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Commercial Leases - What are Authorised Guarantee Agreements?

on Thursday, 14 October 2021.

When owning commercial property, understanding where you and your new and previous tenants stand is incredibly important. We take an in-depth look into Authorised Guarantee Agreements.

What is an Authorised Guarantee Agreement (AGA)?

When a commercial lease is assigned (transferred) to a third party the outgoing tenant will no longer be the 'tenant' under the lease and may expect to have no continuing liability for the property. However, to assign a commercial lease, a tenant will usually have to obtain the consent of the landlord (consent not to be unreasonably withheld or delayed). Where the lease is a 'new lease' (entered into after 1 January 1996 except where granted pursuant to an agreement, option or court order before 1996) and states that the landlord may request one, the landlord may request an AGA as a condition of their consent.

An AGA is an agreement where the outgoing tenant guarantees to the landlord the performance by the incoming tenant of the covenants in the lease that the outgoing tenant is being released from. These obligations include (but are not limited to) payment of the rent and other outgoings at the property and compliance with the repair and decoration covenants.

The effect of an AGA is that if the new tenant fails to comply with the lease covenants the landlord can come straight to the outgoing tenant to remedy the breach. The AGA will also require the outgoing tenant to take a new lease for the residue of the original term (or pay a certain number of months' rent instead) if as a result of the new tenant's' actions the lease is disclaimed.

The liability under the AGA lasts until the earlier of the end of the term of the lease or the date the new tenant assigns the lease to a third party.

The outgoing tenant could seek an indemnity from the new tenant in case the AGA is called on by the landlord. However, if the new tenant can't afford to comply with the lease covenants and pay the landlord, the likelihood of the new tenant being able to pay out under an indemnity is questionable.

Does The Outgoing Tenant Have to Provide an AGA?

If there is a term in the lease requiring an AGA on assignment, the outgoing tenant will have to provide one. It will be in the landlords' absolute discretion to agree otherwise. This will be the case even if in the circumstances it does not seem reasonable to do so.

If there is no term in the lease requiring an AGA, the outgoing tenant should take advice on whether it is reasonable for the landlord to request one.

When entering into negotiations with a new tenant to take an assignment of the lease, consideration should be given to the new tenant's covenant strength. Discussions should include whether the new tenant is willing to enter into alternative security such as rent deposit and/or personal guarantor which may allow the outgoing tenant to negotiate with the landlord that an AGA is not required.

The Implications of AGAs

If the assignment happens in the first few years of a 15 or 20 year lease, there is a possibility of continuing liability under the AGA for a considerable period of time.
If the outgoing tenant is assigning the lease as part of closing/winding up its business, provision of an AGA can cause issues as there remains an ongoing residual liability for the lease.

It is important to take legal advice when entering into a new lease or taking an assignment of an existing lease to ensure you understand the liabilities you are taking on as tenant and the potential liabilities you may retain when you are no longer tenant under that lease.

If you need assistance with commercial leases, do not hesitate to contact Rebecca Beardsley in our Real Estate team on 0117 314 5325, or complete the form below.

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