What are the obligations of an Authorised Guarantee Agreement?

Marie-Claire Bleasdale explains why some operators are finding they owe rent on properties they no longer occupy.

 

The problem

 

A number of major casual dining companies in the UK – including Yo! and PizzaExpress – have discovered that they are on the hook for rent at sites they no longer occupy because they passed the lease on to operators that have since gone bust.

 

The law

 

Commercial landlords frequently require that the outgoing tenant will guarantee payment of rent and compliance with other covenants by the incoming tenant. The obligation is to enter into an Authorised Guarantee Agreement, or AGA for short.

 

Even where the lease does not expressly say that an AGA can be demanded by the landlord, if the lease prohibits assignments without the landlord’s consent, the landlord can stipulate that it requires an AGA as a term of giving consent to the assignment.

 

Expert advice

 

An Authorised Guarantee Agreement (AGA) is a contractual document that means that an outgoing tenant remains liable for the rent after they leave the premises. The liability lasts until the lease ends, or the new tenant (assignee) transfers the lease to someone else.

 

If there is no obligation to enter into an AGA, once the lease is assigned you have no future liability under it.

 

There are some restrictions on when and how a landlord can claim from an original tenant under an AGA. A notice has to be served under section 17 of the Landlord and Tenant (Covenants) Act 1995, which must give details of the sum claimed and be served within six months of it falling due. If the landlord’s notice is too late, the sums aren’t payable.

 

You should ensure you are fully aware of the effect of an obligation to enter into an AGA when a lease is granted, and the terms of a proposed AGA when a lease is assigned. You should always negotiate with the landlord to limit any potential liability under an AGA. You can do this when the lease is granted by:

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  negotiating to exclude any provision for an AGA in the original lease;

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  including a provision in the lease that an AGA can only be required if it is “reasonable in the circumstances; or

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  providing that any AGA required will be for a limited period.

 

Alternatively, it can be negotiated on assignment by:

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  refusing to enter into an AGA when the assignee’s covenant is as strong as or stronger than your own;

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  proposing that the landlord takes security by way of a new guarantor or a rent deposit from the assignee rather than an AGA;

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  agreeing to give an AGA for a limited period only; or

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  expressly providing that the AGA will not apply for any period where the tenant holds over under the Landlord and Tenant Act 1954.

 

To-do checklist

 

If you have received a demand under an AGA, you should:

 

1 Check the AGA’s validity

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  Was the AGA required as a term of giving consent to an assignment? If not, the AGA may not be valid.

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  Were you the tenant under the lease? An AGA can only be entered into by a tenant.

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  What is being guaranteed? It must be a liability of the assignee; it can only last for the period that the assignee is liable under the lease and it cannot be for more than your original liability under the lease.

 

2 Was the landlord’s requirement to enter into an AGA ‘unreasonable’ when it was demanded?

 

This could make it void.

 

3 Check if the tenant’s obligations have been varied

 

If the landlord and assignee agreed to make changes to the lease, which the landlord could have refused, the former tenant isn’t liable for sums referable to the variation.

 

4 Check whether the lease was assigned since the AGA was entered into

 

The AGA only lasts while the original assignee is liable.

 

5 Check if a section 17 notice has been served

 

And if so, whether it was served in time.

 

Beware

 

An AGA can last longer than the term of the original lease. Under the Landlord and Tenant Act 1954 a commercial tenant has a right to remain in occupation of business premises; the tenant ‘holds over’ on the terms of the original lease until it is terminated, or a new lease is granted. The AGA lasts for this ‘holding over’ period and there’s no limit on how long it could last.

 

Contact

 

Marie-Claire Bleasdale is a barrister at Radcliffe Chambers

 

mcbleasdale@radcliffechambers.com

 

Photo: Shutterstock