Historically, landlords could pursue anyone who had ever been tenant under the lease, but the potential liability of previous tenants for the defaults of subsequent tenants in much later years was considered unfair. To redress the perceived imbalance, landlords should only be able to pursue the current tenant and its guarantor. Previous tenants and their guarantors should be released upon assigning the lease.
The Law Commission’s proposals were enacted through the Landlord and Tenant (Covenants) Act 1995. The Act took effect on 1 January 1996, but had become a muddled compromise. The landlord lobby had been appeased by the introduction of the Authorised Guarantee Agreement, which allowed landlords to keep the outgoing tenant on the hook until their immediate assignee assigned the lease. And the new regime would only apply to leases granted after the Act.
The release provisions of the Act were subjected to considerable academic debate, but it took until 2010 for a significant case to reach the courts. Good Harvest-v-Centaur concerned an Authorised Guarantee Agreement (AGA) entered into on lease assignment by an outgoing tenant and its guarantor. When the landlord sought to enforce the AGA against the guarantor several years later, the High Court allowed the guarantor to avoid its liabilities. The Act only permitted tenants to give an AGA, not guarantors.
While the property world was still mourning the settlement of the Good Harvest appeal mid-hearing in the Court of Appeal, along came K/S Victoria Street-v-House of Fraser (Stores Management) Limited. This time the Court of Appeal did get to pass judgment, alleviating the pain inflicted on landlords in Good Harvest by confirming that the outgoing tenant’s guarantor could be kept on the hook after all, by ‘sub-guaranteeing’ the assignor’s liabilities under its AGA.
Not all good news
But K/S Victoria Street didn’t bring exclusively good news. The Court of Appeal also confirmed that the same guarantor can never guarantee consecutive tenants. Lord Neuberger recognised the conceptual difference between a repeat guarantee that is being used to circumvent the Act and one which derives from the guarantor’s separate relationship with the assignee, but ultimately he preferred the simple clarity of outlawing repeat guarantees altogether.
Fast forward to 2016 and EMI Group Limited–v-O&H Q1 Limited. Following the collapse of music retailer HMV, a lease was assigned to HMV’s guarantor, EMI. Despite appearing to be a commercially-sensible move to preserve the lease in a solvent company, the High Court declared the whole assignment void. It would frustrate EMI’s statutory release as guarantor if they became the tenant.
Limited for tenants
It is ironic that an Act designed to benefit tenants has in practice also had the effect of limiting the range of transactions available to tenants, particularly in the context of group restructuring. The price for the abolition of original tenant liability is that tenants can no longer assign leases between group companies on the strength of repeat guarantees from a substantial parent company. Nor can they assign leases to the parent company guarantor if the tenant company fails.
It is doubtful that any of this was intended by the architects of the 1995 Act. The aims of the Act were laudable enough. However, the combination of wide anti-avoidance provisions and the paranoia of the courts that landlords will contrive imaginative ways to frustrate the release of previous tenants and their guarantors has led to a series of controversial cases which have effectively outlawed bona fide commercial transactions.
Bill Chandler is Legal Director in the Property and Construction team at Hill Dickinson