Authorised Guarantee Agreements (AGA) were introduced by the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) and sought to strike a balance between the uncertainty of liability of a tenant who assigns a lease and the protection of the landlord if the tenant assigns to a party who is not particularly acceptable to the landlord.
Under the terms of an Authorised Guarantee, the outgoing tenant guarantees that the incoming tenant (the assignee) will perform all the obligations in the lease. If the tenant were to assign then the tenant would be responsible for the assignee’s breach of lease. There are provisions for the tenant to make payment of rents and fulfil lease obligations i.e. repairs if the assignee does not. Further, there may be provisions that if the assignee falls into bankruptcy and the lease is disclaimed by its trustee, the tenant has an obligation to take a new lease for the remainder of the term.
By virtue of section 5 of the 1995 Act, a tenant is released from all the tenant covenants of a lease if it assigns the lease, provided that the assignment is not in breach of covenant or an assignment by operation of law. A landlord may require a tenant to enter into an AGA in any lease completed on or after January 1st 1996. See below to see if you are liable to enter into an AGA.
1. Do I have to enter into an AGA?
- If the lease contains an absolute covenant against assignment, it is always lawful for the landlord to insist that an AGA is entered into.
- If there is a qualified covenant against assignment, preventing the tenant from assigning the lease without the landlord’s consent, the landlord may only lawfully insist upon the tenant entering into an AGA if it has specified is as an express condition for assignment.
- If the landlord has not specified an AGA as an express condition of assignment, it may still pose such a requirement if it is reasonable to do so.
2. May a landlord automatically insist on an AGA?
The landlord may only automatically insist that the tenant enters into an AGA if the lease expressly makes it an absolute condition of assignment. If the lease states that the landlord ‘may’ require an AGA ‘where reasonable’ the landlord cannot automatically insist on an AGA.
If the landlord cannot automatically insist upon an AGA you should then carefully consider the circumstances in which the landlord can require an AGA. The Landlord Code states that an AGA should not be required unless the ‘proposed assignee…is of lower financial standing than the assignor… or is resident or registered overseas’. That said the Landlord Code is not compulsory or legally binding and a landlord cannot be forced to comply with it. If the landlord cannot automatically specify an AGA they must show that it is reasonable to do so. The question of reasonableness and therefore lawfulness, is judged against the criteria set out in International Fluid Drilling Limited v Louisville Investments [1988].
3. When will I be released from my obligations under the AGA?
- Any variations of the lease which may prejudice the tenant
- Any indulgence or concessions granted by the landlord
- A surrender of part
- The release of a co-guarantor.
If the landlord and the assignee negotiate variations to the lease which affect the legal estate, i.e an addition to the demise or an extension to the term, this is deemed to be a surrender and re-grant of the lease. This would release any guarantor from their liability under an AGA.
4. What am I liable for under an AGA?
There is no set form for an AGA, although the 1995 Act does set out what certain characteristics which an AGA must have and also certain characteristics which it cannot have. Therefore you will be liable for whatever the AGA expressly provides for, unless your liability is limited by statute. The purpose of an AGA is to guarantee that the assignee will perform the tenant covenants of the lease. Therefore you are likely to be required to pay rent arrears should they arise, including service charge arrears and arrears of buildings insurance rent (referred to as a Fixed Charge in the 1995 Act). You are also likely to be required to perform any tenant covenants which the assignee has failed to perform. You may be required to enter into a new tenancy for the remainder of the term, if the assignee becomes bankrupt and the lease is disclaimed.
If you are required to pay a fixed charge the landlord must serve upon you a default notice within six months of the sum becoming due in order for you to be liable for such sum.
5. If I am asked to enter into an AGA, what precautions should I take?
- Check if the landlord has the right to automatically require you to enter into an AGA
- If the landlord does not have the automatic right to require you to enter into an AGA ensure that he is acting reasonably by requiring you to enter into an AGA
- Ensure the AGA does not contain provisions extending your liability past the contractual term
- Obtain a covenant and indemnity from the assignee that they will not allow an ‘excluded assignment’ i.e an assignment in breach of the lease
- If you enter into an AGA and the landlord demands performance from you:
- Ascertain if there has been any variation of the terms of the lease, surrenders of part, as these may release you from liability
- Ensure that the landlord has served a default notice within six months of default if the landlord demands a fixed charge.