TENANT GUARANTEEING PERFORMANCE OF COVENANT BY ASSIGNEE (Hansard, 14 July 1995)

§ Mr. Thurnham
I beg to move, That this House doth agree with the Lords in the said amendment.

§ Mr. Deputy Speaker
With this, it will be convenient to discuss also Lords amendments Nos. 32 to 36.
This important group of amendments revises and refines the operation of clause 12 as it left this House. That clause deals with the Law Commission's recommendation that when a tenant under a new tenancy is released on assignment in accordance with clause 3, it should nevertheless be possible for the landlord, as a condition of the licence to assign, to ask the tenant to guarantee performance of the tenant covenants of the tenancy by his immediate assignee, but no more.
Two important propositions must be implemented effectively by the clause: the proposition that the outgoing tenant should guarantee performance by his successor; and the proposition that the guarantee should cover no more than that. Clause 12 in the original draft set out to give workable effect to those propositions but came in for criticism that it failed to do so effectively. The amendments seek to ensure that the clause is fully effective.
In considering this clause, it should be borne in mind that a landlord will be able to seek a guarantee from an outgoing tenant only if the lease gives the landlord control over an assignment because, in the absence of such control, the lease will be freely assignable by the tenant under general principles without the need to refer to the landlord. Control will arise either by way of an absolute covenant against assignment, which bans it all together, in which case the landlord will be free to demand such a guarantee as the price for waiving the ban, or by providing assignment only with the landlord's consent.
Subsections (1) to (3) of the clause cover those propositions with only minor technical amendments. The remainder of the clause covers the limits on such an authorised guarantee agreement, as the Bill terms it, and the provisions which the landlord can seek to include in it to ensure its effectiveness for his purposes.
The amendments strike the balance between ensuring that the guarantee is effective when the landlord most needs it and ensuring that it cannot be used as a device for subverting the main reform by retaining the effective privity of contract liability once the assignee has assigned.
Amendment No. 31 is entirely technical and inserts the word "tenant" in subsection (1) of clause 12 to make it absolutely clear that it is only tenant covenants, the performance of which may be guaranteed. Amendment No. 32 removes words from subsection (2) consequential on the later amendments, which make the limits of an authorised guarantee agreement absolutely clear. Amendment No. 33 makes it clear that the guarantee will not be effective unless it complies with the new clearer provision introduced by the later amendments.
Amendment No. 34 will simply introduce words to subsection (3) to make it clear that there is no question of an authorised guarantee agreement arising unless the lease contains some form of covenant against assignment.
Amendments Nos. 35 and 36 carry out wholesale revision of the latter part of the clause and are extremely important because without them it could not safely be said that the clause properly gives effect to the two necessary propositions that I outlined earlier.
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Amendment No. 35 deletes the greater part of subsection (4) and replaces that deleted with clearer and more all-embracing provisions setting the limit for an authorised guarantee agreement, and subject to that what such an agreement may include to ensure that it is effective in the circumstances when it will be most needed.
Any provision that is aimed at tying in the outgoing tenant to any kind of liability that is in any way referable to the lease he has assigned will, regardless of its terms, be of no effect once the assignee himself is released by reason of his having assigned. That deals with the proposition that the guarantee should cover no more than the performance of the tenant covenants by the assignee.
Any such provisions will not be void ab initio, however. That is of importance for the new subsection (4A), which will be inserted by the amendment. It deals with the proposition that the guarantee should effectively cover performance by the assignee.
The problem for landlords is that the strict technical rules relating to guarantees generally will result in the guarantor of a tenant being discharged if the tenant becomes insolvent and the lease is then disclaimed by the receiver or trustee in bankruptcy. That is just when the landlord needs the guarantee the most.
The law in general permits several ways around this difficulty, such as provisions whereby the guarantor agrees to take on the liability of a sole or principal debtor that is not discharged in the circumstances, or agrees to take on a new lease replacing the residues of the disclaimed lease. The new subsection expressly permits these devices to enable landlords to ensure that the guarantee remains effective when most needed. That is subject, however, to the general limitation inserted in subsection (4). The effect is that the devices will be available if the assignee becomes insolvent and the lease is disclaimed before he assigns, but will cease to have any effect once the assignee signs and is released in accordance with clause 3.
Amendment No. 36 completes the revision of clause 12 by introducing two new subsections to cover the position of excluded assignments and the position where a tenant who entered into an authorised guaranteed agreement becomes tenant again under the operation of that agreement. In relation to excluded assignments, where a tenant who made an excluded assignment and therefore remains bound is released on the next assignment, he may, in effect, be asked by the landlord to give the guarantee that he would have been asked to give if his assignment had not been an excluded one and had been effective to release him.
The position depends on whether the tenant making the next assignment enters into an authorised guarantee agreement. If he does, the landlord will be able to require the tenant who made the excluded assignment also to enter into an authorised guarantee agreement on terms corresponding to those of the assigning tenant's agreement so that they guarantee the next tenant jointly.
The tenant who entered into an authorised guarantee agreement may become tenant again either by taking back the assigned lease on a disclaimer following his assignee's insolvency or by entering into a new lease under the authorised guarantee arrangement. In those circumstances, when a tenant next assigns, it will be possible to enter 1255 into another authorised guarantee agreement. While this might at first blush seem onerous for a tenant whose assignee is weak, it is entirely appropriate because the failed assignee will have been the tenant's choice. It may have been only the prospect of the authorised guarantee agreement that persuaded the landlord to consent to the assignee.

Mr. John M. Taylor
Once again, I am grateful to my hon. Friend the Member for Bolton, North-East (Mr. Thurnham) for his full and clear explanation of these important amendments. The authorised guarantee agreement is a crucial pillar of the Law Commission's recommendations. These amendments are accordingly very important and I commend them to the House.
I should like to explain a matter that arises from amendment No. 36, on which a little concern was expressed in another place. It is the possibility of a landlord being able to require a tenant who made an excluded assignment to enter into an authorised guarantee agreement when the person to whom the excluded assignment was made himself assigns the lease. That is entirely appropriate, because the person to whom the excluded assignment was made may be someone to whom the landlord could reasonably have objected. To allow release without the possibility of an authorised guarantee agreement might enable tenants to escape liabilities that it would be entirely reasonable for them to retain.
The point on which concern was expressed related to the position of charity trustees. Consequential on amendment No. 36, the first schedule to the Bill will make a consequential amendment to the Trustee Act 1925 which will prevent the possibility of an authorised guarantee agreement in such circumstances bedeviling the administration of estates or trusts and will deal with the concerns that were expressed about charity trustees.