To enter into a commercial lease, one of the requirements of a landlord giving their consent to assign the lease will normally be that the original tenant agrees to enter into an “authorised guarantee agreement”, or (AGA) with the landlord to guarantee the incoming tenant’s liabilities for the lease.
When the incoming tenant fails to comply with the obligations under the lease, the landlord can pursue a claim against the original tenant for losses under the AGA. However, under the Landlord and Tenant (Covenants) Act 1995 (LTA 1995), if the incoming tenant then assigns the lease to someone else, the original tenant will normally be released from the AGA he/she provided to the landlord.
However, in many leases, the landlords also require the original tenants to have guarantors as well. What will happen to these guarantors (original guarantors) if the original tenants subsequently assign the leases and provide AGAs to the landlords? Are these guarantees of AGA (GAGAs) by the original guarantors enforceable under the LTA 1995? A recent case EMI Group v Prudential Assurance has provided answer to this question.
Background of EMI Group v Prudential Assurance
Many people may still remember HMV UK Limited, which was a musical company. In this case, it was the original tenant, with EMI acted as a guarantor. Prudential was the landlord. The lease was later assigned to Forever21 (UK) Limited. In the assignment of lease, HMV entered into an AGA with the landlord.
HMV and Forever21 both became insolvent and were then dissolved. Subsequently, Prudential came after EMI under the GAGA for the rent.
The court found that EMI’s GAGA was valid and enforceable.
The Judge made a decision on the basis of the construction of the Lease. The guarantees should be fairly construed in their context. Refer to Tindall Cobham Ltd. v. Adda Hotels  1 P&CR 5 (CA), Section 25 of the Landlord and Tenant (Covenants) Act 1995 (LTA 1995) itself gave the court freedom to read the offending parts of the lease, and to consider if it was necessary to prevent the removal of the void words from emasculating the remainder of the clause. The court is also entitled to look at the structure of the lease in an objective and common sense way.
In this case, the court rejected the argument that there was an equality of treatment for tenants and guarantors. A GAGA is not subject to the same reasonableness requirement as an AGA. The court stated that the essential part of the GAGA was compliant under s24(2) LTA 1995.
The Court held that the guarantor who gave the GAGA would not be released from liability when the original tenant who gave the AGA entered into liquidation and dissolved. As a result, EMI was not released from the liability by the dissolution of HMV.
The judgement can be used as a reference for any future guarantors who are pursuing to avoid liability under GAGAs and any future landlords who are pursuing to enforce GAGAs of AGAs.
The judgement clarifies that if a GAGA infringes what was permitted by LTA 1995, it is important for the court to have freedom to construe the agreement in its particular context. It prevents the removal of the void words from emasculating the remainder of the clause.
This judgement has reminded any cautious landlord that they can strengthen their position by incorporating a determinative clause, which states that if a GAGA indicates to go beyond what is permissible under LTA 1995, it is only valid to the extent that it is compliant.
The judgement stated that a provision requiring a GAGA to be given in all circumstances when an AGA is required remains valid. On the other hand, an AGA can only be required when it is reasonable to do so. This again is a reminder to cautious landlords to strengthen their position when drafting a lease.
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