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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
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 assigns the lease to a buyer.
If as part of the landlord's consent to the assignment of the lease, the landlord insists that the current tenant'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 landlords and tenants?
- 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 tenants up and down the country.
- It may also signal a change in what landlords require as security to grant a lease or consent to a lease assignment.
Landlords may take the view 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 proposed 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 a guarantee of an assignee given by a tenant when selling his lease is 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 landlords and tenants. 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 tenants who are desperate to assign 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: Simon Tennant
Published: Colman Coyle E-Bulletin
Date: May 2010