Can a guarantor be liable to a landlord after the lease has been disclaimed by the liquidator of an assignee?

Ms Shaw was the tenant of a ground floor lock-up shop and basement.  She had assigned her tenancy with the landlord's permission to Ceramic Café Limited.  As a condition of the landlord's consent to the assignment Ms Shaw was required to enter into an AGA in respect of Ceramic Café's obligations under the lease.

The AGA expressed the guarantee period as being limited to the "period during which the assignee was bound by the tenant covenants in the lease".  Subsequently Ceramic Café ran into financial difficulties and went into liquidation in August 2005. Thereafter the liquidator disclaimed the lease in October 2005.

The landlord sought to make Ms Shaw liable under the terms of the AGA.  Ms Shaw contested liability on the basis that her guarantee under the AGA had terminated with the disclaimer via the liquidator in October 2005. The landlord's case was that Ms Shaw's guarantee liability continued by virtue of the express terms of the AGA, construed in the context of the deeming effect of Section 178 (4) Insolvency Act 1986.

The High Court held that Ms Shaw remained liable. Ms Shaw appealed and argued that her liability was limited to the "liability period". She contended her liability had expired once Ceramic Café had ceased to be bound by the covenants in the lease i.e. when the liquidator had disclaimed in October 2005.  Also as the lease gave the landlord a put option to require the tenant to take a new lease in the event of termination of lease by disclaimer Ms Shaw claimed that this evidenced the parties' intention that the AGA should end at the same time as the tenant's liabilities under the lease.

The Court of Appeal upheld the High Court's decision and applied the Hindcastle case. It found that (a) the obligations of the insolvent tenant to the landlord continued to exist notionally for the purposes of the liabilities of Ms Shaw to the landlord and (b) for the purposes of the AGA Ceramic Café was still deemed to be bound by the tenant's covenants even after disclaimer and therefore remained liable. If the parties had wanted to make the AGA terminate upon disclaimer that would have had to be expressly provided for and the landlord's put option was not inconsistent with Ms Shaw's continuing liability (and was therefore an additional right that the landlord had).

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