Earlier this year in the case of Good Harvest Partnership LLP v Centaur Services Limited, the High Court decided that an authorised guarantee agreement (AGA) given by a former tenant's guarantor in respect of an assignee's covenants is void and unenforceable as against the guarantor.

An appeal of the High Court decision was due to be heard on 29 June in the Court of Appeal and many expected the decision to be overruled.

Disappointingly, the case has been settled out of court, so the Court of Appeal has not had an opportunity to clear up the uncertainty posed by the controversial High Court decision and to establish a more commercial position. Instead, the law stands unchanged following the earlier High Court ruling.

This is an extremely important case with significant implications for landlords, tenants and guarantors.

In February 2010, the High Court held that a guarantee given on an assignment by a guarantor of the former tenant is void, since it falls foul of the anti-avoidance provisions of the Landlord and Tenant (Covenants) Act 1995. This means that a tenant's guarantor will be released upon a lawful assignment of a new tenancy (that is, a tenancy entered into after 1 January 1996) and any provision requiring the guarantor to enter into an AGA will be invalid. Consequently, any attempt by landlords to recover an assignee's arrears from a former tenant's guarantor will fail regardless of whether the guarantor has guaranteed the assignee's obligations pursuant to an AGA or a separate guarantee (even when given voluntarily).

The outcome of the case will be disappointing for landlords, particularly in the current economic climate, as it leaves a great deal of uncertainty and exposure for landlords, no longer able to rely on guarantees previously given to them. Where leases have already been assigned, landlords will need to establish if guarantees are caught by Good Harvest and, to the extent that they are, if there is any other security available to them which they might be able to call upon when required. On a proposed assignment, landlords should consider requesting additional security, for example, a rent deposit, bank guarantee or, alternatively, a guarantee given by a different entity.

The decision potentially also has an adverse impact on tenants, who may find it harder to obtain consent to an assignment, as landlords will undoubtedly focus more on the covenant strength of the proposed assignee in its own capacity. Tenants may particularly struggle with obtaining consent for an intra-group assignment, as an existing parent company guarantee will be unenforceable going forwards under the current law. This may leave the tenant with few other viable options in terms of providing adequate security to the landlord.

It seems that the only real winners from the High Court decision are those guarantors, whose slates have been wiped clean, so that they are no longer on the hook under an AGA.

Given the controversy surrounding the High Court decision, it seems inevitable that the matter will be tested again in the Courts in the future, which may result in a different outcome. Until then, there are many questions left unanswered and an uncertain, uncommercial position for all concerned.

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