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In 1996, the case of Hindcastle v Barbara Attenborough Associates settled the effect of disclaimer on a lease guarantee but since then a new leasehold regime has been introduced. A recent case, Shaw v Doleman, has revisited the effect of disclaimer in this context.

Original tenants of leasehold property paid a high price in the property crash of the 1990s. Leases were longer, and privity of contract meant that having signed up to a lease, the original tenant remained liable on it for its duration. A future assignee some way down the line might become insolvent, but the original tenant would have had no control over its identity and no warning of impending trouble.

Concern was such that the Landlord and Tenant (Covenants) Act 1995 was introduced. For most leases granted after 1 January 1996 an outgoing tenant would be released from liability on assignment. The exception was when it guaranteed the performance of its immediate assignee by way of an authorised guarantee agreement (AGA).

Hindcastle concerned a pre-1995 Act tenancy. The House of Lords ruled that although disclaimer terminated a lease and the liability of the person whose interest was disclaimed, it did not affect the liabilities of any other person. Section 178(4) of the Insolvency Act 1986 operates so that the rights and liabilities of others, such as guarantors, remain as though the lease continued after the disclaimer.

It is now 13 years since the 1995 Act came into effect, and lease terms are shorter than they were. Where insolvency and disclaimer occur, it is fair to expect a significant proportion of those cases will be in respect of leases to which the 1995 Act applies. The decision in Shaw v Doleman is both timely and helpful.

In Shaw v Doleman the original tenant had guaranteed the performance of its assignee by way of AGA. Its guarantee was to remain in force for 'the period during which the assignee is bound by the tenant covenants of the lease'.

The assignee became insolvent and its liquidator disclaimed the lease. The original tenant argued that as the disclaimer terminated the lease, the assignee ceased to be bound by the tenant covenants. Accordingly, she argued, her liability under the AGA had come to an end.

The Court of Appeal followed the House of Lords in Hindcastle,and decided that the meaning and effect of the AGA must be determined in the context of s178(4) Insolvency Act 1996. That is, that the assignee ceased to be bound so far as its own obligations were concerned, but it was to be treated as still bound so far as third party obligations were concerned. The original tenant remained liable under its guarantee, notwithstanding the disclaimer.

The outcome of this case is welcome news for landlords. In this difficult financial climate:

• a landlord is better placed to look to a guarantor for payment of rent, than try to relet empty property
• the rent reserved in an existing lease is likely to be higher than the current market rate
• a landlord is under no obligation to mitigate its loss by taking possession and reletting.

Finally, a warning note: a landlord seeking to rely on a guarantee after disclaimer must be careful not to do anything that might be regarded as unequivocally terminating the lease.

Guidance is available about what can be done, and it should be sought. Inadvertent termination of a lease by the landlord would determine a guarantor's liabilities.

 

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