Wake-up call: Be very careful before you sign an Authorised Guarantee Agreement
Landlords requiring guarantees are not unusual in hospitality, but Debra Kent warns that operators need to be very careful of what they agree to
The problem
It is not unusual for a landlord to require a guarantee to a lease of a hotel, restaurant, leisure or foodservice business. In the case of an Authorised Guarantee Agreement (AGA), you would not be guaranteeing your own company, over which you have some control; you would be promising to fulfil the obligations under the lease of the assignee/buyer after you had assigned your lease.
The law
Under a lease, the guarantor promises the landlord that it will ensure that the tenant (or in the case of an AGA, the assignee/buyer) will fulfil its obligations under the lease. If the tenant or the assignee does not do this, then the guarantor is often required to perform these obligations. If the breach of the lease relates to a failure to pay the rent (which might also include service charge and other monies payable under the lease) then the guarantor can be required to pay these, although any action for damages for rent arrears must be brought within six years from the date of such arrears. Any claim for damages not relating to rent has a 12-year limitation period.
Expert advice
Landlords often require guarantees where the financial strength of the tenant is insufficient or the company has not got a good track record. However, once the business has been operating well for some time and the tenant has paid all moneys due under the lease and complied with the other lease obligations, it is not unreasonable for the guarantor to ask to be released from the guarantee. Most landlords will still try and resist this.
It is a good idea to negotiate at the beginning that if the tenant complies with its obligations for a set period of, say, three years, or if it meets a profits test, then the guarantor can be released. The usual profits test is that the tenant provides audited accounts for not less than three consecutive years, showing an annual net profit before tax of at least three times the rent payable under the lease. Other profit or capital strength tests can be agreed for the release mechanism or even that an alternative security is provided, such as a rent deposit or a bank guarantee.
To-do checklist
• Try and negotiate that no guarantee is provided
• If the landlord insists, then negotiate for a release after either a set period or until the tenant meets a particular financial test or provides some other security
• In each case this will also usually be dependent upon there being no material breaches of the lease
• An assignment of the lease, which is permitted under the lease terms, will usually provide for a release of the guarantor
• An assignment will often require that the then current tenant will guarantee the new tenant under an AGA
• Ideally the lease should provide no AGA will be required if the new tenant meets certain financial tests or provides other security or otherwise only if it would be reasonable for the landlord to insist upon the AGA
Beware
Landlords should note that a guarantor can directly guarantee the assignee/new tenant but an AGA entered into by a tenant's guarantor to guarantee the assignee's obligations is void. A landlord might also ask the guarantor to enter into any licence for alterations or deed of variation of the lease as otherwise the guarantor might be released from its liability to the landlord.
Contact
Debra Kent is a partner at Charles Russell Speechlys LLP
