The Landlord and Tenant (Covenants) Act 1995 had, as its primary aim, the abrogation of the unjust rules of privity of contract in landlord and tenant law whereby a landlord could pursue a tenant for unpaid rent long after the tenant had assigned its lease. However, given the shortened average length of a modern commercial lease (research suggesting it hovers at around 6 years), and the almost universal use of the authorised guarantee agreement (AGA) when a lease is assigned, it is arguable that tenants have not been freed by the Act from the worry of liability after assignment. This begs a question: does a tenant know, or is the tenant properly advised as to, the extent of liability it is exposed to when its lease includes a standard requirement for an AGA on assignment?
An AGA is simply an ordinary lease guarantee under which the liabilities of an assigning tenant (and, in some cases, the liabilities of a former tenant) are extended to cover the liabilities of the incoming tenant following the assignment of a post-1995 Act lease. Under an AGA, the assigning tenant guarantees the performance by the assignee of the covenant or covenants from which the tenant has been released by reason of the assignment. Invariably, this is a guarantee of performance of all covenants. Tenants should understand that this means that they continue to have a liability in respect of rents unpaid by the assignee (including service charge, insurance rents and business rates), but that liability will also extend to all of the tenant covenants from which the tenant has been released. Therefore, to the extent that the assignee does not settle a terminal dilapidations claim, or fails to reinstate premises in breach of covenant at the end of the term, the former tenant retains a liability, even though it is without the ability to carry out works to prevent the breach. Indeed, liability under an AGA does not depend upon non-performance by the assignee. The AGA may “impose on the tenant any liability as sole or principal debtor in respect of any obligation owed by the assignee under the relevant covenant”; (see section 16(5)(a) LTCA 1995).
Liability under the AGA will run until a lawful assignment of the lease by the assignee or, if none, the end of the lease. Will it continue into a period of statutory continuation under the 1954 Act? In general, the liability of a guarantor will not run into a period of statutory continuation under section 24 of the 1954 Act unless express provision is made: See Junction Estates Ltd v Cope (1974) 27 P & CR 482. However, the AGA may be drafted so that the tenant covenants with the landlord “throughout the Term” (defined to include a period of statutory continuation), so that if the assignee does not further assign the lease, but holds over, the former tenant, as authorised guarantor, will remain on the hook.
What if the lease includes a break right? Once a tenant assigns the lease, it loses control over whether or not liability can come to an end through the exercise of the break right. In an ideal world, a tenant’s AGA would limit the tenant’s liability to the period from the assignment of the lease until the break date (on the basis that the tenant could have avoided further liability if it had remained as the tenant). It is difficult to see a landlord accepting this at the outset, since it is the tenant’s option to assign, rather than to remain as tenant and break the term. At assignment, the proximity of the break date might give the tenant some leverage if it threatens to remain as tenant solely to exercise the break. Tenants need to be advised generally that a personal break right is exercisable by the named or identified person and by no other. Assignment of a lease by a person enjoying a personal right to break will normally mean that the right has permanently ceased to be exercisable. See Norwich Union Life & Pensions v Linpac Mouldings Ltd [2010] EWCA Civ 395.
What if the assignee goes into liquidation? Most AGAs require the tenant, in the event of the lease assigned being disclaimed, to enter into a new lease of the premises for the residue of the disclaimed term; (see section 16(5)(c) LTCA 1995). A tenant should be advised at the outset of this potential liability, including the costs associated with its being enforced (e.g. SDLT; landlord’s legal costs).
At least there are some protections for former tenants. Many of the protection provisions of the 1995 Act apply in relation to former tenants and their guarantors, whether under new or old tenancies (e.g. the requirement to serve section 17 default notices in respect of the recovery of fixed charges; rights to overriding leases under section 19 of the Act, and protections against post-assignment lease variations under section 18). However, section 17 only applies in respect of unpaid “fixed charges” such as rent and service charge and does not, for example, give a former tenant any right to be notified of an unpaid dilapidations liability.