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Parent Company Guarantee
QUESTION: I am a landlord negotiating to let my office building to a new company backed by a parent company guarantee. Does this give me the same covenant strength as if the parent company were the tenant?

There is some doubt, leases with guarantees that give the landlord equivalent covenant strength to having the parent company as tenant provide that:

1. The guarantor will comply with the tenant’s covenants if the tenant does not, and will indemnify the landlord
2. The guarantee is a primary obligation, so the landlord can pursue the guarantor without first suing the tenant
3. The landlord may require the guarantor to take a new lease on similar terms if the lease is disclaimed or forfeited
4. A proposed assignee’s covenant strength must be no worse than the combined covenant strength of the tenant and it’s guarantor. In addition, leases often provide that on assignment, the landlord can require the guarantor to guarantee the tenant’s obligations under an authorised guarantee agreement.

A less common requirement is that the lease must be assigned first to the guarantor and then to the third-party assignee with an authorised guarantee agreement from the guarantor. However, it is unclear whether such provisions would be void under the Landlord and (Covenants) Tenant Act 1995 anti-avoidance provisions.

The risk of the guarantor being released in a company voluntary arrangement can be cut by additional lease drafting. But in some recent high-value lettings, the landlord insisted the lease be granted direct to the parent company as this increased the value of its investment.

So lawyers will draft to put you as close as possible to having the same covenant strength as the parent company, but there is some doubt about whether you are really getting the same.

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