Good Harvest – bad news for landlords and tenants?
Release Date: 02 June 2010
Following the recent decision of Good Harvest Partnership LLP –v- Centaur Services Limited the phrase “there are no guarantees in life” has never rung truer for landlords and tenants.
What has changed?
Almost 15 years after the Landlord and Tenant (Covenants) Act 1995 (“the Act) muddied the waters the High Court has finally decided that the Act prevents a guarantor of a tenant’s obligations from being required to give further direct guarantee in respect of an assignee of the lease. Some believe the saving grace of this judgment is that the Act only applies to “new tenancies”: those completed after 1 January 1996.
The decision in Good Harvest means that landlords cannot require a guarantor to guarantee an assignee’s obligation either by way of an authorised guarantee agreement (“AGA”) or a direct guarantee. Furthermore, landlords will not be able to recover arrears owed by an assignee from a former tenant’s guarantor even if it has entered into an AGA or guarantee stating otherwise.
Bad news for landlords?
Following this decision, landlords can no longer rely on the guarantees given by former tenant’s guarantor following an assignment of the lease. As a result landlords who receive an application for consent to assign are likely to ask for a direct guarantee for the potential assignee from a party other than the current tenant’s guarantor.
Landlords should be mindful that the only guarantees that they can now rely on are ones given by current tenant’s guarantor, or the former tenant. Landlords should review the covenant strength of their former tenants following an assignment as their guarantee may be all that the landlords have to fall back on in the event of default by the current tenant.
Bad news for tenants?
On face value this case represents a win for tenants and their guarantors, but rest assured this decision will result in a less flexible approach by landlords on the grant of new leases. Landlords will asses the covenant strength of the proposed assignee in isolation rather than the combined assignee, tenant and guarantor packaged of old.
This decision could result in tenants being asked to provide additional security to satisfy the landlord that the tenant’s covenant is not diluted by the loss of the tenant’s guarantor on assignment.
Is this the end of the AGA?
Legal commentary on this decision has flown in thick and fast and the case is currently being appealed. It is hoped that the Court of Appeal will take the opportunity to restore some commerciality to the protection of guarantors afforded upon the assignment of a lease.
If you would like advice on the implication of this case on your organisation please contact Hilary Harrison on 0121 214 7440 or by email hilary.harrison@anthonycollins.com
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