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Aga Lease Assignment

Commercial property solicitor Jason Goldsmith considers the role of authorised guarantee agreements in business leases and their implications when exiting.

If your business needs to exit its current leasehold unit and you have lined up a willing assignee to take over your space, you will need to ensure that your landlord is happy to consent to the change of occupant.

However, your liabilities relating to that lease will generally not come to an end upon assignment. Commercial property solicitor Jason Goldsmith explains the role of authorised guarantee agreements and the continued liability of original tenants.

On assigning a lease and exiting a commercial unit you will wish to reduce the risk of being pursued by your former landlord in regard to any breaches in the lease terms by your successor.

However, landlords may be able to pursue you, dependent upon the age of your lease and whether there is anauthorised guarantee agreement:

  • if your lease was granted pre-1996, then landlords can look to any former tenants to be liable for a breach by the current tenant. It might be that the lease has been assigned several times since you were the tenant. That does not matter, the landlord can still pursue you for breaches by the current tenant.
  • if your lease was granted post-1996, then landlords are more restricted in who they can pursue. Normally they will require that you provide an authorised guarantee agreement on assignment of the lease. The advantage of this agreement is that the liability to guarantee your successors’ obligations comes to an end when your immediate successor assigns.

What is an authorised guarantee agreement?

This is a special form of guarantee that specifically applies to leases granted from 1996 onwards. They were created by statute and are frequently imposed as a condition of a landlord giving consent to the assignment of a lease.

Your landlord’s solicitors will generally present you with their standard form of document. Sometimes this can be negotiated to create a slightly more preferential position for you.

An authorised guarantee agreement requires you to guarantee the performance of the lease obligations by the assignee. Following assignment, if the assignee breaches a lease covenant, then the landlord will be entitled to look to you, or the relevant successor, to make good that breach.

Most leases entered into after 1996 make the landlord’s consent to assign the lease conditional upon the assignor providing an authorised guarantee agreement. You will not receive your landlord’s licence to assign unless you enter into an authorised guarantee agreement.

The agreement lasts until your assignee in turn assigns the lease. If the assignee does not assign, then you will remain liable until the expiry of the lease.

For example, a lease for 15 years is granted to company A, who assigns to company B after 5 years. At the point of assignment, company A grants an authorised guarantee agreement for company B’s liabilities to the landlord as a condition of obtaining landlord’s consent. Company A’s liability under the agreement is limited to company B’s breaches alone. After 10 years, if company B then assigns to company C (in accordance with the terms of the lease,) then company A’s liability automatically comes to an end.

In very limited circumstancesthe authorised guarantee agreement lasts beyond a second assignment, for example if company B did not obtain the landlord’s consent before assigning to company C. In this case, company A’s liability under the agreement would last until the next assignment authorised by the landlord.

In certain limited circumstances the agreement can be discharged before the usual expiry date. The actions of a landlord can sometimes result in the discharge of an authorised guarantee agreement, for example the material variation of a lease without the guarantor being a party to it.

For advice on whether an authorised guarantee agreement applies, please contact Jason Goldsmith a solicitor in Keystone's Commercial Property Team specialising in commercial real estate work.

For further information please contact:

This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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Authorised guarantee agreements - what are they and what should a tenant know

Tuesday, 19th December 2017

Introduction

There is a common misconception that selling a commercial lease will relieve the seller of liability for rent and other obligations under the lease. However, if you are entering into a lease of a commercial property it is likely that the lease will include provision that the outgoing tenant enters into an Authorised Guarantee Agreement or "AGA" if the lease is sold (assigned) to a third party.  This article explains the key terms of an AGA and gives practical pointers on how a tenant can improve its position during a negotiation.

What is an AGA?

An AGA is an agreement which places an obligation on an outgoing tenant to guarantee the performance by the new tenant or "Assignee" of the tenant covenants contained in the lease.

If the Assignee fails to perform the tenant covenants in the lease (which include payment of rents and repair obligations) the AGA allows the landlord to pursue the outgoing tenant under the terms of the AGA.

An AGA also provides the landlord with the option to insist on the outgoing tenant taking on a new lease (on the same terms of the existing lease) if the new tenant defaults and the existing lease is disclaimed. 

How long does it last?

It is usual that an AGA lasts from the date the outgoing tenant sells their interest in the lease to the Assignee until that Assignee has validly disposed of their interest in the lease to a third party or until the term of the lease comes to an end (whichever is sooner). 

Depending on the strength of the tenant's negotiating position a tenant may seek to insert a time limit as to their liability under an AGA.  Any time limit agreed should be expressly stated in either the lease or, if the time limit is agreed when consent to an assignment is given, the AGA in order to protect the tenant's position on a subsequent assignment. 

Points tenant should consider when negotiating terms of a lease

The Code for Leasing Business Premises in England and Wales 2007 provides that an AGA should only be required by the landlord if the Assignee is of lower financial standing than the outgoing tenant or if the Assignee is registered or resident overseas. It is suggested that for smaller tenants a landlord should accept a rent deposit from the Assignee instead of an AGA from an outgoing tenant. 

Tenants can seek to agree with the landlord that an AGA will only be necessary if the above factors are relevant.  Alternatively a tenant can seek to negotiate that any lease expressly states that an AGA will only be provided if at the date of assignment it is "reasonable in the circumstances".  Without the inclusion of the reasonableness wording in a lease a landlord may be able to insist that the outgoing tenant enters into an AGA as a condition of the landlord giving consent to an assignment, even if the covenant strength and financial standing of the Assignee is greater than that of the outgoing tenant. 

Points for tenants to consider on an Assignment

Under statute, an AGA is void if it seeks to impose any further liability on the outgoing tenant than that contained in the lease.

As outlined above, depending on the wording of the lease and the financial standing of the Assignee the tenant may seek to persuade the landlord to dispense with the requirement for an AGA or to impose a time limit on the outgoing tenant's liability under the AGA.

If the lease being assigned is a business lease which has security of tenure under the Landlord and Tenant Act 1954, an outgoing tenant providing an AGA must bear in mind that the AGA may continue beyond the end of the contractual term of the lease.  If the lease continues beyond the end of the contractual term this is known as "holding over".  Holding over can continue until such time as either the landlord or tenant serves a notice on the other to either end the lease or enter into a new lease.  A tenant providing an AGA on an Assignment should seek to ensure that the AGA does not include any holding over period in order that the tenant has certainty as to when their liability under the AGA will come to an end.

Conclusion

AGAs are commonplace in leases of commercial property but it is important that tenants understand the implications of them when the lease is initially granted and on any subsequent assignment.  If you need any further assistance please contact Mairead O'Donnell.

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