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Can Guarantors reap a Good Harvest?

01 June 2010

The recent Good Harvest Partnership LLP v Centaur Services Limited case could be welcome news for guarantors of former tenants, forced to pay out under a guarantee they have given in an Authorised Guarantee Agreement (AGA).

Centaur, the former tenant's guarantor, had been obliged to sign up to an AGA, as guarantor, when the tenant wanted to assign the lease. The assignee failed to pay rent and so the landlord, Good Harvest, claimed it from Centaur on the basis of this guarantee.

When it came to court, the Judge decided that such a guarantee agreement in an AGA was invalid because it went against the purpose of the Landlord and Tenant (Covenants) Act 1995 - which is to abolish all forms of original tenant liability except that of the immediate past tenant under an AGA. Centaur's guarantee in the AGA was not a liability of this type, and so fell foul of the Act's anti-avoidance provisions.

So where does this decision leave a guarantor of a former tenant who has previously paid out under an AGA?

The Good Harvest case opens the door for such a guarantor to claim repayment from a landlord. It could say that the payments were made under a mistake of law - that mistake being as to the enforceability of the guarantee - and there is unarguable case law authority (the House of Lords 1998 decision in the case of Kleinwort Benson) that payments made under a mistake of law can lead to a court order that the money be repaid.

It is clear from the nature of the Good Harvest decision that it covers not just payments to be made from now on, but all previous payments as well.

Although this is good news for guarantors who have paid out under a guarantee that now appears to be unenforceable, this ray of light may not be shining for much longer. The Landlord has lodged an appeal against the decision which is due to be heard in June - so it remains to be seen whether it will be upheld.

Either way, now might be a good time for anyone who has been a guarantor under an AGA to revisit his accounts.

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Lucy Barry

Solicitor
T: 03700 86 8348
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