There has been a very important High Court decision on Authorised Guarantee Agreements (AGAs) and guarantors. The end result is that it is no longer possible for L to insist that T’s guarantor also becomes the assignee’s guarantor. This means that a repeat guarantee provided on assignment by the assignor’s guarantor will be void and unenforceable.

A guarantee of an AGA is sometimes called a GAGA. Such a guaranteed AGA remains valid under L&T (Covenants) Act 1995. But, the problem is that the Act is very narrowly worded in terms of when an AGA can be provided; at the same time, there are wide anti-avoidance provisions in s24 (designed to stop Ls extending liability in a way not permitted by the Act). In the court’s view, a repeat guarantee falls foul of those anti-avoidance provisions.

A typical situation is where G guarantees T. T then assigns, and L requires that G also guarantees the assignee. It is this second guarantee which is now regarded as void and unenforceable. Although the case involved a lease which specifically required T’s guarantor to enter into a guarantee for any assignee, the judge made it clear that such a guarantee would be void even if it was given voluntarily (eg as part of the negotiations with L for consent to assign, even if not specifically required by the lease).

The decision is very important and is bound to be appealed. Some initial thoughts:

many Ls will previously have accepted repeated guarantees that would now seem to be worthless. This could well damage the value of their investment portfolio, and it could make future sales more difficult if T is of weak covenant strength;

when buying any lease reversions, check whether any repeat guarantees were given. If so, regard them as worthless;

Ls could find themselves in a difficult position at the end of a lease when it comes to dilapidations and reinstatement. If the operating subsidiary has served its purpose, then a controlling guarantor may be happy to walk away from the situation. At the same time, it is worth remembering that Ls may fear reimbursement claims from repeat guarantors who have previously been called on;

there will be problems for Ts trying to carry out group reorganisations. Ts with weak covenant strength who are already guaranteed by the parent company will face difficulties on assignment to another group subsidiary if another suitable guarantor cannot be found. In short, group restructions will become far more difficult;

if an assignee has week covenant strength, then L’s will need to work on alternative forms of security (eg rent deposits, bank guarantees, alternative guarantors). In practice, larger deposits are likely to be required;

on new lettings, Ls might consider whether a parent company should be the sole or joint T, rather than be a guarantor. If that happens, then the parent company will be able to act as guarantor to an AGA on first assignment;

the courts have previously said that the s25 anti-avoidance provisions should be applied ‘generously’, so complex schemes are likely to be regarded as a sham (eg T assigning to T and T’s guarantor, before they then both assign to the third party).

No doubt some guarantors will rejoice at this decision. Overall, however, it does introduce major problems for both Ls and Ts. For that reason alone, one wonders whether the CA will be looking to find a way around this decision. See Good Harvest v Centaur [2010] EWHC 330 (Ch) (access free at www.practicalconveyancing.co.uk). See excellent article in [2010] 246 PLJ 6.