Where a landlord has suspicions as to a tenant’s financial status it often takes a guarantee from an entity of better financial standing: a parent company, a parent (!) etc. When that tenant sells its lease and the incoming tenant then fails to pay rent or perform other promises in the lease then the landlord sometimes tries to pursue that former tenant and its guarantor for the incoming tenant’s default. The recent case of Good Harvest Partnership LL v Centaur Services Ltd and makes some important comment about when this will and will not be possible. It is generally seen to interpret the law to be less favourable towards a landlord.
Your liability as tenant under an “old”(pre 1 January 1996) lease
Original tenants of leases entered into pre 1 January 1996 are generally liable under the lease covenants for the whole term of the lease even if they sell their lease and it is a future tenant who fails to pay rent or observe other promises under the lease.
An example: Bob entered into a lease in January 1994 at a rent of £120,000 per annum. In December 2000, Bob sold the remaining term of the lease to Broken Limited who then sold it on to Shattered Limited. Shattered Limited failed to pay the rent on time and left the property in a poor state of repair. The landlord could hold Bob liable for Shattered Limited’s failure to pay rent and failure to repair.
This situation was widely seen to be unfair and so different rules apply to most leases made after 1 January 1996.
Your liability as tenant under a “new” (post 1 January 1996) lease
Most tenants of business premises where their lease was entered into after 1 January 1996 are not liable for the promises they make in that lease after the date when they sell that lease to another tenant. However, landlords are likely to be able to force tenants to enter into a guarantee that its buyer will observe the lease promises but only during its immediate buyer’s period of ownership.
So, how do the Good Harvest and the House of Fraser cases change things?
The case of Good Harvest decided that a guarantee given by a former tenant’s guarantor following assignment of a lease cannot be enforced. The case said on a lawful assignment (sale) of a lease, sections 5 and 24 of the Landlord and Tenant (Covenants) Act 1995 automatically release a former tenant and guarantor from future liability under the lease. The only caveat to this is given by section 16 of the act which says that tenants (but importantly NOT guarantors) can only be held further liable if they have entered into a form of authorised guarantee with the landlord.
Action points
If you are a landlord think about the following:
- Re-evaluate the covenant strength of your former tenant as you may need to rely on that person only in the case of current tenant default. This is even if you have a form of guarantee from your former tenant’s guarantor.
- On an application for consent to assign a lease give even more scrutiny to the incoming tenant’s financial position : think about asking for a rent deposit, for example.
- See if the deal can be structured as an underletting so that the tenant and the tenant’s guarantor remain primarily responsible for rent and other covenants (however, do make sure that in doing so you are not unreasonably withholding consent to the assignment).
- Be aware that upon an intra group transfer of the lease by the tenant, the previous parent company guarantor to the assignor will not be allowed to stand again as guarantor for the new assignee tenant.
If you would like further help please contact Sara Mounsey on 01904 610886 or email sara.mounsey@langleys.com.
Sara Mounsey is a solicitor in Langleys’ Real Estate Unit.
© Langleys Solicitors, 2011. This article applies to England and Wales only. Published for general information purposes only and not intended as legal advice.