June quarter date: Guarantees - a timely reminder

With the June quarter date approaching, commercial landlords are concerned that they are going to be out of pocket as tenants are unable to pay rent and service charge.

Guarantees are one route to securing payment that remains open despite the current restrictions on enforcement.

Is there a guarantor?

If there is a guarantor under the lease, the terms of the guarantee will provide that the guarantor must pay any rents reserved by the lease in the event that the tenant fails to do so.

Well-advised guarantors may seek to show that they have been released from their obligations under the lease. This could be because, for example, a variation to the lease has been entered into without their consent. Whether or not this effects a release of the guarantor will depend on the drafting of the guarantee and the nature of the variation.

Is the lease an ‘old’ lease or a ‘new’ lease

Nowadays most leases are ‘new’ leases, i.e. they were entered into on or after 1 January 1996. If you have an ‘old’ lease (entered into before 1 January 1996, or pursuant to an agreement for lease dated prior to 1 January 1996), the original tenant remains liable for the lease covenants for the entire duration of the term.
The Landlord and Tenant (Covenants) Act 1995 (LTCA 1995) was enacted to remove the injustice of a tenant remaining liable for, in some cases, many years after it had assigned the lease.

Under the LTCA 1995, the only way in which a former tenant can remain ‘on the hook’ for tenant covenants after it has assigned the lease, is if it enters into an authorised guarantee agreement (AGA). Under the AGA it will remain liable for the performance of its immediate assignee. Once that assignee has assigned the lease, the original tenant has no continuing liability for the tenant covenants under the lease.

A guarantor can sub-guarantee the AGA entered into by the outgoing tenant. Like the tenant, it will relinquish liability when the immediate assignee assigns the lease.

Pursuing former tenants and guarantors

If a landlord has not received a rental payment, it can seek to recover this from a former tenant or guarantor. However, landlords must be mindful that a former tenant or guarantor will only be liable if it is served with a notice under section 17 of the LTCA 1995 within six months of the sum becoming due. The notice must be in the prescribed form and provide the former tenant or guarantor with details of the charge that is due.

Request for an overriding lease

If a former guarantor or tenant pays the arrears pursuant to a notice under section 17, it is entitled to ask the landlord for an overriding lease. An overriding lease, in effect, sits above the lease between the landlord and the tenant and makes the former tenant or guarantor the direct tenant of the landlord, and the direct landlord of the defaulting tenant. The former tenant or guarantor could, therefore, choose to terminate the tenant’s lease and occupy the property itself, terminate the lease and find a new tenant, and exercise remedies against the tenant for non-payment of rent.

The key message for landlords is that they must ensure that they act quickly. Where there is a prescribed timeframe for taking action, this must be complied with. Failure to do so, could result in landlords losing entitlement to rental payments. TLT has extensive experience in advising on landlord and tenant issues. If you would like to discuss your matter, get in touch.

Contributor: Alexandra Holsgrove Jones