Tenancy Agreements : How an AGA can stop a landlord catching a cold

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04-09-2011

In the days of silent film, a landlord who did not receive his rent had various remedies available, including strapping the defaulting tenant to a railway track or casting them out in the snow. In the modern world, a more subtle approach is required.

A particular problem arises when a landlord is asked to agree to a tenant transferring his lease to a third party. The landlord wants to ensure that the proposed incoming tenant will be able to pay the rent and meet its other obligations. It used to be that the original tenant remained on the hook until the end of the lease alongside the incoming tenant, giving the landlord a choice of target.  Since 1996, however, the automatic liability of an outgoing tenant ceases when the lease is transferred to a third party with the landlord’s consent, as does the liability of anyone who acted as guarantor for the original tenant.

However, the law does allow a landlord to require the outgoing tenant to guarantee the obligations of the incoming tenant. This guarantee takes the form of an authorised guarantee agreement (‘AGA’) which enables the landlord to look to the outgoing tenant if the incoming tenant should default under the lease.  As long as the landlord ensures there is an AGA in place which meets the requirements of the Landlord & Tenant (Covenants) Act 1995, he is in much the same position as he was automatically pre-1996.

Over the years, landlords have generally required any guarantor of the outgoing tenant to enter into the AGA as well, either to guarantee the obligations of the incoming tenant under the lease or the performance of the outgoing tenant under the AGA.

This option appeared to come to an end when landlords received a rude shock last year from Mr Justice Newey, in the case of Good Harvest Partnership LLP v Centaur Services Limited, who decided that the obligations of a guarantor ceased on the transfer of a lease so that he could not be required to enter into any such guarantee and even if he did, any guarantee which he gave was void.

However the Court of Appeal has provided landlords with some relief in the more recent case of K/S Victoria Street v House of Fraser (Stores Management) Limited. The Court stated that a tenant’s guarantor could in fact guarantee the performance of an outgoing tenant under the AGA and thus effectively provide the landlord with a guarantee for so long as the incoming tenant remained the tenant of the premises.

So after eighteen months of uncertainty, landlords can again so arrange matters that they will have the benefit of a tenant’s guarantee even though the tenant will have disposed of the lease. It is essential however that the Landlord insists upon the provision of a properly drafted authorised guarantee agreement – and gets the guarantor to sign up to it as well as the outgoing tenant – as a condition of agreeing to the assignment of the lease.

To discuss any of these issues in more detail, you can contact our Commercial Property team.


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