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Authorised Guarantee Agreements: Tenants beware!

12th January 2015

So, you decide to move on from your current Premises.  Did you know that you may end up having to guarantee the performance of the incoming Tenant, possibly for years to come?

If you are a Tenant and you intend to transfer your Lease to a new owner, you will most likely be asked to enter into an authorised guarantee agreement (“AGA”).  In 1995, a new statutory regime introduced a policy where the Tenant would be released from future liabilities when it assigned a Lease to a new owner.  Because this was a complete reversal of the old rules, Landlords were offered some comfort as the new rules provided that in certain circumstances, they could ask the outgoing Tenant to enter into a guarantee of its immediate assignee’s performance of the covenants in the Lease by means of the AGA.  So AGAs are used by Landlords to ensure that they are protected against the risk of the new Tenant defaulting.

The other thing Tenants must bear in mind is that as well as potentially having to pay someone else’s rent arrears, they could be asked to take a new Lease of the Premises in the event that the assigned Lease is disclaimed.  This would be in the case of an insolvency situation, so if the new owner to whom the Tenant has assigned gets into financial difficulty then (if the liquidator formally disclaims that Lease as it is entitled to do) the previous Tenant can be compelled by the Landlord to enter into a new Lease and in consequence make the rental payments, deal with any repair issues and rectify any other breaches. It would then be the Tenant’s responsibility to find someone new to take over that lease, regardless of the fact that they are no longer associated with that Property.

There are things you can do to minimise your exposure. You should check the terms of your Lease and see in what circumstances you can be compelled to give this kind of guarantee. Consider negotiating with your Landlord to see whether they may be prepared to consent to the assignment without this guarantee, particularly if the new Tenant is financially robust.

Ultimately, Tenants should ensure that they clearly understand the impact of an AGA and what that could mean for their business planning going forward.

Danni Jhurry-WrightCommercial Property and Business

George Ide
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