Former tenants/guarantors: am I still on the hook?

Former tenants/guarantors: am I still on the hook?

What next for the construction sector: looking at how other common law jurisdictions are responding to COVID-19

A variety of restrictions have been introduced during the current COVID-19 crisis giving defaulting commercial tenants some extra breathing space. If you are a former tenant or guarantor of a lease read on because the landlord may look to you as an alternative source of payment. 

Where are we today?

You may already be familiar with the impact of Coronavirus Act 2020 on commercial tenants. If not, you can find a link here to our own COVID-19 related articles. In short, if you are a tenant under a standard commercial lease, you will be on the hook for all rent and other sums due under the lease, unless it says otherwise.  So, until your landlord is prepared to grant you a formal concession, whether by way of rent holiday, deferment, or simply by agreeing monthly payments to ease cash flow in the short term, you will largely remain at the landlord’s mercy.  This remains the case even though the government has recently sought to introduce guidance to encourage parties to behave responsibly in performing contracts that are currently impacted by COVID-19, whatever that means (see here). 

Landlord options are narrowing

Suing for non-payment of rent or serving statutory demands as a precursor to issuing a winding up or bankruptcy petition are still tools currently available to landlords to enforce payment of rent.  Whilst the government has recently announced that it will restrict landlords from taking steps to wind tenants up where their inability to pay is related to the Coronavirus, this is yet to become law.  As our recent article on CRAR explains (see here), pursuing tenants through bailiffs is also more difficult. Also businesses do not currently face the threat of forfeiture of their leases for non-payment of rent, which would normally result in them paying up.  As options are narrowing, landlords will have to look for alternative ways to recover debts, such as enforcing existing guarantees or pursuing former tenants/guarantors.  We are not currently aware of any government plans to restrict this option to recover unpaid rent at the time of writing.

Former tenants/guarantors should beware

Following the 1980s recession, the government introduced the Landlord and Tenant Covenants Act 1995 (“the Act”) to help stem the rise in landlord enforcement against former tenants and their guarantors. The Act came in to force on 1 January 1996. In simple terms, if you are a former tenant or guarantor under a pre-1995 Act lease (“old lease”) and you guaranteed a tenant’s future performance, you will remain on the hook until the lease expires.  If you are a former tenant or guarantor of a lease granted under a post-1995 Act lease (“new lease”), you will be off the hook as soon as you assign the lease, unless you gave an Authorised Guarantee Agreement (“AGA”), or you have guaranteed the tenant’s performance under one (“GAGA”).  For new leases, the landlord can still pursue you for any arrears until such time as the lease is assigned again, at which point your liability will automatically fall away. 

But, in order to be able to pursue you as a former tenant or guarantor under either new or old leases, the landlord must serve on you a formal ‘section 17 notice’ within 6 months of a ‘fixed charge’ falling due. A ‘fixed charge’ includes rent, service charges, and any other liquidated sum provided for under a lease. Practically speaking, keeping track of notices that have been served may be more difficult for you during the lockdown as our note here explains.  But, it will be incumbent on you to pay up if a valid section 17 notice has been served, so you will need to be vigilant.  If you do receive a valid notice it is also important that you seek urgent advice on your options before paying up.  For example, your guarantee may no longer be enforceable in which case you are off the hook, or you may be entitled to an overriding lease of the property to have more control over the defaulting tenant’s lease.  If you are anxious about your potential liability under a ‘new lease’, there may be some practical steps that you can take to establish whether the lease has been assigned again and to challenge any claim against you.

Existing guarantors

If you are an existing guarantor, you will need to check the wording of the guarantee provisions in the lease to see what you are liable for. For instance, when a tenant becomes insolvent and a lease is disclaimed by a liquidator, it is common in commercial leases for the landlord to be entitled to force guarantors to sign up to a new lease. Often this will be on the same terms as the existing lease and for the duration of the original term.  Also, a landlord may only be able to call on your guarantee in particular situations and for a specified period, or the landlord’s own actions during the course of the lease may have operated to release your guarantee. It is therefore important that you check the wording of your lease and make further enquiries of all the circumstances before accepting liability. 

Until further legislation is introduced by the government to prevent landlords from pursuing tenants/guarantors for unpaid debts arising as a direct result of COVID-19 circumstances, the fact remains, former tenants/guarantors will remain on the hook.  If you are concerned this might apply to you, you should consider taking early advice to understand the extent of your potential liability and how best to respond if and when the landlord comes calling. With the next quarter’s rent due on 24 June and landlord’s options narrowing, that call might come sooner than expected.

Stevens & Bolton’s real estate disputes team are experienced in advising both tenants and guarantors (as well as landlords) on lease liabilities and we would be happy to help you navigate through the current legislation and options available. 

This guidance is current at time of writing on 20 May 2020. 

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