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Guarantee Clause Not Linked to Assignee

23rd February, 2011

In these tough times unexpected traps in agreements are coming to light with greater regularity. A recent landlord and tenant case emphasises what can happen if insufficient attention is paid in the course of negotiation to clauses that might seem unimportant or harmless at the time.

It is usual for a commercial lease to contain a clause which will bind the tenant to guarantee the payment of the rent and performance of covenants under the lease should it be assigned to a third party. In a recent case, a lease was assigned and the new tenant later became insolvent and went into liquidation.

The relevant lease agreement bound the original tenant to guarantee performance during the period the assignee was ‘bound by the tenant covenants of the lease’. The liquidators disclaimed the lease, making no payments, and the landlord sued the original tenant under the guarantee.

The original tenant claimed that it was not liable for the assignee’s rent etc. after the liquidator had disclaimed the lease, the argument being that the assignee was no longer bound by the covenants in the lease and the original tenant could not therefore be bound by them after the lease was disclaimed.

The Court of Appeal did not accept this argument. The original tenant was held liable under the guarantee. The liability of the original tenant as guarantor was deemed separate from that of the assignee.

“Your potential responsibilities under a guarantee if you assign a lease may not be at the forefront of your mind when you are negotiating to take on new rented commercial premises,” says Eliot Hibbert “However, attention to detail and taking professional advice at the right time pays dividends. In the present environment, landlords may agree to some concessions such as limiting or removing guarantee clauses completely if pressed.”

Contact Eliot Hibbert for advice on any commercial property or landlord and tenant matter on 01244 405567 or email him here.

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