Authorised Guarantee Agreements, often referred to as AGAs, are a common feature of commercial leases. They frequently arise when a tenant assigns a lease to a new tenant, yet many businesses are unclear about what an AGA involves or the risks it can create.
An AGA can leave a former tenant financially exposed long after they have left a property. Understanding how AGAs work and when they apply is essential before agreeing to one.
In this guide, we discuss what an Authorised Guarantee Agreement is, when it’s used and why it can become a source of dispute. We also explain how to arrange a free 30-minute consultation with a commercial property dispute solicitor if you need advice.
What is an Authorised Guarantee Agreement?
An Authorised Guarantee Agreement is a legal agreement where a tenant guarantees the obligations of a new tenant after a lease has been assigned. In simple terms, if the new tenant fails to comply with the lease, the former tenant may still be held responsible.
AGAs were introduced under the Landlord and Tenant (Covenants) Act 1995. They’re designed to balance a landlord’s interests with a tenant’s ability to transfer a lease.
AGAs are most commonly required when a tenant assigns a lease and the landlord agrees to release the outgoing tenant from direct liability, subject to the guarantee.
When does an AGA apply?
An AGA usually applies when a commercial tenant assigns its lease to another party and the landlord’s consent is required for that assignment.
As a condition of giving consent, the landlord may require the outgoing tenant to enter into an AGA. This guarantees that the assignee will perform the tenant obligations under the lease, such as paying rent and complying with repair covenants.
The ability to require an AGA must be permitted by the lease and must comply with statutory rules. Landlords can’t impose AGAs in every situation.
What obligations does an AGA cover?
An AGA typically covers all tenant obligations under the lease. This can include payment of rent, service charges and insurance contributions, as well as compliance with repair, use and alienation clauses.
If the new tenant defaults, the landlord can require the former tenant to step in and remedy the breach. In some cases, this may include taking over the lease if the assignee becomes insolvent.
Because of the scope of these obligations, AGAs can represent a significant ongoing risk for former tenants.
Limits on Authorised Guarantee Agreements
Although AGAs can impose ongoing obligations, there are legal limits on what they can cover. An AGA can only require the outgoing tenant to guarantee the immediate assignee, not any future assignees.
This means that once the lease is assigned again by the new tenant, the original tenant’s obligations under the AGA should fall away. Any attempt to extend an AGA beyond this can be unlawful.
AGAs must also be reasonable and compliant with the Landlord and Tenant (Covenants) Act 1995. If an AGA goes beyond what the law permits, it may be unenforceable.
Risks for tenants entering into an AGA
The main risk of an AGA is ongoing financial exposure. Even after leaving the premises, a former tenant may remain liable if the new tenant fails to meet their obligations.
This can include rent arrears, service charges or the cost of remedying breaches of the lease. In some cases, liability may arise years after the assignment.
Tenants may also face difficulty predicting how long an AGA will remain in effect, particularly if the assignee encounters financial difficulties. Understanding these risks before agreeing to an AGA is crucial.
Common disputes involving AGAs
AGAs can have long-term financial consequences and are a frequent source of commercial property disputes. Entering into an AGA without understanding the full implications can expose a business to unexpected liability.
Disputes often arise where landlords seek to enforce AGAs in circumstances that tenants believe go beyond their legal obligations. This can include disputes over whether an AGA has ended, whether the landlord has acted reasonably or whether the guarantee has been triggered correctly.
Another common issue is disagreement over the scope of liability, particularly where substantial repair costs or historic breaches are involved.
Resolving these disputes often requires careful analysis of the lease, the AGA and the surrounding circumstances.
Speak to a commercial property dispute solicitor about AGAs
If you’re being asked to enter into an Authorised Guarantee Agreement or are facing a dispute involving an AGA, professional advice can help you understand your obligations and protect your position.
A commercial property dispute solicitor can review the terms of an AGA, advise on whether it’s enforceable and help resolve disputes if a landlord seeks to rely on it.
Please note that this article is solely for informational purposes. It’s not a substitute for legal advice. We encourage readers to contact Osbourne Pinner for case specific guidance.
We offer a free 30-minute consultation to discuss your situation. You can speak with us via video call or visit our offices in Harrow, Canary Wharf, Piccadilly Circus or Manchester. To arrange your consultation, call 0203 983 5080, email [email protected] or complete the form below.
