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When is a guarantee not a guarantee? A recent ruling means guarantees offered for commercial leases may not be legally enforceable
A recent change in the law regarding commercial leases leaves publicans having to decide whether the change means the glass is now half full or half empty. A significant High Court ruling has changed the law for guarantor obligations. Here we discuss some of the implications for Pub landlords and tenants.
The Background
The High Court case of Good Harvest Partnership LLP v Centaur Services Limited has clarified the law concerning the extent of a guarantor's liability where a party guarantees a tenant under a lease and the tenant sells the lease to a buyer.
If as part of the landlord's consent to the sale of the lease the landlord insists that the seller's guarantor enters into a new guarantee, the guarantee will be void, regardless of whether the lease allows for it as it breaches the Landlord & Tenant (Covenants) Act 1995.
The judge went even further and said that even if the guarantor was a willing party and happy to enter in the guarantee it would still be unenforceable.
What does this case mean for me?
The good news:
If you are personally guaranteeing obligations under a lease you may be able to breathe a sigh of relief as the guarantee could well be invalid even if you as the guarantor voluntarily entered into the guarantee.
The bad news:
- Landlords may now be reluctant to grant leases, or consent to the sale of existing leases as they will be keen to keep their existing guarantors. In the current market this may be disastrous to publicans up and down the country.
- It may also signal a change into what landlords require as security to grant a lease or consent to a lease sale.
The concern is that landlord's decide that the change in law means that they lose confidence in the security provided by a personal guarantee and opt instead for a deposit.
This will then take away valuable cash from the tenant which is essential to any start up business, especially where landlords are asking for a deposit of anything between 3 and 12 months worth of rent.
- It also brings up the issue of how do you ensure the deposit is returned at the end of the lease and is protected from landlord's using the money for their own needs, or protected if the landlord becomes insolvent and creditors seek to get their hands on the deposit monies.
- The case does not mean that tenants who sell their leases and are required to guarantee the incoming tenants are invalid, these types of guarantees known as Authorised Guarantee Agreements remain valid.
Conclusion
It is too soon to know what if any effect this will have on the industry. The case is now being appealed and as such this matter may roll on but the law as it stands offers guarantors some welcome news. However, the bigger picture could mean landlords give far more scrutiny to proposed tenants and may even refuse a request for consent to sell a lease in order to keep a guarantor, keeping publicans who are desperate to sell locked into a lease they cannot afford.
For further advice on the above or any other property issue please contact us on 020 7354 3000 or see our property section for more information.
Author: Robin Church
Published: The Publican, April 2010. Download full article
Date: April 2010