Liability of former commercial tenants and guarantors

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When granting a new lease or consenting to the assignment of an existing lease, one of the biggest risks for landlords is the financial strength of the incoming tenant. It is possible to mitigate this risk by requiring a guarantor. If your tenant defaults on the rent or breaches their lease in some other way, you may be able to call on a former tenant or a guarantor to pay arrears or remedy the breach. However, this will only be possible if you draft the lease properly, follow the correct process and act promptly.

The law relating to guarantors holds a number of traps for landlords, from situations in which you cannot lawfully ask for a guarantee to the danger of accidentally releasing a guarantor by varying the lease. By involving a solicitor when drafting a new lease, seeking to recover arrears, enforce a breach, consent to an assignment or vary the lease then you may be able to avoid a costly mistake.

Types of lease guarantee

There are two ways in which the performance of the current tenant can be guaranteed:

  • Direct guarantees

If you have any doubt about the financial strength of a tenant when a lease is being granted or assigned to a new tenant, it is usual to ask for a guarantor to give a direct guarantee for the tenant’s obligations. The guarantee will allow you to claim arrears and costs from the guarantor and may also give you the right to ask the guarantor to become a tenant by taking a new lease of the premises. The guarantor cannot be required to guarantee performance by anyone other than the current tenant.

  • Authorised guarantee agreements

An authorised guarantee agreement (often referred to as an AGA) is a specific type of guarantee given by a former tenant when they assign a lease. This can be valuable for landlords, as long as the outgoing tenant is in a stable financial position. An AGA is limited in time because the former tenant is released the next time the lease is lawfully assigned. An AGA may be given only by an assigning tenant and only if you require it as a condition for giving consent to the assignment. An outgoing tenant cannot be required to guarantee performance by anyone other than the immediate assignee.

The Anti-avoidance Trap

The rules on lease guarantees and AGAs are set out in the Landlord and Tenant (Covenants) Act 1995. A central part of the 1995 Act is to ensure that tenants and their guarantors are released from liability when they lawfully assign the lease, except where the tenant gives an AGA. The 1995 Act has a very wide anti-avoidance clause which means that anything in a lease, guarantee, AGA or other contract designed to avoid the 1995 Act is void.

This has led to some high profile court cases and can cause practical problems. For example, if a commercial property is let to a tenant which is part of a group of companies, they may want the freedom to assign the lease to a different group company for operational reasons. The obvious commercial deal would be for the parent company to act as guarantor each time – but, even if the guarantor is happy to do this, the courts have ruled that the arrangement would be void under the 1995 Act.

Fortunately the courts have confirmed that it is lawful for a landlord to require a tenant’s guarantor to give a fresh guarantee that the outgoing tenant will perform its obligations under an AGA. The benefit of such guarantee is still limited, the guarantor will be released at the same time as the outgoing tenant, on the next lawful assignment of the lease.

Beware of variations

One of the most common mistakes a landlord makes is accidentally releasing a guarantor by varying the lease without the guarantor’s consent. Not all variations will release a guarantor but it is difficult to be certain, so you should always get a guarantor to join in any deed of variation or licence which alters the tenant’s rights or obligations. It is difficult to get former tenants who have given AGAs to do this, so you may need to accept some risk that they may be released if you agree to vary the lease.

Even where a guarantor or former tenant is not released by a variation, the 1995 Act says that they cannot be required to pay any amount that is due as a result of a variation which the landlord could have refused. For example, if the lease has a rent review mechanism when the guarantor gives the guarantee and the rent increases in line with that mechanism, the guarantee will cover the increased rent. However, if the landlord and tenant (or an assignee tenant) agree to vary the lease and replace that mechanism with fixed increases, a guarantor or former tenant will not be liable for anything due as a result of that variation. If the tenant fell into arrears, you would then face expensive legal proceedings to establish what, if anything, the guarantor or former tenant could be made to pay.

Ending the Lease

A guarantee is generally enforceable only as long as the obligation being guaranteed is still in force. For example, if a lease ends early (by forfeiture or surrender), the tenant’s obligations will end and so will those of any guarantor. There is an exception where the lease ends as part of a tenant’s insolvency. It is best to take advice from a solicitor before forfeiting a lease or agreeing to the surrender of a lease.

Claiming from guarantors and former tenants

If your tenant is behind with rent, service charges or other payments, you must act promptly if you want to claim from a guarantor or former tenant. You must serve a notice on them within six months of the date when the money fell due. As rent and service charges are usually payable quarterly or monthly, new arrears may arise regularly, so you may need to serve multiple notices. You must get your solicitor involved as early as possible to ensure this is done correctly.

A guarantor or former tenant who pays arrears in response to a notice has the right to request a new lease, which will make them your direct tenant. Whether you want to trigger that right is a tactical decision and your solicitor will be able to advise you.

How we can help

The law on lease guarantees is complex and there are risks for unwary landlords. Our expert team will make sure your guarantees are properly drafted and guide you through the process of claiming under them if your tenant falls into arrears.

For further information, please contact David Marsh in the commercial property team on 01733 882800 or email [email protected].

David Marsh, Senior Associate

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