One of the Law Commission's projects within its 14th Programme of Law Reform will look at the reform of commercial leasehold law, including a welcome review of the issues with the Landlord and Tenant (Covenants) Act 1995 (1995 Act).
Overview of 1995 Act
The 1995 Act came into force on 1 January 1996. Prior to this, following an assignment, an outgoing tenant or guarantor with privity of contract would remain liable for any rental arrears or other breaches of covenant throughout the remaining term of the lease. This created unequitable situations where an outgoing tenant may be required to pay its assignee's outstanding arrears even though the assignment had taken place many years previously.
Under the 1995 Act, tenants of leases post 1 January 1996 are automatically released from their obligations on assignment, unless they agreed to enter into an Authorised Guarantee Agreement (AGA). Under an AGA the outgoing tenant effectively guarantees the performance by the incoming tenant of the lease covenants. Many landlords now insist on an AGA as a pre-condition for providing consent to an assignment.
1995 Act in practice
In practice, the use and effectiveness of the 1995 Act has been hampered both by ambiguity within the drafting of the 1995 Act itself and its interpretation in case law. Initially, it was uncertain whether an original tenant's guarantor could enter into an AGA to guarantee the obligations of the assignee. In Good Harvest Partnership LLP v Centaur Services Limited [2010] EWHC 330 (Ch); [2010] 1 EGLR 29 it was held that such a situation would be rendered void by the 1995 Act's anti-avoidance provisions.
However, in KS Victoria Street v House of Fraser (Stores Management) Ltd [2010] EWHC 3006 (Ch); [2011] 2 EGLR 11 the Court of Appeal confirmed that sub-guarantees (also known as GAGAs), where an existing or contracting guarantor of a tenant guarantees the assignor's liability under an AGA, were valid. Furthermore, whilst a tenant's guarantor cannot guarantee the immediate assignee, it can in some circumstances guarantee the performance of a subsequent assignee.
This leads to a somewhat confusing distinction between directly guaranteeing an assignee which is rendered void, and providing a sub-guarantee, which is permissible. This creates confusion and obstacles in the context of intra-group arrangements between tenants and their associated group companies. Within a group of companies it is often common for there to be only one strong financial covenant, with the original tenant being a special purpose vehicle with few assets which is guaranteed by that strong company. If the tenant assigns intra-group, the guarantor can sub-guarantee following House of Fraser. However, the tenants are unable to assign their lease to their guarantor, as found in EMI Group Limited v O&H Q1 Ltd [2016] EWHC 529 (Ch); [2016] EGLR 26.
What reform might look like
It is hoped that the Law Commission's review of the 1995 Act will propose a clarification of the law by removing the constraint on guarantors voluntarily retaining liability by guaranteeing an assignee of a lease, or becoming the assignee themselves. This could remove the complexities around intra-group restructuring or transfers between business partners and will hopefully simplify often unnecessarily complex lease transactions.
