A common misconception among commercial tenants is that assigning their lease means they can walk away from the obligations of the assigned property's tenancy agreement and move on without any further responsibilities. Unfortunately, the reality is a bit more complicated than that.
Many commercial leases contain a provision that the original tenant must enter into an Authorised Gurantee Agreement (AGA). Unless you, as a commercial tenant, fully comprehend the effect of an AGA, you could find yourself being contacted by your former landlord’s solicitor years down the line, informing you that you’re responsible for thousands of pounds in unpaid rent, repairs, or other obligations that the tenant who purchased your lease failed to fulfil.
In this article, we explain everything you need to know about AGAs. If you’re considering assigning your lease and are required to provide such an agreement, seeking legal advice from an experienced Commercial Property Solicitor is highly advisable.
What is an Authorised Guarantee Agreement?
An Authorised Guarantee Agreement is a guarantee by a commercial tenant assigning a lease that the new tenant will perform the obligations under the tenancy agreement, for example, pay rent and undertake repairs and maintenance (as required under the lease). AGAs only apply to leases granted from January 1996.
How does an Authorised Guarantee Agreement work?
To qualify as an AGA, the agreement must comply with section 16(2) of the Landlord and Tenant (Covenant) Act (LTCA)1995, namely:
- The incoming new tenant must guarantee the performance, by the outgoing tenant, of the covenants (obligations under the lease) from which the tenant has been released
- The agreement must be entered into in the circumstances set out in section 16(3) of the LTCA 1995
- The agreement's provisions must comply with sections 16(4) and 16(5) of the LTCA 1995
If the new tenant doesn’t perform the covenants set out in the Commercial Lease Agreement, the landlord can pursue the old tenant assigned the lease for payment, repairs, etc.
An AGA lasts from the date the outgoing tenant sells their interest in the lease to the incoming tenant until the incoming tenant has validly sold their interest in the lease to a third party or the lease term expires (whichever is sooner).
Do I have to provide an AGA if I am assigning a lease?
It depends on the provisions of your Tenancy Agreement. If it states that an AGA is required to assign the lease, you’re legally obliged to provide an AGA unless you can come to an alternative agreement with your landlord. If the lease is silent on the matter, you need to talk to a commercial property solicitor who’ll advise you on whether it’s reasonable for your landlord to demand an AGA.
The Code for Leasing Business Premises in England and Wales 2007 provides that the landlord should only require an AGA if the new tenant is financially weaker than the outgoing tenant or if the new tenant is registered or resident overseas. In all other cases, a landlord should accept a rent deposit from the outgoing tenant instead of insisting on an AGA.
Who are the parties to an Authorised Guarantee Agreement?
There are three parties to an AGA, namely:
- The outgoing tenant who’s assigning the lease
- The new incoming tenant who’s taking on the lease
- The landlord
What if the incoming tenant becomes insolvent?
A landlord will often insist that if the assignee falls into bankruptcy and the lease is disclaimed by its trustee, then the outgoing tenant must take a new lease for the remainder of the term.
How can I protect my interests if I am asked to provide an AGA?
There are a few steps you can take to protect your best interests if you’re required to provide an AGA, including:
- Obtain the Authorised Guarantee Agreement indemnity and a covenant in the lease from the incoming tenant that, in the future, they’ll not assign the lease if it’s in breach of the lease agreement or agreed in a way that breaches the assignment terms of the agreement
- Ensure the AGA doesn’t extend your liability past the contractual term of the lease) (this is especially important if Security of Tenure applies to the lease, as a holding over period may apply unless you ensure the AGA doesn’t include such a provision)
- If the landlord tries to enforce the Authorised Guarantee Agreement, make sure you contact your solicitor immediately and seek advice as to whether or not the landlord has legitimate grounds to take such action
Get legal assistance from LawBite
If you’ve concerns about an Authorised Guarantee Agreement, please don’t hesitate to contact us. Our commercial property solicitors can check that the agreement complies with the Landlord and Tenant (Covenant) Act 1995 and that your best interests are protected. To find out more, book a free 15 minute consultation with one of our expert lawyers or call us on 020 3808 8314.