This post was also written by Philip Olmer and Alex Heaton.

Earlier this year we wrote about the impact of the Good Harvest case (Good Harvest Partnership LLP v Centaur Services Limited), both from the perspective of the landlord and of the tenant . Much of the commentary from the spring of this year was advising those involved in property to wait and see what the outcome of the Appeal would be; however, the Good Harvest case settled before it got to the Court of Appeal. Now we need to operate with the High Court decision standing as good law unless (or until) there is a dispute that is large enough to involve a Court of Appeal decision on the same subject.

This posting covers what we are experiencing in advising our clients in practice.

Granting New Leases –

  • Some new leases are non-assignable and this is agreed in return for tenants getting a great deal of flexibility in underletting. This preserves covenant strength and value for landlords without the tenants significantly reducing their ability to offload property that they no longer need. A prohibition against assignment does mean that a tenant does not have the opportunity to be released from its obligations as it would be if the lease is assigned twice, but so far that has not been viewed as a significant problem.
  • Granting a lease that is non-assignable seems to be a more popular solution than making a proposed guarantor a joint tenant.
  •  It is too early to say that we are seeing a tightening of the tests that tenants and assignees have to satisfy before they can assign, but we are seeing some landlords proposing stricter conditions in the first draft of their leases.

Buying and Funding Investments –

  • We have been disclosing to potential investors which guarantees would no longer be enforceable.  Banks require this information and are certainly not relying on the fine legal difference between a guarantor giving an authorised guarantee agreement and a guarantor being a sub-guarantor.

Lease Assignments –

  • Many existing leases contain wording similar to that considered in the Good Harvest case and requiring a guarantor to give an authorised guarantee on assignment. Some landlords continue to seek such guarantees despite their current unenforceability. Our advice is for landlords to consider investment value based on the covenant strength of the assignee and its guarantor with only the tenant liable under an AGA.

Intra-Group Assignments –

  • Where performance by a tenant was guaranteed and the covenant strength rests with the guarantor, group assignments are virtually impossible without a different guarantor of good covenant strength being available.

Sub-letting –

  • Tenants are advised to consider subletting as a more realistic and often speedier option if assignments are proving difficult to agree; however, many tenants signed up to leases with tough controls over subletting which are not easy to satisfy in today’s market.  Given the depressed status of the rental market, it is too early to say whether this will have an effect on rental values upon review.

Conclusions –

  • The real estate world has had to adjust to the perhaps surprising unenforceability of authorised guarantee agreements given by guarantors (rather than previous tenants), and at the moment it seems that it is tenants who are paying the price by finding it harder to deal with their leases and to offload surplus properties in a difficult market.

For further advice, do get in touch with your usual contact at Reed Smith or the authors.