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.
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 Sarah Lomas.