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People , assignment of lease and authorised guarantee agreement (“aga”).
A tenant who wants to assign (transfer) a lease must check its terms to see whether or not this is permitted.
Usually the assignment of the whole of the property let under a lease is permitted provided the tenant obtains the landlord’s consent.
A lease will usually contain a provision that such consent should not be unreasonably withheld or delayed but will also set the conditions which need to be met before the consent is provided to assign a lease.
One of the main conditions, which a landlord will require prior to granting the tenant consent to assign a lease, is that the tenant guarantees the future performance of the new tenant by giving an AGA to the Landlord.
This means that the tenant must guarantee that the assignee will comply with the covenants in the lease. This will include all covenants to pay rent and to keep the property in repair.
Risks of Transferring a Lease
As a tenant it is important to understand the risks in agreeing to provide an AGA when you assign a lease. It is always worth asking the landlord to dispose of this requirement, in particular where the covenant strength of the assignee is greater than the tenant’s or where the landlord is collecting a rent deposit from the assignee.
If the tenant is assigning to an assignee with a weaker covenant strength, a landlord will insist on an AGA being entered into. The risk to the tenant is that the assignee may fail to comply with the covenants, which means the landlord can pursue the tenant for compliance. This could mean the Tenant is forced to pay rent, repair the demised premises and anything else under the lease, which could become rather costly for a tenant.
In the event the lease is disclaimed after the insolvency of the assignee, the landlord can request the tenant to enter into a new lease. This would of course defeat the purpose of the tenant disposing of the lease in the first place.
The final point is that in the event the lease benefits from security of tenure under the Landlord and Tenant Act 1954, the AGA may continue beyond the end of the contractual term. The tenant could potentially be guaranteeing the assignee’s compliance with the covenants for an indefinite period of time. It is therefore suggested that the tenant seeks to limit its obligation under the AGA only until the end of the contractual term, and not any “holding over” period.
Have a question about transferring a lease?
You can contact a member of our Commercial Property Law team and they will be happy to help.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.
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Authorised guarantee agreements - what are they and what should a tenant know
Introduction.
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.
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- Home News and Insights What is an AGA? When are you required to give one and what does it mean?
What is an AGA? When are you required to give one and what does it mean?
23rd September 2022
An authorised guarantee agreement (“AGA”) is an agreement where the outgoing tenant enters into an agreement guaranteeing that the assignee will observe and perform the covenants in the lease.
This may occur when the owner of a veterinary practice may decide that they want to sell their practice to a proposed buyer. As part of the transaction, if you, as the owner, occupy the property under a lease and you still have a significant number of years left to run on your term you may decide that you want to assign or transfer your interest to the proposed buyer. You will be required to obtain consent from the landlord, and this cannot not be unreasonably withheld or delayed.
The landlord may require you to obtain financial forecasts and references from the proposed assignee. However, you may still be left with the risk that the assignee does not comply with their obligations under the lease. By entering into an AGA with the landlord and the assignee, you will largely be guaranteeing any future breaches of covenant under the lease by the assignee. This means that if the assignee fails to pay rent, the landlord has the option to demand payment from you or require that you take a new lease for the remainder of the term of the lease.
In most circumstances, you will be proposing to assign or transfer your interests in the lease to a third party. The Licence to Assign enables you to transfer the lease to assignee, and acts as the landlord’s consent to the transfer. Following completion of the Licence to Assign, you and the assignee will then enter into a separate transfer or deed of assignment to document the assignment of the lease from the tenant to the assignee.
When are you required to give one?
This is often a requirement set out in the lease in accordance with S19 (IA) of the LTA 1927, in which case it must be complied with. If the lease simply says that the tenant is not to assign without landlord’s consent, it will be implied that the consent cannot be unreasonably withheld.
If it is not set out in the lease, the landlord may request from the outgoing tenant an AGA, provided that it was reasonable in the circumstances. The standard position is that the AGA will last from the date of the assignment of the lease to the assignee until the earlier of either:
- The date that the assignee validly disposes of their interest in the lease to a third party
- Until the lease comes to an end.
The 2007 Code of Lease Business Premises states that an AGA should not be automatic requirement on an assignment of a lease. It is necessary only when the assignee is of a lower financial standing than the assignor, or is resident or registered overseas. It may be worth mentioning this to the landlord – however, they still may still insist that a guarantee is required.
In the first instance, it will be agreed between parties at the start of the transaction and set out in the heads of terms who will be responsible for the landlords’ legal costs in preparing and completing the Licence to Assign and any associated documents.
In most circumstances, if you are assigning the lease, the onus will be on you as the existing tenant to pay the landlord’s cost as you are requesting the assignment to exit the lease. However, this will depend on each party as every transaction is different. The licence then contains a clause obliging the landlord’s legal costs to be settled on completion of the licence.
To that end, it is usually standard practice for the landlord to insist on an outgoing tenant entering into an AGA on an assignment of a new lease and as mentioned in this article, your liability will continue until the end of term of the lease (however it may end). Therefore, as the tenant, it is important that you understand what you will be agreeing to as it essentially means that whilst the assignee is the tenant under the lease, you will be the guarantor.
It should be noted that this is note has been prepared on the basis that the lease that is being assigned is a new lease for the purposes of the Landlord and Tenant (Covenants) Act 1995 -namely a lease granted after 1st January 1996.
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News & Insights
Understanding authorised guarantee agreements.
Our commercial property partner Michael Higgin explains what an AGA is, and what its enforcement means in practice.
The law on Authorised Guarantee Agreements is complicated, and is evolving as cases on the Landlord & Tenant (Covenants) Act 1995 (the “1995 Act”) are working their way through the courts.
Lawyers call leases “old” or “new”, as referred to in the 1995 Act. Leases dated before 1 January 1996 (or granted pursuant to Agreements for Lease entered into before that date) are referred to as “old” leases, and leases dated on or after that date are “new” leases.
With an “old” lease the original landlord and original tenant are bound to perform all the landlord and tenant obligations throughout the whole lease term, even if they transfer their interest to someone else. This principle is called “privity of contract”. So, for example, an original tenant who assigned their lease some years earlier could receive a demand for outstanding rent payments or to perform other tenant obligations, by reason of the default of the current tenant, and they would have to pay up or perform those obligations. This came to be regarded as particularly onerous on tenants and was seen as overly protective of landlords. Accordingly, the 1995 Act set out to release tenants and third parties of their obligations on assignment.
However, this release is qualified, as the landlord has the option to require the outgoing tenant, on assignment, to guarantee the obligations of the new tenant (the “assignee”) by way of an “Authorised Guarantee Agreement”, commonly referred to as an “AGA”. This guarantee only lasts until the assignee assigns its interest in the lease – upon such subsequent assignment the guarantor’s AGA falls away.
An AGA can require the guarantor to enter into a new lease, if the lease is disclaimed by a trustee in bankruptcy or liquidator.
Most AGAs provide for a guarantor’s liability to automatically arise when there is a liability under the lease and does not require a formal demand to be made by the landlord. However, s.17 of the Landlord & Tenant (Covenants) Act 1995 provides that the guarantor will not be liable under an AGA for rent, service charges or other “fixed charges” that the assignee has failed to pay, unless the landlord serves notice on the guarantor within six months of their respective due date, following the assignee’s failure to pay. This is described as a “s.17 Notice”. “Fixed charges” must be ascertained: they can therefore include balancing service charges which have been assessed, or third party costs which have been incurred. This process does not apply to unspecified liabilities such as unquantified claims for compensation for disrepair, which are still claimable, just not through this process.
Having received a s17 Notice the guarantor should settle the liability to the landlord. At this stage the guarantor is not in possession of the premises (having made an assignment of the lease), but still has liability to pay the rent every following quarter if the assignee does not pay it. Having received a s.17 Notice upon which it has made a payment, the guarantor can bring matters to a resolution by serving notice under Section 19 of the 1995 Act (a “s.19 Notice”) calling for an “overriding lease” to be granted. This new lease is inserted between the interests of the landlord and the assignee, converting the assignee into an undertenant. This allows the guarantor to pursue the assignee for the rent debt and/or to negotiate a surrender of the underlease and/or to forfeit the lease (it now being an underlease) which enables the guarantor to re-use the premises or to market and dispose of them a second time.
The landlord may have several people upon whom a s.17 Notice can be served and needs to be aware of the fact that any one of them can apply for an overriding lease.
The landlord should therefore only serve a s.17 Notice upon a party who it would be prepared to have as its tenant going forwards pursuant to an overriding lease.
A guarantor under an AGA should take legal advice promptly upon receipt of a s.17 Notice.
Michael Higgin
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- Commercial Leases - What are Authorised Guarantee Agreements?
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Rebecca Beardsley
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Dilapidations: five top tips for landlords and tenants, lease or licence - what is the difference, the leasehold and freehold reform act 2024 - here's what you need to know, ofcom revises its code of practice: telecommunications code, share this page:, 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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Out-law / your daily need-to-know.
Out-Law Guide 3 min. read
Guarantees on lease assignment: implications for tenants
25 Aug 2011, 4:54 pm
The Court of Appeal has confirmed that, when a lease is assigned to a third party, the outgoing tenant's guarantor can guarantee the outgoing tenant's liabilities under an authorised guarantee agreement (AGA). In doing so, the guarantor can indirectly guarantee the incoming tenant's obligations.
This guide considers the implications of a recent case for tenants. For the implications for landlords and their lenders, please see our separate Out-Law guide .
What is an authorised guarantee agreement?
Authorised guarantee agreements (AGAs) were created by the Landlord and Tenant (Covenants) Act, and their content is strictly regulated by statute.
Tenants and their guarantors are automatically released from liability to the landlord when a lease is lawfully assigned to a third party. Landlords can, however, require outgoing tenants to enter into AGAs guaranteeing the liabilities of the new tenant under a lease. There are no provisions allowing guarantors to do so as well.
The Landlord and Tenant (Covenants) Act applies to leases granted on or after 1 January 1996, unless the lease was granted under an agreement or court order made before that date. It includes anti-avoidance provisions which invalidate contractual provisions designed to work around it.
Recent case law
There were heated debates about the validity of guarantees of leasehold liabilities following the High Court's decision in the Good Harvest case in 2010 that a guarantee of an assignee given by the outgoing tenant's guarantor was void. This was considered again later that same year in a case between landlord K/S Victoria Street and House of Fraser (Store Management) Ltd.
In January 2006 K/S Victoria Street agreed to the sale and leaseback of a property in Wolverhampton to a company in the House of Fraser group. Under the agreement, the store management company was to take a lease guaranteed by the group holding company. The Agreement for Lease also required it to assign the lease to another group company by April 2006, but no assignment ever took place. In March 2010, the landlord brought proceedings against all three of the House of Fraser companies seeking to enforce the assignment.
House of Fraser relied on the Good Harvest decision to argue that the agreement was unenforceable. The High Court agreed, deciding that the guarantee to be given by the parent company as the outgoing guarantor in respect of the new tenant's liabilities under the lease was invalid. It also doubted whether sub-guarantees - that is, guarantees by outgoing guarantors in respect of outgoing tenants' liabilities under AGAs - were effective. The decision caused difficulties for landlords and tenants, and meant that in many cases groups of companies could no longer make assignments between themselves.
The Court of Appeal clarified the law and upheld the validity of sub-guarantees. The decision confirms that:
- an outgoing tenant's guarantor can guarantee an outgoing tenant's liabilities under an AGA – but not the liabilities of the incoming tenant to which the lease was assigned;
- once released from liability by an assignment, guarantors can provide fresh guarantees in respect of subsequent assignees.
Grant of a lease
During negotiations, it is going to be more difficult for a tenant to object to a landlord's requirement for a guarantor to guarantee its AGA now that the Court of Appeal has confirmed that such arrangements are valid.
Assignment of a lease
A guarantor cannot guarantee the obligations of the new tenant to which the lease is assigned even if it wants to. This poses a particular problem for intra-group assignments. A tenant should anticipate that it will be a common condition on assignment that a guarantor is asked to guarantee its obligations in an AGA.
There is a suggestion that a tenant may not be able to assign its lease to its guarantor. It may be advisable to avoid this scenario until the position is clarified.
Intra-group assignments
The Court of Appeal confirmed that an outgoing tenant's guarantor cannot directly guarantee the liabilities of the incoming tenant when a lease is assigned.
This has important consequences for alienation provisions which allow the landlord to control the assignment by a tenant of its lease. Corporate tenants often request provisions in leases which will allow assignments between companies in the same group without the landlord's permission. Landlords often agree to these arrangements, subject to a condition that the tenant's guarantor continues to guarantee the incoming tenant's liabilities under the lease. The decisions in the Good Harvest and K/S Victoria Street cases prevent this because:
- it will be impossible to obtain a further guarantee from the same guarantor for the incoming tenant;
- the Landlord and Tenant (Covenants) Act provides that it is only possible to obtain an AGA from an outgoing tenant, for which the outgoing guarantor can then be a guarantor, if the lease prevents the tenant from assigning the premises without the landlord's consent.
As a result of this, landlords may seek to prevent assignments between companies in the same group without their consent in order to obtain a sub-guarantee from an existing guarantor. Alternatively, landlords may attempt to impose some other form of control – for example, a financial test – to ensure that an assignee is suitable.
Note too that the Court of Appeal did not say whether tenants can validly offer the same guarantor through a string of intra-group assignments using a series of guarantees and sub-guarantees, or more complex arrangements, in order to provide a fresh guarantee from an outgoing guarantor.
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When is the guarantee of an AGA enforceable?
20th September 2019
In Co-operative Group Food v A&A Shah Properties , the High Court has provided guidance on the tricky issue of how a guarantor can validly guarantee an outgoing tenant’s obligations in an authorised guarantee agreement, without breaching the Landlord and Tenant (Covenants) Act 1995. Specialist Real Estate Litigator Martin McKeague explains and offers practical advice.
Why is this case of interest?
On the assignment of a lease to which the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act ) applies, whether (and how) a guarantor can guarantee an outgoing tenant’s obligations under an authorised guarantee agreement ( AGA ) is a tricky legal issue which can cause practical problems. The issue often arises in the context of intra-group assignments.
The recent case of Co-operative Group Food v A&A Shah Properties [1] is of interest because it provides clarity and guidance as to when such a guarantee will be lawful and enforceable, and when it will be rendered invalid under the 1995 Act.
What does the law say?
The 1995 Act provides that, on an assignment, the outgoing tenant is released from the tenant covenants, and any guarantor of the outgoing tenant is simultaneously released from the guarantee. The 1995 Act contains ‘anti-avoidance’ provisions, which specifically prevent parties from contracting out of this position.
The 1995 Act does, however, allow the outgoing tenant to enter into an AGA to guarantee the assignee’s performance of the tenant covenants; and case law [2] confirms that the outgoing tenant’s guarantor can also guarantee the outgoing tenant’s performance of its obligations under the AGA. The latter is effectively a ‘sub-guarantee’.
Where, however, a guarantor attempts to guarantee performance of the covenants by the assignee, this would be a ‘direct guarantee’. Such a direct guarantee would fall foul of the anti-avoidance provisions in the 1995 Act and be rendered invalid and unenforceable.
These subtle and complex legal provisions can present significant traps – in particular for unwary landlords, and for anyone instructed to draft the various assignment and guarantee documents.
What happened in this case?
Facts and aga/guarantee provisions.
A supermarket and car park were let by the landlord (A&A Shah Properties) to the original tenant (Somerfield Stores Ltd) pursuant to a lease dated 22 June 2006 for a term expiring in 2031 (the Lease ). The tenant’s obligations under the Lease were guaranteed by Somerfield Ltd. In 2011, the Lease was assigned to 99p Stores Ltd, and Co-operative Group Food Ltd assumed liability under the guarantee.
The form of AGA required on assignment was contained within a licence to assign and included the provision: “ The Tenant and the Tenant’s Guarantor covenant to observe and perform the obligations set out in the Authorised Guarantee Agreement immediately after completion of the assignment” .
A second provision provided “ …the Tenant’s Guarantor agrees that its guarantee and other obligations under the Lease shall remain fully effective and…shall extend and apply to the covenants given by and the obligations on the part of the Tenant under this Licence” .
When the original tenant and assignee entered administration, the landlord sought to recover rent from Co-operative Group under the above guarantee provisions. It fell to the court to determine whether the provisions amounted to a valid sub-guarantee of an AGA and were therefore enforceable; or whether they amounted to direct guarantees which were invalid and unenforceable under the 1995 Act.
High Court decision
In relation to the first provision, the High Court found that the original tenant and the guarantor (now Co-operative Group) had both covenanted to observe the obligations under the AGA. The obligations were therefore direct guarantees of the assignee’s obligations and were void and unenforceable against the guarantor.
In relation to the second provision, the High Court held that this was a valid sub-guarantee. The judge explained that, because the outgoing tenant had covenanted (effectively guaranteed), in the licence to assign, to observe and perform the provisions of the AGA, this second provision was a sub-guarantee to that effective guarantee.
What practical advice arises?
This case is a cautionary reminder for landlords that, on any assignment of a lease to which the 1995 Act applies, it is not enough that the assignment documentation seems to offer, on its face, sufficient guarantees to safeguard the landlord’s positions if/when original or outgoing tenants fail to comply with their rental or other obligations. Instead, the operation of the 1995 Act – in particular its anti-avoidance provisions – mean that it is essential for landlords to ensure that any AGA-guarantee arrangements are properly structured to be a sub-guarantee (and not a direct guarantee) if they are to be relied upon and enforced against guarantors.
The temptation in many assignment scenarios is simply to get the deal done, and that can especially be the case where the assignment is ‘merely’ intra-group. However, the risk of inadvertently letting a guarantor ‘off the hook’ by failing to structure and word the documentation correctly is significant, such that specialist advice and drafting assistance should be sought in every case.
________________
[1] [2019] EWHC 941 (Ch) [2] K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2011] EWCA Civ 904 and Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch) – see our earlier briefing for further information
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GAGA about AGAs
- Author Jenny Colvin
An option available to a tenant under a commercial lease is the ability to assign (or transfer) the lease to a third party. This will usually require the landlord’s consent. One of the conditions of a landlord giving their consent will inevitably be that the outgoing tenant agrees to guarantee the incoming tenant’s liabilities for the lease in an “authorised guarantee agreement”, or AGA. This ensures that the landlord doesn’t lose a perfectly good tenant only to replace them with a tenant of far lesser covenant strength (ability to pay). From a landlord’s perspective though, the AGA is of little use to them if the outgoing tenant company is to be dissolved, or the original tenant’s strength was through the backing of a substantial guarantor. The landlord may therefore decide that they would prefer the tenant’s guarantor to enter into the AGA.
In Good Harvest Partnership LLP vs Centaur Services Limited [2010] , the High Court decided that any attempt by a commercial landlord to do this would be void under s25 of the Landlord and Tenant (Covenants) 1995 so the guarantee would be unenforceable. It will still be void even if the guarantor voluntarily agrees to enter into the AGA, or if the lease itself sets out this contractual requirement. Bad news for landlords.
In K/S Victoria Street vs House of Fraser (Stores Management) Ltd [2010] , however, a case decided later that year, the Court decided that whilst Good Harvest was good law, a sub-guarantee given by the tenant’s original guarantor (or indeed any guarantor) was still valid.
So what’s the difference? The outgoing tenant’s guarantor cannot enter into an AGA with the landlord to guarantee the incoming tenant’s performance. However, they can guarantee the outgoing tenant’s performance under the AGA through a sub-guarantee, sometimes known as a GAGA. This is a very crucial difference. It means that if the incoming tenant fails to meet their lease obligations the landlord pursues the outgoing tenant under the AGA. If the outgoing tenant fails to then meet their guarantee obligations under the AGA, then the landlord can pursue the tenant’s guarantor under the GAGA.
If you have any queries at all on assigning a lease of a commercial premises, please contact Jenny Colvin in our Portsmouth based Commercial Property team on 023 9277 6558.
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.
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How do I avoid future liabilities on assignment of my commercial lease?
by Levi Solicitors | May 10, 2017 | Blog Posts
If you own a business and operate from a property under a commercial lease, your lease will contain various obligations to your landlord. Should you wish to sell the business and assign your interest in the lease to the new owner, it is important to be aware that your liabilities under the lease may still continue after assignment.
The law on assignment of leases
Leases granted on or before 31 December 1995 are known as “old tenancies” . Where a tenant assigns an old lease to a new tenant (“assignee”), the tenant remains liable for the obligations under the lease.
The Landlord and Tenant (Covenants) Act 1995 (“the Act”) introduced a new type of tenancy known as a “new tenancy” . These are tenancies granted on or after 1 January 1996.
Where a tenant assigns a new tenancy, he will automatically be released from the lease’s covenants (liabilities and obligations). This means that the assignee will have full responsibility when he takes over the lease.
On first glance, it would therefore appear that the law protects tenants on assignment of the lease. This potentially leaves landlords in a position where they have a tenant they didn’t choose (the assignee); with the risk that they may not comply with their obligations under the lease. For this reason, s16 of the Act allows landlords to require tenants to enter into an Authorised Guarantee Agreement (AGA) as a condition of the landlord’s consent to assign the lease.
What is an Authorised Guarantee Agreement?
An AGA is the tenant effectively guaranteeing any future breaches of covenant by the assignee. This means that if the assignee fails to pay rent, the landlord can demand payment from the tenant.
As a tenant’s liability is automatically released on assignment of a lease, the tenant must consent to enter into the AGA for it to be a valid agreement. However, in order to obtain consent from your landlord to assign the lease, he may require the tenant to enter into an AGA. This leaves the tenant having to choose between remaining in the property, or agreeing to guarantee the assignee’s performance of the lease.
What do I do next?
Firstly, check your lease. Are there any restrictions on assigning the lease to a third party?
If you wish to sell your business and are required to enter into an AGA, make sure you are confident that the incoming tenant is able to pay the rent and perform the other obligations under the lease. Consider whether the new tenant is a business start-up or whether they are an established business with good accounts.
If you are unsure of your obligations to your landlord and the effect of assigning your lease, our specialist business transfer department can help. Call us today on 0800 988 7756 .
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A guide to understanding landlord consent for lease assignment: Advice for tenants
Assigning a commercial lease can be an appealing solution for tenants aiming to relieve themselves of lease obligations.
Often, commercial tenants find themselves bound by a lease with no break clause and a landlord unwilling to accept surrender.
Several factors may prompt a tenant to seek lease assignment, such as a change in business size, the property’s unsuitability for current business needs, or a business sale agreement that involves transferring the lease to the buyer.
What is a lease assignment?
Lease assignment allows the current tenant (the ‘assignor’) to transfer the lease to a new tenant (the ‘assignee’), who will assume the assignor’s responsibilities and obligations.
Steps for lease assignment
If the lease does not specify any rules for assignment, tenants can transfer the lease without the landlord’s approval. However, most modern commercial leases require the landlord’s consent before assigning the lease. Typically, partial assignments are not allowed.
Why seek landlord approval?
Landlords generally require tenants to obtain their permission before assigning a lease to ensure their rental income is secure and their investment protected. They prefer tenants who consistently pay rent and maintain the property’s condition. Landlords control lease assignments by stipulating that their approval is required.
Can a landlord refuse assignment consent?
Section 19(1A) of the Landlord and Tenant Act 1927 allows leases to outline specific situations where landlords can reasonably withhold assignment consent and any conditions required for approval. Tenants should carefully review the alienation clause in their lease to understand these requirements. Typical reasons for refusal include:
- Outstanding rent payments
- Breach of tenant obligations
- The assignee’s inability to fulfil lease obligations
- Lack of guarantor or security by the assignee
- Assignee’s intended use being unsuitable for the property
- Insufficient financial stability of the assignee
- Assignee being a group company
Common conditions for assignment include providing an Authorised Guarantee Agreement (AGA), covering the landlord’s legal and professional costs, and ensuring all dues are settled before lease transfer.
Reasonable vs. unreasonable refusal
Landlords must not unreasonably withhold consent under Section 19(1) of the Landlord and Tenant Act 1927. Upon receiving a written application for assignment, landlords should:
- Provide or deny consent within a reasonable timeframe
- Give the tenant written notice of their decision
- Forward the application to the appropriate party
Refusal is deemed unreasonable if:
- The reason is unrelated to the landlord-tenant relationship
- The refusal benefits the landlord unfairly
- The landlord introduces new grounds that were not initially stated
Obtaining a landlord’s consent to assign a lease is an essential part of the leasing process, ensuring both parties’ interests are safeguarded. Tenants should meticulously follow their lease procedures and work collaboratively with their landlords to secure consent, facilitating a smooth transition and avoiding legal complications.
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AGA's on renewal 1
Wallis Fashion Group Limited -v- General Accident Life Assurance Limited
Since the passing of the Landlord and Tenant (Covenants) Act 1995 we have been waiting for case authority on a number of issues raised by the statute. One of these issues relates to the imposition of an authorised guarantee agreement (AGA) on a renewal of a business tenancy. Would a requirement for an AGA on any assignment be accepted as one of the terms of the new lease? At last we have some guidance from Mr Justice Neuberger in the case of Wallis Fashion Group Limited -v- General Accident Life Assurance Limited [2000] PLSCS 66.
In this case the original lease of a shop unit in Bath contained a covenant not to assign without the landlord's consent, such consent not to be unreasonably withheld. Further, on an assignment, the assignee was obliged to enter into a direct covenant with the landlord to observe the terms of the lease.
The lease came to an end and negotiations commenced for a new tenancy under the provisions of the Landlord and Tenant Act 1954. The landlord was aware that unless the new lease provided for the tenant to enter into an authorised guarantee agreement on an assignment, the tenant would no longer be bound by the terms of the new lease after the assignment. Therefore, the landlord proposed that in any licence to assign the tenant should enter into an AGA. There would be no test of reasonableness. It would be regarded as an automatic AGA. Not surprisingly the tenant argued that the requirement for an AGA should be subject to a reasonableness test.
Mr Justice Neuberger agreed with the tenant, as the requirement for the landlord to act reasonably struck a fair balance between the interests of the parties.
Previous case law shows that there has to be a good reason for imposing any new term in a renewed lease, against the wishes of one of the parties. Just because the tenant would be in a more favourable position than under the current lease due to the passing of the ‘95 Act did not give good reason. Mr Justice Neuberger also felt that the fact that other tenants in the shopping centre had accepted the landlord's proposed wording did not affect his decision.
This case must be welcomed as giving some guidance on the terms that can be imposed in a renewed lease although it will not suit both sides of the coin. It also has to be remembered that Mr Justice Neuberger was sitting in the Bristol County Court and the case may not hold as much weight as a decision from a higher court.
For further information please contact Caroline Potter at [email protected] or +44 (0)20 7367 2721. All previously written case reviews and articles are available on our information archive which is accessible via the LawNow section of our website (http://www.cmck.com).
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18 July 2011
- Liability of guarantors on assignment of leases
- Addleshaw Goddard LLP
- Insights & News
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The Court of Appeal delivered its judgment in K/S Victoria Street v House of Fraser, so clarifying an issue on the validity of guarantors on assignment of leases that has been simmering since the Landlord and Tenant (Covenants) Act 1995 ("the 1995 Act") was enacted.
The Court of Appeal's unanimous judgment attempts to put to rest uncertainty by spelling out when a guarantee will and will not be valid. In short, the Court said:
- A Guarantor can be asked to guarantee an outgoing tenant's obligations under an 'authorised guarantee agreement' (AGA), such guarantee commonly being known as the "GAGA".
- A Guarantor cannot either be obliged or voluntarily offer to guarantee a future immediate assignee of a lease.
- A Guarantor can voluntarily choose to guarantee a further assignee - for example, it can guarantee T1, can't guarantee T2, but could guarantee T3 - but it cannot be obliged to do this.
It is understood that leave has not been sought to appeal this decision in the Supreme Court.
What are the ramifications for the marketplace?
The AGA sub-guarantee, or GAGA, is lawful, and can be validly requested by landlords on assignments where an AGA is required.
- Difficulties lie ahead for landlords and tenants involved in corporate restructuring. It is common for a weak subsidiary company to be the tenant guaranteed by its parent. When that subsidiary wishes to assign to a different subsidiary as part of a restructuring, it will commonly offer the same parent as guarantor. As the second
- guarantee is not enforceable, if landlord's consent is required, landlords may require further forms of security which the subsidiary may not be in a position to offer.
- Landlords have been persuaded to concede in leases that intra-group assignments are permitted, without consent, as long as the parent company extends the guarantee to the assignee. That guarantee is not enforceable at least for the first assignment.
If there are no other tests or conditions to be applied (such as financial strength tests) on assignment, and if the part of the clause requiring the parent company guarantee is severable from the remainder of the clause, landlords may find themselves exposed to an assignment to a further weak subsidiary without the ability to ask for an AGA or GAGA.
One unexpected by-product of this litigation is that we now know that an AGA (and thus a GAGA) can only be required when consent to an assignment is needed. As intra-group assignments may be allowed without consent, landlords may face assignments to a weak subsidiary with no AGA.
Overly permissive intra-group assignment clauses will have an adverse effect on investment values.
On careful reading, the judgment was not clear on the overall position where intra-group assignments are concerned and more clarity on this point will be welcomed.
- Will landlords' practices giving consent to assignments change? Landlords must certainly ensure that guarantors being offered for an assignee are not the same as the current guarantor, because any such guarantee will be unenforceable.
- An assignee who can only offer a guarantee from the previous tenant's guarantor will need to offer different security packages, such as rent deposits. Landlords should be careful, however, that a rent deposit isn't requested from the former guarantor; that may be void under 1995 Act.
- Landlords will no doubt now face opposition in trying to demand rent from existing guarantors who have given repeat guarantees. This will affect the investment value of properties where the covenant strength lies mainly with the guarantor.
- Guarantors who have directly guaranteed their tenant's assignee may be able to reclaim payments under that guarantee as paid under a mistake of law.
- New leases should not require the same guarantor to guarantee a future assignee, whether on immediate assignment or at any point in the future, and such clauses should not be agreed at Heads of Terms stage.
- Property professionals will need to be alive to guarantees of this nature when advising on investment purchases. Purchasers and lenders may need to scrutinise any guarantees which are factored into the valuation process to check that they are capable of being enforced and do not fall foul of the 1995 Act.
This discussion applies to "new" leases, namely those granted on or after 1 January 1996 (save for leases granted under an agreement for lease entered into before 1 January 1996).
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Assignment of Lease and Authorised Guarantee Agreement ("AGA") January 24, 2022. A tenant who wants to assign (transfer) a lease must check its terms to see whether or not this is permitted. Usually the assignment of the whole of the property let under a lease is permitted provided the tenant obtains the landlord's consent. A lease will ...
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 ...
23rd September 2022. An authorised guarantee agreement ("AGA") is an agreement where the outgoing tenant enters into an agreement guaranteeing that the assignee will observe and perform the covenants in the lease. This may occur when the owner of a veterinary practice may decide that they want to sell their practice to a proposed buyer.
However, this release is qualified, as the landlord has the option to require the outgoing tenant, on assignment, to guarantee the obligations of the new tenant (the "assignee") by way of an "Authorised Guarantee Agreement", commonly referred to as an "AGA". This guarantee only lasts until the assignee assigns its interest in the ...
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 ...
Assignment of a lease. A guarantor cannot guarantee the obligations of the new tenant to which the lease is assigned even if it wants to. This poses a particular problem for intra-group assignments. A tenant should anticipate that it will be a common condition on assignment that a guarantor is asked to guarantee its obligations in an AGA.
On the assignment of a lease to which the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) applies, whether (and how) a guarantor can guarantee an outgoing tenant's obligations under an authorised guarantee agreement (AGA) is a tricky legal issue which can cause practical problems. The issue often arises in the context of intra-group ...
The Assignment of a lease is essentially the selling of a lease to a third party. Commercial leases will often include a provision which allows for the assignment of the lease. ... In these cases, there is the risk of the new tenant failing to comply with the convents of the lease. Under the terms of the AGA the landlord will then be able to ...
If the outgoing tenant fails to then meet their guarantee obligations under the AGA, then the landlord can pursue the tenant's guarantor under the GAGA. If you have any queries at all on assigning a lease of a commercial premises, please contact Jenny Colvin in our Portsmouth based Commercial Property team on 023 9277 6558. ENDS.
I have a lease where the landlord can insist on an AGA if it is reasonably required. I have read the practice note on Leases: Assignments and I am not clear on the position. I have always thought the test as to whether it is reasonable to insist on an AGA (when the lease has wording similar to above) is whether if the lease had no conditions or circumstances other than the tenant may assign ...
group companies so that the lease is first assigned to one company (with a full release for the guarantor) with an immediate second assignment to a third company and the return of the guarantor. However, if the first assignment is conditional upon the second assignment the Court may hold that this contradicts the anti-avoid-
An AGA is the tenant effectively guaranteeing any future breaches of covenant by the assignee. This means that if the assignee fails to pay rent, the landlord can demand payment from the tenant. As a tenant's liability is automatically released on assignment of a lease, the tenant must consent to enter into the AGA for it to be a valid agreement.
Several factors may prompt a tenant to seek lease assignment, such as a change in business size, the property's unsuitability for current business needs, or a business sale agreement that involves transferring the lease to the buyer. ... (AGA), covering the landlord's legal and professional costs, and ensuring all dues are settled before ...
The landlord was aware that unless the new lease provided for the tenant to enter into an authorised guarantee agreement on an assignment, the tenant would no longer be bound by the terms of the new lease after the assignment. Therefore, the landlord proposed that in any licence to assign the tenant should enter into an AGA.
A Guarantor can be asked to guarantee an outgoing tenant's obligations under an 'authorised guarantee agreement' (AGA), such guarantee commonly being known as the "GAGA". A Guarantor cannot either be obliged or voluntarily offer to guarantee a future immediate assignee of a lease. A Guarantor can voluntarily choose to guarantee a further ...
30 CFR Part 585 Subpart E - Lease or Grant Assignment, Segregation, and Consolidation Agency Bureau of Ocean Energy Management, Department of Interior. Part 585. Authority: 43 U.S.C. 1337. Source: 88 FR 6430, Jan. 31, 2023, unless otherwise noted. Subpart E of Part 585 ...
Resource ID 6-524-3929. I have a lease dated December 1995. The lease provides that the tenant may assign the whole of the property with the consent of the landlord such consent not to be unreasonably withheld or delayed. The lease also specifies some "requirements" to be fulfilled by the tenant including a requirement for the assignee to ...
State Housing Inspectorate of the Moscow Region Elektrostal postal code 144009. See Google profile, Hours, Phone, Website and more for this business. 2.0 Cybo Score. Review on Cybo.
We act for a landlord who is assigning a contracted out lease with AGA. Is a statutory declaration required from the incoming tenant? The precedent documents for assignment that we have used indicate that it is but the assignee is claiming it is not appropriate.
In 1938, it was granted town status. [citation needed]Administrative and municipal status. Within the framework of administrative divisions, it is incorporated as Elektrostal City Under Oblast Jurisdiction—an administrative unit with the status equal to that of the districts. As a municipal division, Elektrostal City Under Oblast Jurisdiction is incorporated as Elektrostal Urban Okrug.
Black Raptor Pro Elektrostal postal code 144006. See 3 social pages including Youtube and Instagram, Hours, Phone, Website and more for this business. 2.5 Cybo Score. Review on Cybo.
Licence to assign. Licence from the landlord giving consent to the tenant to assign a lease which is a new lease under the Landlord and Tenant (Covenants) Act 1995. The tenant is required to give an authorised guarantee agreement (AGA) in a separate document and any guarantor for the outgoing tenant is joined as a party to the licence.
Geographic coordinates of Elektrostal, Moscow Oblast, Russia in WGS 84 coordinate system which is a standard in cartography, geodesy, and navigation, including Global Positioning System (GPS). Latitude of Elektrostal, longitude of Elektrostal, elevation above sea level of Elektrostal.