Sarah Wertheim, Dannii Wise and Ruth Crout look at the role of authorised guarantee agreements in commercial leases.
A corporate tenant occupies an office under a commercial lease. The tenant decides they wish to move but has a significant number of years remaining on the term of their lease. The tenant will likely be looking to assign their interest in the office to a proposed buyer.
The tenant may hope to ensure that assigning the commercial lease to the buyer will relieve them of their obligations under the lease. On the other hand, the landlord will wish to ensure that their interests are as thoroughly protected for the remainder of the term as they have been to date – and generally, the tenant will need the consent of the landlord in order to assign the lease.
How can a happy balance be struck between the ensuring that commercial tenants can move as and when their business needs necessitate it, and guaranteeing the protection of commercial landlords under the terms of their leases?
The answer (according to the Landlord and Tenant (Covenants) Act 1995 (the “LT(C)A 1995”)) is that the landlord can request an Authorised Guarantee Agreement (an “AGA”) as a condition of their consent.
What is an AGA?
AGAs were introduced by section 16 of the LT(C)A 1995, which provides that a landlord can request that an outgoing tenant enters into an AGA with the incoming tenant on assignment of the lease, provided that the lease is entered into on or after 1 January 1996. Prior to the LT(C)A 1995, the original tenant remained liable for upholding the tenant’s covenants for the whole of the term even if they assigned the lease to a buyer – a situation which could be onerous for commercial tenants under leases which typically lasted 25 years. Now, for leases entered into after 1 January 1996, assignment of the tenancy releases the outgoing tenant from all liability from the date of assignment (section 5 LT(C)A 1995; note exceptions in section 11).
Section 16 of the LT(C)A 1995, however, provides comfort for landlords who may be unsure of the incoming tenant’s ability to fulfill obligations, by allowing them to request that the outgoing tenant acts as guarantor for their replacement. The AGA places an obligation on the outgoing tenant to guarantee performance of tenant covenants provided in the lease. Following the agreement of an AGA, if the new tenant fails to comply with the lease covenants, the landlord may seek remedy from the outgoing tenant.
The LT(C)A 1995 allows AGAs to be reasonably broad, although the obligations and liabilities imposed on the incoming or the outgoing tenant under the AGA cannot exceed those in the original lease. Typically, AGAs cover obligations to pay rent, and covenants regarding repair or maintenance of the property. AGAs will usually continue from the date the outgoing tenant assigns the lease until the new tenant either disposes of their interest in the lease, or until the lease terminates. It is possible to place a time limit on the outgoing tenant’s liability to be imposed under an AGA; any such time limit should be expressly stated in the AGA itself.
The AGA may be a separate document or included in a license to assign. In both circumstances, the AGA must be signed by the outgoing tenant for it to be enforceable.
It is important to note that, although AGAs are useful tools, they are not all-powerful. The biggest issue for some landlords is that the court would be unlikely to force insolvent outgoing tenants to enter into an AGA – this was argued in Wallis v CGU Life Assurance [2000], where Neuberger LJ held that tenants could oppose a requirement for an AGA if ‘no reasonable landlord could, in the circumstances, require it.’ Additionally, the Landlord Code, although not legally binding, states that an AGA should not be required unless the ‘proposed assignee…is of lower financial standing than the assignor… or is resident or registered overseas’.
A further limitation on the applicability of AGAs is that only the outgoing tenant is able to enter into the AGA; this means that where an outgoing corporate tenant is insolvent, but there is a solvent parent company, the parent company is not able to enter into the AGA on behalf of the tenant.
Conclusions
Overall, AGAs are helpful and frequently used tools in commercial leases. They can provide a reasonable level of security for landlords whose tenants are assigning their leases to incoming tenants of ‘lower financial standing’, or to tenants who are based overseas. However, it is not a tool which can solve the problem of an insolvent tenant, even where there is a solvent parent company; landlords wanting additional security for incoming tenants here may look to ask the incoming tenant to provide a guarantor.
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