an AGA guaranteeing the assignee’s obligations and an AGA is not a “tenant” covenant. It is rather a guarantee that someone else will perform those “tenant covenants”. Therefore nothing in the Act prevents a guarantor covenanting to guarantee the obligations of the outgoing tenant under an AGA.
But our landlord must be careful. It should not ask the guarantor to covenant to join in the AGA as surety. The Act sets out a rigid blueprint for AGAs in section 16 and nowhere in the list of things they may contain does the Act mention guarantee provisions. Put your guarantee in your AGA at your peril, because you may not only lose him to a court decision that says he cannot guarantee AGAs, you may have completely voided your AGA; the ultimate double whammy for landlords.
Possible solutions are either to have the guarantor covenant in the lease to guarantee the tenant both for the time the tenant is tenant under the lease and for the period of any AGA or to have the guarantor covenant to enter into a separate guarantee document which sits under or parallel to the AGA rather like any contract of guarantee.
Support for this argument sprouts out wherever you look in the Act. Here is a brief selection:
- Section 2(1) provides that “this Act applies to a landlord or tenant covenant of a tenancy”. We know from section 24(2) that the Act applies to release guarantor covenants insofar as they are directly guaranteeing tenant covenants. However, nowhere does it try to release them further than this. On one reading of section 2(1) a covenant by a guarantor to guarantee an AGA is not even one to which the Act applies, let alone one it forbids.
- Sections 17 and 18 contain express provisions to protect guarantors under AGAs. Clearly, the draftsman assumed that they would be a common creature.
- Section 24(2) as we saw earlier, because of the Act’s careful definition of tenant covenants, is a more precise and narrow section than some commentators suggest.
- Section 22 allows the landlord to impose conditions on assignment; provided they are properly set out in the lease or other document in advance then by virtue of this section, they cannot be found to be unreasonable. This provides enough scope for making it a condition of assignment that the tenant procures that the guarantor guarantees his AGA or that the tenant should procure a third party to do the same thing.
However, there are counter arguments. On one, very provocative and by no means mainstream, reading of the Act, it may be that a landlord can neither force a guarantor to guarantee an AGA, nor even require an automatic AGA from a tenant.
As these possibilities demonstrate, the Act is unclear. We have no decided cases on AGAs and guarantors. Even leading QCs are giving conflicting advice on these points. Nonetheless, the message to landlords is not to despair because there is a strong argument that if you want your guarantor to guarantee an AGA, then the Act probably says you can do it. Still, until the law is clarified, the best solution must remain making sure that a company of substance takes the lease as tenant.
