A sting in the tail
In the recent case of Gabriella Shaw v Hazel Doleman [2009] EWCA Civ 283, the importance of ensuring that any documentation entered into by a tenant when assigning their leasehold interest in a property granted to them after 1 January 1996 to a third party was highlighted.
If you were granted a lease after 1 January 1996 and have subsequently assigned the leasehold interest in the property to a third party, it is likely that you will have entered into an authorised guarantee agreement (AGA) – a document by which you as the outgoing tenant would guarantee the performance, by the new tenant, of some or all of the tenants covenants in the lease (section 16 of the Landlord and Tenant Covenants Act 1995).
The AGA will almost certainly link the period for which the guarantor is liable to the period during which the assignee is liable for the tenant’s covenants in the lease. Indeed the AGA can include a requirement for the guarantor to take a fresh lease of the assigned premises if the third party goes into liquidation and the liquidator disclaims their interest in the lease (section 16(5)(c) of the Landlord and Tenant Covenants Act 1995).
If the AGA does not include a provision requiring the guarantor to take a new lease on disclaimer, you would be forgiven for thinking that as a guarantor, your liability is intrinsically linked with the new tenants under the lease, i.e. as soon as they stop being bound by the tenant covenants, then so do you. If true, this would mean that as soon as the lease was disclaimed, your liability as guarantor was no more.
However, the Court of Appeal’s decision in the Gabriella Shaw case makes it clear that if the parties to the AGA want the guarantor’s liability to end at the same time as a the lease is disclaimed, express provisions should be inserted into the document to that effect.
The Court of Appeal upheld the earlier decision by the High Court in the Hindcastle Limited v Barbara Attenborough Associates Limited [1996] UKHL 19 that in relation to the liabilities of a guarantor, the relation ship of landlord and tenant is notionally preserved so that the obligations of a guarantor to the landlord remain in full force in spite of the disclaimer.
It should be noted that if a lease was granted on or before 1 January 1996, the original tenant remains liable under the lease, regardless of any assignment to a third party, until it is released by the landlord. The lease in the Hindcastle case was granted on or before 1 January 1996 and shows that the guaranteeing of a tenant’s liability under an AGA or as the original tenant (as the case may be) whether pre or post 1 January 1996 applies in much the same way.
As a result, there could be a number of guarantors out there who are in for a potentially nasty surprise. Indeed, the Court of Appeal accepted that its decision may come as a surprise to guarantors, but that the law was well established on that point.
Author: Jonathan Stallard
Published: 18 August 2009