Authorised Guarantee Agreements (AGAs) are a specific feature of commercial property leases in England and Wales, introduced by the Landlord and Tenant (Covenants) Act 1995. This legal framework reformed the way in which obligations are passed on when a commercial lease is assigned (transferred) from one tenant to another. Before the 1995 Act, the original tenant (assignor) who assigned their lease to a new tenant (assignee) could be indefinitely liable for the lease obligations if the new tenant failed to fulfil them. Nowadays, an outgoing tenant is only liable if there if there is an AGA.
Purpose of AGAs
The purpose of an AGA is to provide security for landlords when a commercial lease is assigned. It does this by requiring the outgoing tenant (assignor) to guarantee the performance of the lease obligations by the incoming tenant (assignee) to the landlord.
Effectively, the outgoing tenant (assignor) acts as a personal guarantor for the incoming tenant.
When is an AGA Used?
An AGA is used when a commercial lease is assigned (ie transferred).
Most modern commercial leases contain a clause which says that as a condition of giving consent to an assignment, the landlord requires the assignor tenant to enter into an AGA and therefore personally guarantee the liabilities under the lease of the incoming new tenant.
Key Features of AGAs
Key features of an AGA are as follows : -
- Guarantee:
The assignor gives a personal guarantee to the landlord that the new assignee tenant will pay rent and comply with the lease. The assignor will have to pay to make good any breach of the tenant of these obligations.
-New Lease :
An AGA will typically include an obligation on the assignor tenant to enter into a new lease in certain circumstances and if the landlord gave notice requiring it. These circumstances might include if the lease was forfeit by the landlord of if the assignee tenant became insolvent.
- Limited Liability:
The liability of the outgoing tenant under an AGA is limited to the period during which the assignee (the new tenant) holds the lease. If the lease is further assigned, the original tenant's liability under the AGA typically ends.
- Formalities:
For an AGA to be enforceable, it must be in writing and comply with the requirements set out in the legislation.
What are the Potential Liabilities under an AGA ?
If an outgoing tenant signs an AGA then the potential liability would including the following :
(1) Assignee’s rent arrears;
(2) Breach by the assignee of any other obligations under the lease including for property repairs;
(3) Liability for landlord’s costs, losses and legal expenses etc;
(4) In circumstances, an obligation to take back the property from the landlord under a new lease.
Considerations for Tenants and Landlords
- For Tenants:
Those looking to assign their lease need to be aware of the potential liability under an AGA. They should consider the financial stability and reliability of their assignee, as any failure on the part of the assignee to comply with the lease terms could result in liability for the assignor.
- For Landlords:
Landlords benefit from an additional layer of security through AGAs, as it ensures that there is always someone responsible for the lease obligations if the current tenant defaults. However, landlords must also ensure that any AGA is properly drafted to be enforceable and compliant with the 1995 Act.