What happens if a lease is assigned and the assignee becomes insolvent, with the liquidator then disclaiming the lease? Does the AGA entered into by the assignor remain binding (so L can enforce the AGA against the assignor)?

T had a shop lease which he assigned to T2, with T entering into an Authorised Guarantee Agreement (AGA) with L, guaranteeing T2’s performance of its lease obligations. Eventually, T2 went into liquidation, and the liquidator of the company disclaimed the lease under s178(4) Insolvency Act 1986. As the Act makes clear, such a disclaimer ‘operates so as to determine... the rights, interests and liabilities of the company in/or in respect of the property disclaimed’.

Under the AGA, T had guaranteed T2’s performance of the lease obligations during the ‘liability period’, which was the period when T2 was ‘bound by the T obligations of the lease’. Not surprisingly, T argued that the disclaimer by T2’s liquidator also ended her obligations under the AGA. Against that, L argued that T remained liable because s178(4)(b) of the 1986 Act says a disclaimer ‘does not... affect the rights or liabilities of any other person’. The CA agreed with L’s argument, and accordingly T remained liable under the AGA.

As a matter of principle, this seems a fair decision, given that the purpose of an AGA is to ensure that L will not lose out by reason of the default of an assignee with whom L may not have chosen to contract. In practical terms, s178(4)(b) is likely to mean that most guarantors under AGAs will have no choice but to meet their liabilities when a lease is disclaimed on insolvency.

It is important to note, however, that it is only a T who can remain liable for the covenants under an AGA. A guarantee of an assignee’s obligation given by any other party (in particular the former T’s guarantor under the lease) will be invalid because of the anti-avoidance provisions in s25 Landlord and Tenant (Covenants) Act 1995 – see Good Harvest [2010], noted in our April 2010 issue, p18. That is an important decision which has caught many L&T practitioners on the wrong foot; in simple terms, lease guarantors cannot also guarantee an AGA. But, Ts can guarantee AGAs – and the disclaimer of the lease on insolvency will not remove them from that liability (see Shaw v Doleman [2009] EWCA Civ 279). Source: Barlow Lyde & Gilbert (access free at www.practicalconveyancing.co.uk).