What is an Authorised Guarantee Agreement?

Authorised Guarantee Agreements (AGA) were introduced by the Landlord and Tenant (Covenants) Act 1995 to find a balance between the liability of a tenant assigning a lease and the protection of the landlord (if the tenant assigns the lease to a party who is not favoured by the landlord).

An AGA places an obligation on an outgoing tenant to guarantee the performance of the covenants contained in the lease by the new tenant, but this only applies to leases granted from 1996 onwards. Taking on a role of guarantor puts the outgoing tenant at risk of considerable financial costs, should the new tenant prove unreliable and unable to meet the terms set out in the lease.

The covenants contained in the lease normally include payment of rents and repair and maintenance obligations. If the new tenant fails to perform the covenants, the landlord can pursue the outgoing tenant under the terms of the AGA. If the new tenant defaults, the landlord is normally provided with the option to insist on the outgoing tenant taking a new lease on the same terms of the existing lease.

AGA’s can be complex documents and they vary between individual lease agreements. The code for Leasing Business Premises in England and Wales 2007 (Lease Code 2007) recommends that an AGA should only be required if at the date of the assignment, the new tenant is of lower financial standing than the outgoing tenant or is a resident or registered overseas. It is recommended that for smaller tenants a landlord should accept a rent deposit from the new tenant instead of an AGA from the outgoing tenant.

An AGA cannot impose any further liability on the outgoing tenant than the liability already contained in the lease, otherwise it would be deemed void. The outgoing tenant is only bound under the AGA for the duration the new tenant remains bound by the lease. If the new tenant filed for bankruptcy then the outgoing tenant would need to assume responsibility of the lease. Once the lease term ends, the outgoing tenant is then released from the AGA.

It is important for a tenant to carefully consider a lease that includes an AGA condition because if they fail to meet the obligations, they could be taken to court, face fines or even in some cases face criminal prosecution.

For further advice relating to Authorised Guarantee Agreements, get in touch with Farleys’ Commercial Property Department on 0845 287 0939 or alternatively contact us through the website.