When a commercial lease is assigned, the risk to a landlord can increase, particularly if the incoming tenant is less financially secure. One of the tools available in these situations to protect a landlord is the Authorised Guarantee Agreement (AGA).
Before AGAs: liability under ‘Old Leases’
Under leases made before 1 January 1996, the original tenant remained liable for all lease covenants even after assignment.
If an assignee failed to comply with any tenant covenants, the landlord could pursue any previous tenant. While this was effective for landlords, it often left original tenants with long-term responsibilities.
What is an AGA?
An AGA is an agreement made between the landlord and outgoing tenant on the assignment of a lease.
Under an AGA, the outgoing tenant guarantees the assignee’s performance and the landlord gains assurance that, if the assignee fails to comply, there is a financially viable party to pursue.
Although these agreements are optional, many modern leases require an AGA as a condition of assignment.
When do AGAs apply?
AGAs were introduced by the Landlord and Tenant (Covenants) Act 1995, which applies to any lease granted on or after 1 January 1996.
The Act made two key changes: –
- Tenants are released from the lease covenants upon assignment.
- Liability transfers to the next assignee.
To balance out this loss, landlords were given the ability to require AGAs.
Landlords benefit in two main ways: –
- They retain a route for recovery if the assignee defaults.
- The outgoing tenant will be highly motivated to ensure the assignee is reliable, as they will be liable for any breach.
Who can enter into an AGA?
Only the outgoing tenant can act as a guarantor under an AGA, and this point has been clarified by various cases over the years.
Why do AGAs matter?
For landlords, AGAs are crucial in terms of risk management. They: –
- Provide security if the assignee defaults
- Encourage careful consideration of assignees by outgoing tenants
- Help maintain the strength of the covenants throughout the lease term
In summary, AGAs provide a layer of protection for landlords following the assignment of a lease, particularly under leases granted on or after 1 January 1996. By requiring the outgoing tenant to guarantee the performance of the assignee, AGAs ensure that landlords retain the ability to recover losses in the event of a default, while also encouraging outgoing tenants to choose reliable assignees.
Therefore, AGAs remain an important step in managing risk and maintaining financial security of commercial lease arrangements. Contact our expert Real Estate team to learn how we can best assist you and your business here.