Guarantees. Enforceable or not?

09/06/2010

By Felicity Warran-Smith, Partner in Commercial Property & Development.

A recent decision in the High Court on the liability of a guarantor is causing concern for landlords.

Good Harvest Partnership LLP v Centaur Services Ltd has given landlords concern regarding the extent to which a guarantor can be obliged to guarantee the continuing obligations of an outgoing tenant who enters into an authorised guarantee agreement (known as an AGA) to guarantee the performance of the lease covenants by the new tenant.

The decision in the case turned on very specific facts. As a pre-condition to consent to assign the tenant's guarantor was required to enter directly into an AGA with the landlord in addition to an AGA given by the outgoing tenant. The additional AGA given by the guarantor was held to be unenforceable as the guarantor’s obligations were not limited in time.

Usual commercial practice is that the guarantor covenants in the lease itself to guarantee all obligations of the tenant including those under an AGA. It is believed that this is still effective as the guarantor's obligations are then limited in time but although the judge considered the point he did not make a decision and further cases are therefore expected.