Good Harvest - food for thought

Several interesting questions were raised in relation to the Good Harvest case (Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch)) at this lunchtime’s Property PSL online seminar – “The 1995 Act – a Practical Insight”:

1. In the light of Good Harvest, could a tenant, instead of assigning, underlet the property, with its guarantor guaranteeing the under-lease? Subsequently, the landlord accepts a surrender of the head-lease from the tenant, thereby releasing the tenant.

At first blush, this sounds feasible – although a first and fundamental issue would be whether the tenant would agree to it. If the tenant knows that the landlord cannot really block an assignment, because the landlord has no reasonable grounds available to rely upon, the tenant may reject the suggestion that he under-lets. However, in a case where the landlord has an ability to refuse consent to an assignment, under-letting might be the only option left for the tenant. The question then would be whether it is reasonable (a) for the landlord to insist upon the under-tenant’s obligations being guaranteed, and (b) that they are guaranteed by the head-tenant’s guarantor. The latter condition would seem to be a condition too far, unless stipulated for in the lease by way of a pre-condition. If the tenant is co-operative, and is prepared to go along with this strategy, the next issue would be how the “freely negotiated” surrender of the head-lease came about. Was there no prior agreement for the surrender – an agreement that would surely be caught by section 25 LTCA 1995? Any form of agreement that leaves the guarantor with a continuing liability may still amount to an agreement rendered void by section 25. The more adventurous might argue, however, that this strategy has not resulted in a release of the tenant under the 1995 Act, so that there is no release of a guarantor, under section 24(2) LTCA 1995, to be frustrated.

2. Can an associated or connected company of the tenant’s guarantor be required to act as a guarantor of the tenant’s AGA?

It seems so, as the landlord is not hereby requiring the continuation of the guarantor’s liability, and there are no group company provisions in the 1995 Act. However, again, the fundamental question is more about how this can be achieved, rather than whether it is allowed. Requiring an associated company to guarantee a tenant’s AGA is something one would need to stipulate for in advance, in the assignment clause, by way of a section 19(1A) LTA 1927 condition. One would need to stipulate that the landlord can withhold its consent to an assignment unless the assigning tenant is able to offer a guarantee of its AGA from a company (whether within, or outside of, the tenant’s group) that is reasonably acceptable to the landlord. Introducing a rigid condition for a guarantee from within the group, as a fresh requirement at licence to assign, seems very likely to amount to an unreasonable condition.

3. Can the landlord accept a voluntarily offered guarantee of the AGA by the tenant’s guarantor?

No. If Good Harvest is to be interpreted as ruling out a requirement for a tenant’s guarantor’s guarantee of an AGA (nb. technically, the case only rules out a tenant’s guarantor’s guarantee of an assignee – but let us not split hairs), then it must also rule out a voluntarily offered guarantee. Indeed, this is a point expressly considered by Mr Justice Newey in Good Harvest.

4. When acting for a landlord on the grant of a lease, where the tenant is to provide a guarantor, should we advise the landlord to require the guarantor to be a joint tenant, instead of a guarantor?

Absolutely. In this way, both the tenant, and its joint tenant, can be required to enter into an AGA on assignment.

5. At licence to assign, where the assignee would only be acceptable to the landlord if supported by a guarantee, can the landlord require the assignee’s guarantor to stand as a joint tenant with the assignee, rather than as a guarantor, so that on the next assignment, a joint AGA can be required?

This sounds commercially sensible, but surely it is unreasonable? By this condition, the landlord appears to be seeking a condition of assignment that is more concerned with obtaining security for performance on the next assignment, rather than on this one. The matter for consideration by the landlord is whether this assignee (and any security offered) is good enough, not whether the security offered on the next assignment is good enough. For that reason, the condition sounds unreasonable.