An Authorised Guarantee Agreement, or AGA, (relevant to England and Wales only), is a guarantee provided by the outgoing tenant to the landlord that the new tenant will perform its covenants under the lease. In other words, it is an agreement requiring a tenant to act as a guarantor for the party to whom a lease is assigned.
Failure by the new tenant to perform its covenants will result in the outgoing tenant having to indemnify the landlord direct against any loss it suffers. This could include payment of rent and service charge and the cost of complying with the lease covenants. It is a common means whereby a landlord seeks to protect its own investment and income stream. A landlord can require a tenant that wishes to assign a lease to a third party to guarantee the performance of an assignee by entering into an AGA.
Pearson Hinchliffe Commercial Law has acted for a pub owner (the landlord) in Bury, Lancashire, who gave a 10-year lease to a tenant. The tenant wished to sell his business to his son’s company and asked the owner whether he could assign the lease.
In the spirit of the Code of Practice for Commercial Leases the landlord wished not to unreasonably withhold consent for an assignment of the lease. However the Code says Authorised Guarantee Agreements should be required only when the assignee is of 'lower financial standing' than the assignor.
Fortunately the landlord came to Pearson Hinchliffe Commercial Law’s commercial property department for advice. We advised him that since the proposed purchaser was a new company with no track record he should seek an Authorised Guarantee Agreement, or AGA, from the outgoing tenant. The outgoing tenant (the guarantor) and the new tenant (the assignee) agreed to enter into an AGA under which each covenanted with the landlord that the assignee would pay the rent and perform the lessee's covenants from the assignment until the next lawful assignment of the lease.
Then, after 12 months the assignee went into Administration, and after a further delay of 6 months and having caused a large amount of damage vacated the property. Our client was thus able to rely on the Authorised Guarantee Agreement put in place for just such an eventuality and enforce against the original tenant (the guarantor). Somewhat predictably however the guarantor refused to pay and we were forced to sue. After a 2-day trial we succeeded in securing damages worth £27,000 plus our legal fees. At the time of writing we were further pursuing the original tenant for dilapidations.
Commercial litigation partner, Christopher Burke, commented: “Landlords may be anxious about the covenant of an assignee on assignment because some occupiers are struggling to meet their commitments because of difficult economic conditions.”
This rather typical commercial property dispute demonstrates the importance and value of seeking early commercial legal advice and then acting on it. In this example, had there been no authorised guarantee agreement, the client would almost certainly found it impossible to recover arrears from the former tenant and been left with a hefty bill to repair his property.
To speak to a commercial property solicitor about an Authorised Guarantee Agreement, or any Landlord and Tenant matter, please use the contact details provided below.
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0161 785 3500
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