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Lease Disclaimers and Authorised Guarantee Agreements

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The recent Court of Appeal case of Gabriella Shaw v Hazel Dolemand [2009] has further clarified the approach of the Courts when considering the continuing liability of a guarantor of a lease on the insolvency of the tenant.

The Insolvency Act 1986

Section 178 of the Insolvency Act 1986 (the "Act") gives the liquidator of an insolvent company the power to disclaim "Onerous Property". Section 178(3) of the Act defines Onerous Property and includes a lease.

Should the liquidator of an insolvent company choose to disclaim a lease, he is required to serve all interested parties with notice. If however, after 14 days of serving notice on all the relevant parties none of the parties has made an application to the Court objecting, the lease is considered disclaimed.

According to section 178(4) of the Act the effect of a disclaimer is to end any right, interest and liability of the insolvent company in the lease but does not, except so far as is necessary for the purpose of releasing the insolvent company from any liability, affect the rights or liabilities of any other person.

The Landlord and Tenants (Covenants) Act 1995 and Authorised Guarantee Agreements

It is well established that the disclaimer of a lease does not automatically bring a third party's guarantee of the tenant's obligations to the landlord to an end (Hindcastle Limited v Barbara Attenborough Associates Limited).

Under section 5 of the Landlord and Tenants (Covenants) Act 1995 (the "L&T Act") where a tenant of a lease granted after 1 January 1996, lawfully assigns that lease to a third party, the tenant is released from liability from that date. However, the L&T Act also created the concept of an authorised guarantee agreement ("AGA"). An AGA is a document by which the outgoing tenant is asked to guarantee the performance of the tenant's obligations in the lease by the new tenant.

AGAs are used by landlords on an assignment by the tenant of their lease to a new tenant to ensure that they are protected against the risk of the new tenant defaulting on rent payments or other lease obligations. If the new tenant defaults on the lease the AGA allows the landlord to claim any monies outstanding from the previous tenant.

The Facts of the Case

In March 2004 Ms Shaw entered into a 10 year lease of a ground floor lock up shop and basement. In August 2005 Ms Shaw assigned her tenancy to the Ceramic Café Limited ("Ceramic"). The landlord provided Ms Shaw with it's consent to assign the lease however, it was a term of the landlord's consent that when Ms Shaw assigned the lease she would have to enter into an AGA in respect of Ceramic's obligations.

Unfortunately, Ceramic started to have financial difficulties and went into liquidation in August 2007. As part of it's financial struggles Ceramic had neglected to pay some of it's rent. The liquidator disclaimed the lease on 31 October 2007 and the landlord sought to make Ms Shaw liable for the outstanding rent under the AGA.

Ms Shaw argued that the operation of the L&T Act had released her from liability as a tenant on her assignment of the lease to Ceramic. In addition, Ms Shaw argued that she was not liable for the outstanding rent as a result of entering into the AGA because the AGA stated that she would only be required to guarantee Ceramic's liability under the lease throughout the ‘Liability Period' as defined in the AGA.

Ms Shaw proposed that the Liability Period had come to an end when the liquidator disclaimed the lease because Ceramics obligations under the lease, as the current tenant, had terminated at that time. Ms Shaw argued that she could not be held to guarantee Ceramic's compliance with the terms of the lease if Ceramic was no longer liable itself.

The Court of Appeal held that Ms Shaw remained liable under the AGA despite the disclaimer of the lease by the liquidator. The Court suggested that if the parties to the AGA had intended the AGA to terminate at the same time as the tenant's liabilities under the lease they could have drafted clear provisions expressly stating this. The Court found that the definition of the Liability Period was not clear enough to show this intention.

Conclusion

The case emphasises that on an assignment of a lease and the signing of an AGA outgoing tenants should be extremely careful about the wording which is used to define their liability to guarantee the new tenants obligations in the event of the new tenant's insolvency. Should outgoing tenants wish to avoid liability for the rent arrears of the subsequent tenant more is required than simply to link the termination of their liability to the end of liability of an insolvent tenent.

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