We have seen that if T assigns, then T’s guarantor cannot also guarantee the assignee. But, what about the more common situation where the guarantor does not guarantee the assignee, but merely guarantees T’s continuing obligations in the AGA (ie he is guaranteeing the AGA, rather than the lease)? This is generally referred to as a sub-guarantee and is very widely used.

The judge in Good Harvest [2010] did not specifically rule on whether a sub-guarantee will fall foul of the anti-avoidance provisions in s24 of the 1995 Act. Although the judge did not decide this issue, he did make obiter comments that indicated a lack of conviction about the enforceability of such sub-guarantees. Despite that, however, some major law firms remain convinced that sub-guarantees are effective. The technical basis for that belief seems to lie in the wording of s24, dealing with the release of T’s guarantor; the Act says that when T is released from the covenant of a tenancy (following an assignment) then T’s guarantor is released from ‘a covenant of the tenancy imposing any liability of penalty in the event of a failure to comply with that tenant covenant’ – the point being that the sub-guarantee covers T’s AGA, and the latter is not a ‘tenant’s covenant’.

Whether that is correct remains to be seen. For the time being, it seems that major firms are persevering with sub-guarantees (and that approach is endorsed by the respected www.practicallaw.com). All we would say is that there is no harm in continuing the sub-guarantees, as long as clients are warned that there is some uncertainty as to their validity (and that they cannot necessarily be relied upon). Good Harvest v Centaur [2010] EWHC 330 (Ch) (access free at www.practicalconveyancing.co.uk). Source: Olswang.